What Happens If Oil Prices Stay Down?

The postmortem of the oil sector, which has been well underway for months, has been focused primarily on what this means for energy producers. It is likely that the dire warnings will not quite pan out, but it is also pretty clear that the boom is over until there’s a return to global demand norms or a reduction in supply. At this point, neither of these developments seems likely—at least in the short to medium term. This means that other economic sectors are starting to react to the prospect of low fuel prices for an extended period of time. As far as the cost of energy is concerned, this may be the most important impact.

From the very start, this predicament has impacted the automotive sector because the government has tasked the auto sector with two somewhat mutually exclusive goals: create safe vehicles that meet fuel efficient standards to address issues of air quality and climate change due to the production of greenhouse gas. The way to address fuel efficiency is simple enough. The smaller and lighter the vehicle, the less fuel it uses. Addressing safety concerns is pretty simple as well. Make cars strong and heavy—lots of steel and lots of protection built in. One approach opposes the other, however.

For a while, consumers supported the fuel efficient approach as they wanted cars that sipped fuel—at least as long as the price per gallon was headed for $5 or $6. Now that $2 a gallon has arrived in some parts of the country, safer and bigger cars are back in vogue, and the fuel sippers are sitting on the lots. This makes the challenge for carmakers even tougher. If they are supposed to get their fleet mileage down, they need people to buy the small car. If the consumer continues to prefer the truck, SUV and big car, the mileage standards are going to be hard, if not impossible, to meet.

Other sectors will be affected as well. Airlines were starting to place a great deal of emphasis on acquiring fuel efficient aircraft, and they wanted to phase out their fuel gulpers as fast as possible. Now that driver is less than it was and orders for fuel efficient planes have started to slacken at the same time the fuel consuming aircraft are getting a reprieve from the graveyard. There is also less interest in fuel efficient trucks and trains although these industries are looking ahead and understand that at some point the price of fuel will go up again.

The real motivation for consumers to choose fuel efficiency is not some intense concern for the climate change patterns. It comes down to money and the costs of that fuel. This is one reason that some people are pushing hard for a steep hike in the gasoline tax. It would push prices back toward $4, and it would provide money needed to fix highways. From a policy point of view, that is a winning combination—from the consumer’s point of view it would be a very unpopular approach

-- Chris Kuehl, NACM economist

To read more of Chris Kuehl’s commentaries, visit FCIB’s Knowledge and Resource Center.

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