In Praise of High Gas Prices

Why sticker shock when filling our cars or our oil tanks is a good thing.

By Thomas M. Keane Jr.  | November 20, 2005

From an inflation-adjusted high of $2.86 in 1981, the price of a gallon of gasoline plummeted to a 50-year low of just $1.23 in 1998. During that time, as documented by the Boston-based think tank MassINC, people in Massachusetts started to move ever farther away from one another and from their jobs. From 1980 to 2000, the number of the state's residents who commuted alone increased by 20 percent. Carpooling dropped from 19 percent to 9 percent. The average trip to work rose from 21 minutes to 27. Gas-guzzling SUVs, the light truck disguised as a car, became a suburban fixture.

Coincidence? Hardly. Those changes occurred despite fresh memories of oil embargoes and energy crises. They occurred even though we all knew that global warming and dependence on foreign oil were bad. They occurred because of a fundamental truth: Price drives behavior.

And now, having seen gasoline and oil at new highs, the oft-heard political prescription, from both sides of the partisan divide, is to try somehow to ease the pain. Tap the Strategic Petroleum Reserve, the government-controlled stockpile of crude oil. Reduce pump prices by cutting highway taxes. Jaw-bone oil companies and gas station operators. Dispense with environmental controls. Subsidize home heating costs.

All of those are exactly the wrong things to do. If we let markets work, the energy problem will resolve itself. But if, albeit with the best of intentions, government intervenes and tries artificially to push prices down, today's problem will indeed become tomorrow's crisis.

The reasons come down to the fundamentals of economics - demand and supply. When something gets more expensive, people use less of it. Even now, rising energy prices are altering our behavior. One reads anecdotes of commuters running cars on fryer grease or abandoning their vehicles for bicycles. More commonly, we're doing little things, such as thinking harder about the trips we take, turning down thermostats, or shutting off unused appliances.

Higher prices also affect some of our most important decisions: the kinds of cars we buy, the size of our homes, and even where we choose to live. Thus, for example, SUV sales are dropping while those of hybrids (which combine gas engines with electric motors) are up. True, hybrids get better mileage than their conventional counterparts, but they also cost about $3,500 more. Run the numbers and - with gas at $1.25 a gallon - it might take more than 12 years to pay back that price difference, making hybrids an expensive sacrifice. But with gas at, say, $3, the payback period drops to a more reasonable five years - which explains why Toyota now anticipates selling more than 1 million hybrids by 2010. And if gas prices were to drop back to the lows of the 1990s? Goodbye hybrids; hello again to SUVs.

Consumption, though, is only half the equation.

The common alarmist refrain - that we're running out of energy - is untrue. But what is in short supply is cheap energy. At higher prices, however, formerly uneconomic sources of oil become feasible. Moreover, alternative energies - the solar, wind, and biomass dreams of Greens everywhere - also start to make sense.

In Massachusetts, the cost of electricity is roughly 11 cents per kilowatt hour. At that price, says Jim Gordon, president of Cape Wind, the company hoping to build wind turbines in Nantucket Sound, wind power becomes a reasonable - which is to say profitable - business proposition. Similarly, shale fields in the Rocky Mountain states are estimated to have the potential to produce up to 1 trillion barrels of oil (three times Saudi Arabia's proven reserves). Yet the costly extraction of that oil is only practicable when oil fetches more than $30 a barrel. And if oil prices were to fall precipitously? That happened before, in 1982, when Exxon shuttered a $5 billion shale project, a victim of cheap oil from overseas.

In short, the virtue of higher prices is that they create new solutions. True, they impose burdens as well, something New Englanders will see with discomfiting clarity as heating costs surge this winter. The answer to that, perhaps, is direct aid to those most in need. But pushing down energy prices? If your goals are shortages, excess consumption, and continued dependence on foreign oil, by all means. Otherwise, let 'em rise.