From Nation of Change
The Energy Deficit
by Michael Spence
I have been surprised by the recent coverage in the American press of gasoline prices and politics. Political pundits agree that presidential approval ratings are highly correlated with gas prices: when prices go up, a president’s poll ratings go down. But, in view of America’s long history of neglect of energy security and resilience, the notion that Barack Obama’s administration is responsible for rising gas prices makes little sense.
Four decades have passed since the oil-price shocks of the 1970’s. We learned a lot from that experience. The short-run impact – as always occurs when oil prices rise quickly – was to reduce growth by reducing consumption of other goods, because oil consumption does not adjust as quickly as that of other goods and services.
But, given time, people can and do respond by lowering their consumption of oil. They buy more fuel-efficient cars and appliances, insulate their homes, and sometimes even use public transportation. The longer-run impact is thus different and much less negative. The more energy-efficient one is, the lower one’s vulnerability to price volatility.
On the supply side, there is a similar difference between short-term and longer-run effects. In the short term, supply may be able to respond to the extent that there is reserve capacity (there isn’t much now). But the much larger, longer-run effect comes from increased oil exploration and extraction, owing to the incentive of higher prices.
All of this takes time, but, as it occurs, it mitigates the negative impact: the demand and supply curves shift in response to higher prices (or to anticipation of higher prices).
In terms of policy, there was a promising effort in the late 1970’s. Fuel-efficiency standards for automobiles were legislated, and car producers implemented them. In a more fragmented fashion, states established incentives for energy efficiency in residential and commercial buildings.
But then oil and gas prices (adjusted for inflation) entered a multi-decade period of decline. Policies targeting energy efficiency and security largely lapsed. Two generations came to think of declining oil prices as normal, which accounts for the current sense of entitlement, the outrage at rising prices, and the search for villains: politicians, oil-producing countries, and oil companies are all targets of scorn in public-opinion surveys.
A substantial failure of education about non-renewable natural resources lies in the background of current public sentiment. And now, having underinvested in energy efficiency and security when the costs of doing so were lower, America is poorly positioned to face the prospect of rising real prices. Energy policy has been “pro-cyclical” – the opposite of saving for a rainy day. Given the upward pressure on prices implied by rising emerging-market demand and the global economy’s rapid increase in size, that day has arrived.
Read entire article at Nation of Change.