The strange pain of cheap gas
Oil market anomalies a threat to the environment
We may never know if the recent oil and natural gas price slump is making Ralph Klein’s life easier or more difficult. The man’s face was made to deliver bad news in the most sincere manner, not to try and make spending sprees look serious.
The dust had yet to settle on the recent billion-dollar budget contraction when Klein felt the need to deliver a holiday message warning of $300 million in potential budget reductions for next year. The impetus for Santa Ralph’s message of cheer is the possibility that the price of oil will not recover from its current slump anytime soon.
The Government of Alberta remains dependent on oil and gas for its revenues, yet it has little say in the price of this non-renewable resource. The oil pricing game is played out in a surreal combination of U.S. geopolitical interests and the economics of OPEC and non-OPEC producers. Alberta and Canada could play a greater role in their fossil fuel fate if they were willing to stand up to the wrath of the oil and gas industry and replace a portion of our income and business taxes with a carbon tax.
As proponents of capitalism and free markets grow more obsessed with short-term returns, the price of oil becomes more divorced from economic fundamentals and enters a world where short-term supply and demand, and a refusal to acknowledge potential implications, can outweigh obvious courses of action.
Each surge and collapse in oil prices is followed by a litany of expert rationalizations that all sound similar. The two simple facts that should determine the price of oil and gas are rarely mentioned: we are completely dependent on them for survival, and they will both run out sooner than later. In theory, this would mean that, a few ups and downs aside, the price should consistently increase over time. This is not a bad thing – it would create a growing pressure for people to shift from fossil fuels to alternative sources of energy.
Instead, as a result of the West’s response to the oil crisis of the ’70s, the value of oil in the ground has consistently declined over the past 20 years. When the Arab nations that form a majority of OPEC reduced their production to protest western support for Israel in the 1973 Arab-Israeli war, causing prices per barrel jump from $2.90 to $11.65 US, the West responded by finding and exploiting new oil and gas resources from Alaska to the South Pacific. When these new resources had the expected effect of pushing the price of oil down, the companies increased production. The Government of Alberta, hooked on oil and gas revenues (like so many other producers), egged them on by reducing its royalties to encourage development at an ever-faster pace. As each OPEC and non-OPEC entity responded in a similar fashion, the price of oil has sunk lower – even as it should become more valuable.
In response to lower prices, our dependency on oil and gas has grown, not lessened, over the years. At the most superficial level, our dependency on cars has increased and the cars we choose have become less fuel-efficient. At other levels, our dependency on less efficient but more convenient forms of transportation (trucking instead of trains, or flying instead of buses or trains) has also increased.
In the meantime, experts argue over when we will run out of oil. Pessimists figure the world’s known reserves will start declining in 2004, and even optimists predict reserves will peak in 2020. Neither scenario leaves people, industry or government a lot of time to figure out what our next energy fix will be. Progress so far has been, at best, slow.
Speeding up development in fossil fuel alternatives without distorting the economics of the energy sector – more than the current subsidies to oil and gas conglomerates already do – is a tricky matter. Outside of the paranoid business interests of Alberta, however, one simple possibility is quickly gaining credibility with both environmentalists and free-market economists: a carbon tax.
A government can encourage people and industry to wean themselves from fossil fuels without distorting the economy by gradually increasing taxes on the production of fossil fuels while reducing income and business taxes. This revenue neutral process is already under way in Europe and is capable of fostering both efficiency in the use of fossil fuels and the search for alternative energy sources.
Put another way, people have started asking why the sudden and dramatic boom of innovation in the information and communication technology sectors has not been replicated in the far more important world of energy. So much of the technology, from solar, wind and geo-thermal power to fuel cells, has already been developed and is waiting for the right incentives to encourage widespread production and use.
In the technology world, subsidies – the largest being the research and development spending in the U.S. Defence budget – have spurred innovation. A carbon tax would be a similar spur for progress in the world of alternative fuels – the only thing that stands in the way is $14 a barrel of oil and Ralph Klein’s fiscally responsible bliss.
Interesting sources
· www.earthfuture.com/stormyweather/ – Guy Dauncey and Patrick Mazza talk about practical methods of developing alternative energy
· The Economist, December 15, 2001 – Free-market rag throws its support behind carbon taxes
· www.iea.org – International Energy Agency
· www.sustdev.org – Sustainable Development International |
