Market Forces versus Regulation

Reuters reports on growing information showing that while the use of oil will continue to grow for some time, the world’s “oil intensity” (oil demand growth divided by economic growth) is decreasing and decreasing more rapidly. The point of the statistic is that for each incremental increase in global economic activity, the amount of oil used to achieve that growth is decreasing.

“Globally speaking, oil intensity has been declining by around 2 percent annually over the past decade…Our working assumption is that with fuel economy standards, fuel diversification and substitution … oil intensity lessens by just under 2.5 percent over the next five or six years.” – David Fyfe, head of the International Energy Agency’s oil industry and markets division

A key debate for anyone who thinks continuing or accelerating this trend is a good idea is the question of why this is happening. The report states that the declines are “spurred by high oil prices, moves to alternative fuels and measures to curb global warming.” But the article’s author notes that oil prices are “probably” a factor considering that “crude oil hit a record high of almost $150 per barrel in 2008 and are now fairly high historically at around $80.” I’d say that’s a pretty strong “probably”. Other than some fairly minor increases in fuel economy standards, nothing in the article points to any major cause for the decline other than the cost issue.

The experts cited generally predict that global oil usage will peak sometime in the next 10-20 years. But while this is generally good news, it’s a bit of “too little, too late” from my perspective. Stabilizing fossil fuel usage, GHG emissions, etc. is a start. But we’re going to have to actually reduce usage in the very near future. That means either massive, strict regulation of some kind or big price increases to bring market forces to bear on the problem. Given the minimal success we’ve had in the last generation with bringing much in the way of energy regulation to the table, I think we’re looking at pricing power as the one tool that might be able to have any meaningful impact on fossil fuel use. Carbon tax anyone?

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