Sustainable Energy Transitioner

Recent reports by Goldman Sachs and UBS have predicted an average oil price of ~$160 within a few years, while calling $200 a super-spike possibility if a major supply disruption occurs. It’s important for us to then determine what such a price would mean for the US and other players in the global marketplace.

The $160 price would be felt as a huge burden for net importers. It would mean that over $500 billion in wealth would be transferred out of the US each year. It would exacerbate the trade deficit and put further pressure on our country to sell its assets to foreigners and on the dollar to fall further. A barrel for $160 would roughly translate into $6 per gallon at the US pump or $72-$90 to fill up a 12-15 gallon tank. Such inflation in weekly expenses would erode our standard of living if we don’t change driving habits. It would increase pressure on airlines to merge and could send the stocks of GM, Ford and Chrysler even further down due to the inefficiency of most of their fleet. Heating homes this winter may double in cost for the 30% of Northeastern homes that use heating oil, which would pressure natural gas prices to break post-Katrina records as those homes switch to the substitute fuel.

On the climate side, there is a bit of silver lining. A price of $160 is $110 per barrel more than what the EIA and World Bank predicted in its emissions generation models. Thus, the price difference translates into a $270/ton of carbon dioxide tax on our largest source of carbon dioxide. As long as substitution does not all go to coal, we would likely see a decrease in the rate of greenhouse gas emissions in net importing countries. But global emissions would probably continue to rise, without enacting other major initiatives, due to increased consumption in exporting countries and places like India and China where subsidies block a full price signal. But such a price would exert tremendous pressure for price controls to be relaxed in net importer countries as their costs would otherwise balloon.
 
A $160 oil price would certainly change the world. Global economic convergence may take place between developed net importers and developing net exporters. But the poorest countries that do not produce their own oil, such as Haiti and Nicaragua, would face a dangerous reduction in their already low standard of living. Here’s hoping that we can reduce oil demand fast enough to prevent even higher prices than the $200 super-spike Goldman Sachs scenario.