Roller coaster oil prices versus conservation momentum

The roller coaster of oil prices did something quite amazing this year: It went up long enough to catalyze lasting changes to America’s energy consumption patterns. Oil prices are in decline while American business and consumers are just getting into a committed consumption retreat.

According to data from the U.S. Dept. of Energy (DOE), May 2008 prices for oil were about 100% greater than prices in May 2007 and May 2006 ($120 compared to about $60 in nominal dollars). The steep incline started in August 2007; the incline is sharpened by the decline that occurred between August 2006 and January 2007, when oil fell to approximately $50 per barrel. You can see these trends in a graph of historical oil prices at www.eia.doe.gov/emeu/mer/pdf/pages/sec9_2.pdf.

Since the price of oil skyrocketed, the degree to which it influences inflation rates indirectly has become tangible, even though energy and food prices have been removed from the U.S. Dept. of Commerce’s inflation index.

What’s fun to see are the many changes to consumption patterns across the U.S. economy: airline companies have been retiring old jets and buying fuel-sippers. Auto manufacturers are closing some SUV plants and retooling others to pump out smaller, more gas-efficient cars. Developers are building smaller homes within shorter commuting distances. Mass transit and bicycle racks are packed with people trying to save gas (and shave their carbon footprints). Schools, businesses, and government offices are looking at four-day work/school weeks, and adopting technologies for distance learning, telecommuting, and teleconferencing.

Also, television commercials and magazine ads—which are powerful influences on decision making and meaningful indicators of public sentiment—tout green or efficient products from cars to windows, and advice is everywhere on how to save energy. There also are more reports from the DOE on renewable energy gaining steam, especially wind power, and I hear there’s a backlog for photovoltaic panels because of high demand.

And goodness gracious, energy policy is a differentiating factor in this presidential election.

Recently, however, the price of oil has dropped 20% since its record high of about $150 per barrel, currently at $118. Twenty percent is a big number. Some say it’s because consumption is ebbing due to the higher prices; others say that it’s an election year ploy; and others say investigations on insider trading and market manipulations are cleaning things up. Time will tell what the influences are and how long they’ll last.

What will be interesting to see is whether the momentum to conserve energy and increase renewables can withstand a serious drop in oil prices. Conservation goes up and down with costs. We tend to find new ways to consume energy as we make the old ones more efficient.

Optimistically, I think there could be a windfall if oil prices continue to drop while efficiency measures kick in. Wouldn’t it be great if this windfall were spent on additional conservation measures?

Send your questions and comments to: Michael.Ivanovich@reedbusiness.com