Twice since the Arab Oil Embargo of 1973, the U.S. has gone through essentially the same sequence
of events.
During the 1979 Iranian Revolution, oil price increased as the supply from that country stopped. In the 1991 Gulf War, oil wells in Iraq and Kuwait abruptly went off-line.
I have seen the cycle three times now, and the sequence of events each time was the same:

1. A sudden reduction in oil supply,
2. A sharp increase in price,
3. Renewed attempts to conserve energy or develop alternative sources, in the form of new government regulations, startup companies, new R&D programs from big companies, and personal decisions (like biking instead of driving),
4. Attempts to push oil prices back down and get supply back up, mostly by government action.
5. After about a year, a return to lower, stable prices,
6. Gradual abandonment of most of the conservation and alternative energy efforts, as government, startups, big companies, and individuals pull back in the face of low oil prices.

Two things are striking about this sequence.
First, the response to the “energy crisis” ensures that we will have another one. Pushing the price back down and holding it there eliminates the incentive to conserve and develop alternative sources of energy. Towns relax building codes again, government energy conservation programs lose funding, sellers of wind turbines and advanced insulation go out of business or cut programs, sales of large cars go back up. So we renew most of our dependence on oil again.
The second is that the public has a distorted view of the situation. After every “crisis” there is publicity for years about the long-term energy “problem”. But at the same time people buy bigger SUVs and move farther from work. When energy prices start falling, people continue to perceive that there is a long-term energy problem, but they stop acting like it.

In the past, the only way I could see out of this vicious circle was sustained higher oil prices. This could happen in several ways. One would be to stop depressing oil prices through government action after a crisis. They would go down eventually, but the higher prices would last longer. This would give more momentum to conservation and new technologies. That would allow more to get accomplished before the drop in prices comes.

Another would be to quit subsidizing the oil industry. Don’t allow accelerated depreciation of drilling expenses. Don’t lease government land for drilling at submarket rates. I’m not sure oil gets any more subsidies than other large industries. But if we stopped the subsidies prices would rise and we would all have more incentive to shift from oil.

A third is to elevate oil price through taxes. Levy a tax of maybe $1/barrel the first year, $2/barrel the second, and so on. We could still try to limit price increases in a crisis. But we would keep on collecting a little more tax each year. The long-term price would rise slowly but surely. Everyone would know prices are going up now and forever, so the efforts to conserve and innovate would be sustained over time. This is similar to the taxes on cigarettes. They have risen in recent years, and have probably been part of the reason smoking has declined. If our public officials had the courage, we could even use the oil tax revenue to cut the deficit or the income tax.

An oil tax has been proposed several times and gone nowhere. Many states have not even raised their gas taxes fast enough to keep pace with inflation. Both officials and the public have instead shown that they can tolerate inaction better than the alternative.
They prefer not dealing with rising oil prices; they prefer sticking with high income taxes and deficits and the risk of wars to defend the oil supply. At some level they would rather risk losing their children in war than paying more for gas and gradually adjusting their lifestyle. So we accept instead unpredictable oil price jumps that we cannot control instead of a gradual phase-out of oil with a new tax from our own government.
So be it. Except that the latest increase in prices was different.

In 2008 the price of oil in the US passed $91/barrel. This was up from $23 in 2002. It has since fallen back to about $50 and may fall further, like the past times.
But this time is not like the past times. There are no longer enough oil transport ships to get the oil out of the Middle East.

Where were the tankers in 2008? They were busy taking oil to China and India.
The growth of their economies will increase oil demand for the long-term. Demand has increased, while the volume of easy-access deposits is the same. When demand grows and supply stays constant, price rises. The recent pullback in prices is the result of recession. The decrease in demand is only temporary. Before long, economies around the world will grow again. Then oil prices will rise again, and keep rising for a long time.

This time, it has nothing to do with politics in the Middle East. This time, U.S. policy cannot control the supply or price of oil any more than it can control the falling of rain. We did what we could to hold it low for as long as we could. Now we can only react as it rises.

Next issue: Recovery, ICF Style

Pieter VanderWerf is President of Building Works, Inc., a consulting company that helps companies enter and invest in the construction products industry. He can be reached at pvander@buildingworks.com, and his company at www.buildingworks.com.

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