A few policies to hedge against crashing oil prices

Oil pump at sunset (iStockPhoto)

Fuel prices have been falling as I expected, and may fall much further. This week oil hit a 21-month low, at one point sinking below $55-a-barrel for Brent North Sea crude-well below the $140-a-barrel highs we saw just a few months ago in July. 

The reality is that oil prices have been perfectly random for 140 years. So, while the latest dive may distract some with short attention spans, it shouldn't affect those focused on long-term, viable solutions to our energy, financial, security and environmental needs. 

Before I lay down some government policies I believe will keep us on track, consider these four points: 

• We now have techniques to save half our oil and gas, and three-quarters of our electricity, at about an eighth of their price. Energy efficiency remains one of the highest-return and lowest-risk investments in the entire economy, no matter how low the price of oil might realistically go. See RMI's Winning the Oil Endgame Initiative for details.

• Continuing, indeed increasing, concerns about national energy security and about climate change persist even if fuel prices drop. In general, making our energy services affordable, secure, and climate-safe requires exactly the same actions (chiefly energy efficiency).

• Electricity prices are dominated by capital cost, not fuel cost. Some very costly options, like nuclear power, would greatly increase our electricity prices, while some cheap ones, like windpower and energy efficiency technologies, would reduce them. With our climate and energy security problems, we need to ensure we pursue the best buys first. Since society only has so much money to spend on tackling climate change, each dollar spent poorly reduces our ability to reduce emissions in the future. Buying anything costlier or slower makes matters worse.

• Just counting side-benefits of energy efficiency roughly doubles the energy saving a typical U.S. manufacturing plant can justify: 6-16 percent higher labor productivity in efficient offices, 40 percent higher retail sales in well-daylit shops, 20-26 percent faster learning in well-daylit schools, faster healing in green and efficient hospitals, and higher throughput, flexibility, and quality in efficient factories. See the Heschong Mahone Group, Inc. for details.

With that in mind, we should be aggressively pursuing efficiency and renewable power despite falling oil prices. 

Here are some governmental policies to ensure we don't slip back to wasteful ways as prices continue to crash: 

• Reward electric and gas utilities for cutting our bills, not selling us more energy. Half the states have recently adopted or are considering this  "decoupling-and-shared-savings" reform to align utilities' and customers' interests.

• Introduce size- and revenue-neutral "feebates" (fee + rebate) for lightweight vehicles. In each size class, inefficient models pay a corresponding fee while efficient models earn a rebate paid for by others' fees.

• Use tailored financing programs to help low-income Americans (many of whom can no longer afford personal mobility) to buy new, very efficient, highly reliable cars bundled with insurance and price-hedged gasoline. Scrap dirty old cars a few years early. Net result: a new million-car-a-year market for Detroit among customers who couldn't previously qualify for a new car; cleaner air; faster oil savings; and astonishing new employment opportunities for low-income citizens who couldn't previously get to work.

• At all levels of government and in business, focus attention less on getting prices exactly right and much more on "barrier-busting" -- turning into a business opportunity each of the 60-80 market failures in buying energy efficiency. For details, see Climate: Making Sense and Making Money (PDF). 

• Above all, adopt an economically conservative energy policy that allows and requires all ways to save or produce energy to compete fairly at honest prices, regardless of their type, technology, size, location, or ownership.

Conscientiously pursued, this best-buys-first approach would solve the oil, climate, and proliferation problems at a profit, over a few decades, totaling trillions of dollars. 

Amory Lovins is co-founder and chief scientist at Rocky Mountain Institute.