Economy Divorces Oil

The central myth on which opposition to climate legislation rests is crumbling away.  This myth states that the American economy is completely dependent on fossil fuels, such that any increase in the price of fossil fuels threatens economic growth—an especially potent threat in a fragile economy.  Indeed, the myth of the economy’s linkage to fossil fuels is so pervasive that even progressive outlets like ClimateProgress argue that high oil prices could “smother the nascent economic recovery,” repeating the conventional wisdom that “a sustained $10 increase in oil prices would shave about two-tenths of a percentage point off economic growth.”

But things aren’t working out as conventional wisdom might have predicted.  I’ve long maintained that no matter what energy prices are, markets will work to mute the impact of higher prices; “if government policy increases the price of energy, smart businesses will invent new technologies that reduce the cost of compliance and spawn entire new industries.”

And now we’re beginning to see evidence that I was right, and economic growth is decoupling itself from energy consumption.  In the New York Times:

The increase in energy prices is beginning to resemble the rise in 2008. But this time, the American economy may be better prepared for higher fuel costs.

Gasoline prices have risen by nearly a third in the last year, and oil costs more than $100 a barrel for the first time in more than two years, driven by fears of extended Middle East supply disruptions and increased demand from an improving global economy.

While the latest surge in energy prices is likely to cause some pain and slow the recovery from the recession, economists say the spike is unlikely to derail the rebound unless prices rise a lot further.

One big reason is that consumers and businesses have learned lessons from the last oil shock. Many drivers, for example, have given up their gas-guzzling sport utility vehicles. Automakers, which are selling more fuel-efficient cars than five years ago, reported higher sales in February even as gas prices rose.

Industries like airlines and trucking, which are most severely affected by fuel prices, have passed on their higher costs almost immediately instead of waiting for the price increases to hammer profits.

And much of the rest of the United States economy is far less dependent on oil than it used to be. Oil consumption has dropped more than 5 percent since 2005, while natural gas use has risen 10 percent. A glut of domestic natural gas has kept prices low, providing a lift to industries like chemicals and pharmaceuticals and tempering the price of electricity, much of which is generated from natural gas.


But so far, consumers and businesses seem to have adapted to the higher prices much more quickly than in 2008, when gasoline reached an average of $4.11 a gallon and oil topped $145 a barrel. In part, that is because the last oil shock helped prompt a new focus on energy efficiency.

Take automobiles, for example. Congress got hundreds of thousands of the worst gas guzzlers off the road with the cash-for-clunkers program. And automakers changed their product mix to emphasize more small cars and fewer sport utility vehicles, reflecting consumer demand and tougher fuel-efficiency mandates from the government.

As a result, the industry is better prepared for high gas prices. Mike Jackson, the chief executive of AutoNation, the country’s largest chain of dealerships, said half of the vehicles on his lots are now cars, up from 40 percent in 2008, and just 8 percent are sport utility vehicles, down from 15 percent three years ago.

In other words, individuals and companies responded to a combination of high oil prices and government mandates by finding ways to do the same things with less oil.  And now that we’re facing high oil prices again, those government mandates and adaptations are paying off, insulating budgets from the effects of costly oil.

It’s very clear: over the long term, high energy prices don’t mean less growth—they mean less energy will eventually be needed to fuel the same growth.

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