Why Cheap Gas is Bad for America

MarkM — Sat, 14 Feb 2009 18:06:45 -0800

I topped off my CRV at the Exxon up the street, poured a cup of black coffee, and was handed change for my $20. I know I should have been happy, but as the coins clinked in my hand I had to wonder. Cheap gas lowers the cost to transport goods, saves people money getting to work and generally makes us happy. But we can’t forget that there are two sides to every coin. In many ways, cheap gas is bad for America. Cheap gas destabilizes key countries, discourages investment in alternative fuel development, and encourages Americans to live lives that are out of touch with environmental realities.

In declining economic climates, populism often wins. Two of our world’s key nations are directly destabilized by dramatically lower gas prices. As you know, oil is exported to the US, where it is refined and made into gasoline. So the cost of oil is the source of the cost of gasoline. The fact that oil moved from $147 a barrel in July to the upper $30s in February is due to a complex combination of factors, but primarily it means oil consumption slowed faster than oil exporting countries could cut production. In Iran, 50% of the state budget is derived from oil exports. Unemployment in Iran, which had hovered around 15%, is now expected to go to 30%. Inflation is around 25%. The dramatic drop in oil has created an economic crisis that in turn has created a very tenuous political climate. Fundamentalist Muslims have been held at bay in Iran by national economic opportunity. If we think we have problems in the Middle East now, imagine what would happen if Iran collapsed.

The same thing can be said of Russia. When gas was high, I could still smile because part of my retirement portfolio was in Russian mutual funds. The Energy Security Analysis Group just reported that “low oil prices are the biggest threat to Russian domestic social and economic stability.” While the United States may have trouble with Putin’s approach to politics, at least we know what to expect. The World Bank estimates that “the oil and gas sector generated more than 60 percent of Russia’s export revenues (64% in 2007), and accounted for 30 percent of all foreign direct investment (FDI) in the country.” Like Iran, low oil prices create a very unstable social and economic context in Russia.

I’m told that blogs are supposed to be short, so just two more thoughts. First, low gas prices reduce investments in alternative energy. Remember the gas crisis during President Carter’s term? We started building nuclear plants and developed amazing electric cars. But as the Middle East stabilized and oil imports became dependable, gas prices dropped. Need I say more? We moved from electric cars to Hummers. Alternative fuels are more expensive to develop than maintaining current energy infrastructure. But new fuels are critical to American economic development. We know oil won’t last forever, but low prices allow us to put off the inevitable, making the future choices more expensive and transitions more dramatic.

Finally, low gas prices are bad for the environment. Americans comprise 5% of the world’s population and consume 23% of the world’s energy. When gas is cheap, we continue to drive like Americans, without thought to the environment. The Congressional Budget Office just published a study that clearly links the cost of gas to how fast and far we drive and the types of vehicles we buy. When the price of gas is high, trains, subways and buses see dramatic increases in ridership. When it goes down, America’s commuters get back in the Suburban and charge off to the office. Cheap gas means American consume more carbon fuels and produce more greenhouse gases.

Do the economic benefits of cheap gas outweigh the problems? I really don’t know. It’s an amazingly complex system and there are many variables. The other factor that changes the equation is the high probability of oil’s price increasing almost as fast as it declined. As soon as the global economic situation stabilizes and consumption resumes, gas will return to new highs. Maybe we should enjoy it while we can.

alternative fuels

Why Cheap Gas is Bad for America