Why Should We Pay More for Gas?

by William E. Rees, PhD

Americans enjoy the most energy-intensive economy on the planet. Much of the country depends, directly or indirectly, on fossil fuel for heat in winter and for air conditioning in summer. The American way of life feeds on mainly fossil-fueled transportation that moves people and everything they need over vast distances within the country. Oil-fueled transportation also connects the nation materially to the rest of the world, including to more than 60% of its oil supplies. Thanks to production agriculture and industrial food processing, American food now ‘embodies’ more fossil energy than solar energy. Many products on retailers’ shelves, from various textiles to personal computers are made, in part, from oil or natural gas.

The reality is, that for all the paper wealth being generated by ‘new economy’ high-tech and internet stocks, the country’s entire post-industrial economy still floats on an ‘old economy’ pool of oil and gas. No wonder that in recent months Americans have been take aback by significant increases in the price of gasoline, diesel fuel, heating oil, and natural gas. Domestic sources are drying up, demand everywhere is rising, and the Organization of Petroleum Exporting Countries (OPEC), taking advantage of its increasing dominance in world markets, has tightened the screws on global supplies.

The federal government has responded to the price hikes and public howls by intensively lobbying OPEC to open the valve and let the oil flow more freely - with some success. While this is may be good short-term politics it is bad economics and lousy environmental policy. And it won’t prevent even steeper price increases in the near future. Indeed, if the US government really wants to seize the initiative, it should be leading western governments to agreement on a persistent, orderly, predictable, and steepening series of oil price increases over the next two decades.

This argument comes in two parts. The first is neatly summarized in a 1998 report by the Washington-based International Centre for Technology Assessment on "The Real Price of Gas". The purpose of this report was to quantify the numerous external costs associated with the use of fossil-fueled motor vehicles that are not reflected in US consumer prices. Such hidden costs range from various tax and direct subsidies to the oil industry from governments, through publicly funded infrastructure costs, to the health and environmental costs associated with burning fossil fuels (e.g., breathing ‘second-hand exhaust’). These direct and indirect subsidies seriously distort energy markets, burden the economy with rampant inefficiencies, and are wrecking the world’s climate.

Depending on the definition of the subsidies and the quality of available data, the total unaccounted cost in the US was found to lie between $559 billion and $1.7 trillion dollars annually. Thus, a fuller social cost accounting for the use of fossil fuel would result in a gasoline price per gallon of between US$ 5.60 and US$ 15.14, or between about four and 10 times recent prices. In other words, even with the burden of existing taxes, prevailing energy prices do not ‘tell the truth’ about the costs of using fossil energy - Americans are still paying a small fraction of the price they would pay for gas in a perfectly functioning market.

In fact, US consumers enjoy the most underpriced fuel available in any major industrialized country — with predictable results. As any economist will tell you, the invariable consequence of underpricing is overuse. Americans live in ever-larger energy-inefficient houses, drive ever-bigger and less fuel-efficient vehicles and are generally squandering in a few decades a non-renewable resource that took tens of millions of years to accumulate. Even if there were no other issues at hand, it would be economically rational and ecologically beneficial for the federal government to intervene in today’s energy market to correct at least the best-documented and non-controversial market imperfections. This alone would result in significantly greater taxes and prices at the pump.

But there is another issue at hand. The world is running out of conventional oil. Recent price hikes are mere tremors heralding the real price shock to come. Surely this is not the time to be deepening our dependence on fossil fuel.

The evidence? Oil ‘production’ (i.e., extraction) in the US peaked around 1970 and in North America as a whole in 1984. Non-OPEC production is peaking even as you read these words. Several recent studies project global oil production to peak by 2013 or sooner, possibly as soon as 2007. Even the necessarily conservative International Energy Agency (IEA) in its World Energy Outlook, 1998 concurred for the first time that global output could top out between 2009 and 2012 and decline rapidly thereafter. Indeed, the IEA projects a nearly 20% shortfall of supply relative to demand by 2020 that will have to be made up of from "unidentified unconventional" sources (i.e., known oil-sands deposits have already been taken into account). Other studies show that by 2040 total oil output from all sources may fall to less than half of today’s 25-26 billion barrels of oil per year.

And running out of oil is not running out of just oil. Oil is the means by which industrial society obtains (and over-exploits) all other resources. The world’s fishing fleets, its forest sector, its mines, and its agriculture all are powered by liquid portable fossil fuels. Seventeen percent of the US energy budget, most of it oil, is used just to grow, process, and transport food alone. (It takes a gallon of fossil fuel to feed each American every day.) Keep in mind, too, that petroleum is not just a fuel. Oil and natural gas are the raw material for thousands of products from medicines, paints, and plastics to agricultural fertilizers and pesticides. Since oil is directly or indirectly a part of everything else the coming scarcity of oil and the attendant price shock means higher prices for everything else as well.

But wait a minute. Many analysts will agree with energy economist M.A. Adelman that rising prices will stimulate "..a stream of investment [creating] additions to proved reserves, a very large in-ground inventory, constantly renewed as it is extracted". Unfortunately, this argument is dangerously misleading. The physical stock of exploitable oil is not being "renewed"; historically, improved technology has simply made a dwindling finite resource more accessible. Abundant short-term market supplies then effectively short-circuit the price increases that would otherwise signal impending real scarcity, even as finite stocks are depleted.

Moreover, Adelman’s argument ignores the fact that oil exploration is very much subject to diminishing material returns. Despite increasing effort, we currently discover less than six billion barrels of new oil per year, not even a quarter of present consumption. A few decades ago, oil extractors in the US would discover 50 barrels of oil for every barrel consumed in drilling and pumping. In the mid-1990s the ratio was five to one, heading to one for one by 2005. At that point, there will no point in extracting oil with oil at any price even though there will still be plenty left in the ground.

What about substitutes? Concerns over climate change have already stimulated a growing interest in alternative energy sources. ARCO’s CEO Michael Bowlin is on record as saying, "We’ve embarked on the beginning of the Last Days of the Age of Oil". Ford Motors’ William C. Ford, has stated that "[he expects] to preside over the demise of the internal combustion engine". All very well, but we sometimes forget that different fuel types are not readily interchangeable. Wind, photovoltaics, and other forms of solar electricity may be able substitute for most of the electricity currently generated by fossil fuels (nuclear fission has failed and commercial fusion reactors are decades in the future). However, electricity cannot replace many of the direct uses of petroleum derivatives as fuel nor overcome their clear advantages in energy storage. There is great promise in fuel-cell development but the fact is that no suitable substitutes are yet in sight for the fossil fuels used in heavy farm machinery, construction and mining equipment, diesel trains and trucks, and ocean-going freighters. Jet aircraft cannot be powered by electricity, whatever its source. (While rapid advances are being made in coal- and other carbon-based synthetic fuels, these substitutes leave us with the specter of climate change.) Again, nothing yet can replace cheap hydrocarbons as feedstocks in the manufacture of myriad industrial and agricultural products. Finally, it is no small irony that we need high-intensity fossil fuel to produce the machinery and infrastructure required for most alternative forms of energy. Sunlight is simply too ‘dilute’ to use in manufacturing the high-tech devices and equipment required for its own conversion to heat and electricity. Industrial civilization faces a paradox: we need oil to move beyond the age of oil.

The human population has grown six-fold in less than 200 years. The global economy has quintupled in less than 50. No factor has played a greater role in the explosive growth of the human enterprise than abundant cheap fossil fuel. No other resource has changed the structure of economies, the nature of technologies, the balance of geopolitics, and the quality of human life as much as petroleum. Little wonder that some scientists believe that passing the peak of world oil production will be a shock to the human enterprise like no other event in history. Population and consumption are still on a steep trajectory but the rocket is running out of fuel.

In this light, ordinary citizens and public service organizations alike should be urging the US government to get real about energy policy and pricing. Significant price increases are long overdue. Waiting longer to act will impose an even greater future burden on those ordinary citizens who will suffer the most from generally rising prices. (A comprehensive program of ecological fiscal reform would include lower income taxes - possibly even a negative income tax for the poorest families - to compensate for rising energy and material costs.)

The data and trends are no secret. Major governments have known about the deteriorating supply situation for years yet prefer to allow the public to wallow in ignorance while hoping something will happen to halt the downward slide. This in turn creates a political climate in which a looming crisis remains invisible and corrective action is impossible. Higher energy prices are needed now to signal the real scarcity to come. Without higher prices we will not invest in the alternative energy technologies needed for a smooth transition to the post-petroleum age. Without higher prices we will not conserve the fossil energy needed to manufacture those alternative technologies. Without higher prices, argues petroleum analyst Richard Duncan, the remaining life expectancy of industrial society may well be less than 40 years!

Dr. William E. Rees is an ecological economist and a professor at the University of British Columbia's School of Community and Regional Planning, in Vancouver. Dr. Rees co-authored OUR ECOLOGICAL FOOTPRINT: Reducing Human Impact on the Earth

Also see Dr. Rees' excellent REVISITING CARRYING CAPACITY: Area-Based Indicators of Sustainability at http://dieoff.com/page110.htm

Adelman, M.A. 1993. The Economics of Petroleum Supply. Cambridge, MA: MIT Press.

Bartlett, A.A. 2000. An Analysis of US and World Oil Production Patterns Using Hubbert-Style Curves. Mathematical Geology 32/1: 1-17.

Brown, L. R. 2000. The rise and fall of the Global Climate Coalition. Worldwatch Issue Alert 2000 - 6 (July 25, 2000)

Campbell, C.C. 1999. The Imminent Peak of World Oil Production. http://www.hubbertpeak.com/campbell/commons.htm

International Centre for Technology Assessment.1998. The Real Price of Gas. Washington: ICTA.

International Energy Agency.1998. World Energy Outlook.

Youngquist, W. 1997. GeoDestinies. Portland: National Book Company

Youngquist, W. 1999. The Post-Petroleum Paradigm - and Population. Population and Environment 20(4): 297-315.

Additional Sources of Information:

• DieOff
• The Real Price of Gas