By Mark P. Mills
Even with bombs falling in Iraq this
month, oil prices remain stubbornly low, staying as they have for months in the low teens
and even dipping into single digits in the spot market.
Oil today is cheaper than it was
before the Arab OPEC embargo of 1973 (in real inflation-adjusted dollars) which
comes as a real shock to environmentalists who forecast, nay wished for, the $100 barrel
two decades ago.
They may well be wishing still. After
all, low oil prices are bad for Kyoto-based goals because they inspire (horrors!) economic
growth and thus greater energy use.
Low oil prices might also require
journalists and policymakers to take a closer look at the benefits of cheap energy, which
has the unintended consequence of protecting Americas greatest energy assetits
carbon-filled coal fields.
The oil price collapse has been big
news in the energy business for months and has seeped out into the popular press because
of its profound implications for the economy. (One early December Wall Street Journal headline
trumpeted "As Energy Prices Continue to Plunge, U.S. Sees a Benefit in Lower
Inflation.") But the media have yet to gush.
There are two remarkable things about
all the press coverage in recent months, one perhaps obvious, the other less so.
First, it is a rare article (come to
think of it, I havent actually seen one) that, while breathlessly citing the
economic value of low-cost oil and energy, even remarks in passing on the obvious linkage
to the ClintonGore Administrations climate warming policies, whose stated goal
is to raise oil prices.
It doesnt take an
econometrician (a fancier fellow than an economist) to realize that if $12 per barrel is
wonderful ("falling oil costs are aiding growth...the biggest boon is lower
inflation," as the Wall Street Journal correctly notes), then a high-priced
$30-plus per barrel would be terrible economically.
But when writing about the energy
implications of global warming policies, most journalists can only manage to skeptically
acknowledge "industry" studies that point to the economic punishment from
raising energy prices in a Kyoto-inspired world.
Conversely though, journalists do not
seem compelled to point to experts or skeptically refer to "industry studies"
when making their own observations that cheap oil is great for the economy and
Cheap oil is self-evidently good for
the economy. Yet the media hem and haw: Not that we dont love the earth, but
maybe Kyoto-style policies that will make oil expensive could be, perhaps, well, um,
according to the "industry," costly. Such is the nature of the debate.
The second issue is a little more
subtle, but it really shouldnt be. U.S. businesses, consumers, and industry
collectively buy slightly more than $200 billion per year of petroleum products (roughly
50 percent of it gasoline). If lowering the cost of oil is very good, and conversely
raising the cost is very bad, then doesnt it logically follow that the same economic
calculus would apply to another energy commodity on which the U.S. spends $230 billion per
And further, if the demand for the
former energy commodity (oil) has remained essentially constant for two decades, but the
demand for the latter commodity has risen 70 percent in the same time, then surely the
price for the second mystery energy commodity should be considered even more critical for
controlling inflation and spurring economic growth.
In case you hadnt realized,
that mystery commodity is electricity.
Yet I cannot recall a single instance
of a news article comparing the relative economic importance of oil and electricity.
Ignorance is no
More important in these
Kyoto-inspired times is that neither have any journalists made their own independent leap
of economic faith (as they have in the oil arena) regarding the importance to the U.S.
economy of cheap electricity, and derivatively, of coal.
This perhaps (and here I am
speculating) arises from the possibility that journalists have about the same level of
knowledge as the general public when it comes to electricity.
Here I refer to an annual national
survey that has shown each year that:
Fewer than one-third of the
U.S. population knows that most electricity comes from coal-fired power plants.
More than half of those
surveyed volunteer hydroelectric power as the largest source of electricity. (Hydro
provides the United States market with less than 10 percent, whereas coal supplies us with
Indeed, most non-energy folks, and
even many ostensible energy pundits, are unaware that our own natural gasbiased
Department of Energy forecasts that coal will not only continue to supply 50 percent of
all electricity two decades from now, but will make up more than one-half of all the
growth in electric supply for the next 20 years. (It is worth noting that even this
apparently bullish coal outlook rests on the assumption that natural gas electric supply
will grow 550 percent over that 20 years.)
Dial I for
All of these cold coal facts must be
held against the backdrop of Kyoto-inspired policies, and many other environmental
policies specifically directed at the goal to "dial coal out of the energy
Imagine stating explicitly that we
need to "dial oil out of the energy equation." Or more to the point, imagine any
journalist reporting this postulate without soliciting and reporting any economic
criticism to put the notion into context.
The U.S. economy has grown by more
than $3 trillion in two decades, roughly paralleling the growth rate in (cheap,
predominantly coal-fired) electricity use.
During that 20 years the absolute use
of oil and, by the way, natural gas, has not changed significantly. Meanwhile, the use of
electricity has risen close to 70 percent.
So overall, total energy usage is up,
but total energy expenditures have remained essentially flat at about $520 billion
What does this mean? Much more
economic bang for the buck.
Figure 1. Growth
in total economy compared with total energy expenditures. Source: DOE/EIA.
Two decades ago, $1 spent on energy
supported $9.50 of the gross domestic product (GDP); today that same $1 can support $14 of
the GDPan economic gain of 56 percent. The net effect: more dollars for new jobs,
new technologies, health care, leisure and yes, even environmental goals (real ones). We
can have our cake and eat it too as long as energy stays cheap and, most important, gets
We are talking about both oil and
coal-fired electricity, the two energy forms that anchor the entire economy.
There is no conceivable
Kyoto-inspired strategy to dial fossil fuels out of our economy yet still continue the
economic trends we have so highly praised and collectively enjoyed in recent years.
U.S. Department of
Energy, Energy Information Administration, Annual Energy Review, 1998.
Environmental Education and Training Foundation survey, Roper Starch, November 1998.
J.M., As energy prices continue to plunge U.S., sees a benefit in lower inflation, Wall
Street Journal, 12/2/98.
Mark P. Mills is a technology strategist and energy consultant and president of the
research-consulting firm MillsMcCarthy & Associates Inc.