tag:theconversation.com,2011:/africa/topics/cheap-oil-24709/articlesCheap Oil – The Conversation2020-03-13T12:02:36Ztag:theconversation.com,2011:article/1332932020-03-13T12:02:36Z2020-03-13T12:02:36ZThe oil shock of 2020 appears to be here – and the pain could be wide and deep<figure><img src="https://images.theconversation.com/files/320282/original/file-20200312-111232-15sq2wp.jpg?ixlib=rb-1.1.0&rect=63%2C158%2C5232%2C3279&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Suffering from sanctions, Russia is trying produce more and gain market share.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/pumpjacks-near-the-yamashinskoye-rural-settlement-in-the-news-photo/1206328964?adppopup=true"> Yegor Aleyev via Getty Images</a></span></figcaption></figure><p>The world is again undergoing an oil shock. </p>
<p>Prices, already on a downward trend, have collapsed 30% in less than a week, bringing the total fall to <a href="https://oilprice.com/commodity-price-charts?1&page=chart&sym=CB*1&name=Brent%20Crude">nearly 50%</a> since highs in early January. Consumers, of course, can <a href="https://www.cnbc.com/2020/03/08/plummeting-oil-prices-and-mortgage-rates-could-boost-consumers.html">expect gasoline prices to go down</a>, but the story is far more complicated than that.</p>
<p>Having <a href="https://scholar.google.com/citations?user=dCRySjIAAAAJ&hl=en&oi=ao">researched energy for decades</a>, I see this as a big deal, not only for the global economy, but for geopolitics, the future of transport and efforts to mitigate climate change, particularly if the world enters into a sustained period of cheap oil. </p>
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<h2>What happened?</h2>
<p>Oil prices have been forced downward due to major influences from both the demand and supply sides. </p>
<p>Demand for crude oil and petroleum fuels <a href="https://www.nytimes.com/2020/03/02/business/oil-price-opec-coronavirus.html">has fallen worldwide</a> because of the coronavirus pandemic, nowhere more so <a href="https://www.bloomberg.com/news/articles/2020-02-02/china-oil-demand-is-said-to-have-plunged-20-on-virus-lockdown">than in China</a>. Locking down millions of people closed factories, cut supply chains and reduced transport at home and abroad via trade. This is key, because China is the globe’s <a href="https://www.eia.gov/todayinenergy/detail.php?id=34812">largest oil importer</a> and a major driver of global demand. A global downturn in <a href="https://www.argusmedia.com/en/news/2083583-iea-likely-to-revise-down-oil-demand-projection">demand from transportation</a>, not least <a href="https://www.ainonline.com/aviation-news/air-transport/2020-03-06/coronavirus-spread-becomes-global-crisis-airlines">in air travel</a>, has eroded demand further. </p>
<p>On the supply side, an uneasy partnership between OPEC and Russia has turned into <a href="https://www.latimes.com/business/story/2020-03-08/oil-price-war">a bitter breakup</a>. The resulting war for market share has flooded the world with oil.</p>
<p>OPEC and Russia <a href="https://www.reuters.com/article/us-opec-meeting/opec-non-opec-agree-first-global-oil-pact-since-2001-idUSKBN13Z0J8">first got together in 2016</a> to cut production and raise prices against a river of <a href="https://theconversation.com/attacks-on-saudi-oil-why-didnt-prices-go-crazy-123823">new oil from shale drilling in the U.S.</a> To a degree, it worked – prices did rise, though in <a href="https://www.macrotrends.net/1369/crude-oil-price-history-chart">volatile fashion.</a></p>
<p>But at a meeting on March 6, the Saudis <a href="https://www.cnbc.com/2020/03/06/opec-meeting-coronavirus-weighs-on-oil-demand-as-oil-prices-fall.html">proposed</a> yet another cut to counter muted demand from the coronavirus’ effect on the economy. Russia said it would <a href="https://washingtonpost.com/climate-environment/oil-price-war-threatens-widespread-collateral-damage/2020/03/09/3e42c9e2-6207-11ea-acca-80c22bbee96f_story.html">elevate production instead</a>, and the Saudis responded by saying they would, too. A few days later, the United Arab Emirates said it would also <a href="https://www.reuters.com/article/us-saudi-aramco-output-capacity/saudi-announces-plan-to-boost-oil-production-capacity-for-first-time-in-years-idUSKBN20Y0PO">boost output to record levels</a> and accelerate plans to increase capacity.</p>
<p>Russia’s motives <a href="https://www.latimes.com/business/story/2020-03-08/oil-price-war">seem evident</a>. Suffering under sanctions for its seizure of Crimea, Russia had kept its production relatively muted for years at the bidding of Saudi Arabia, which allowed U.S. shale producers to gain market share at the expense of Russian companies.</p>
<p>There is little doubt, too, that U.S. oil companies are <a href="https://qz.com/1815335/russias-oil-price-war-with-saudi-arabia-could-cause-defaults-in-us/">especially vulnerable right now</a>. Many have operated along the edges of profitability and remain deep in debt. With demand falling, an added downward push on prices should bring real pain to the plains of Texas, North Dakota and Ohio. Still, I expect U.S. producers to survive as they have before – by consolidating, finding ways to lower costs, becoming more efficient and innovating. </p>
<h2>Floods of oil</h2>
<p>Russia’s calculus that it could gain market share against shale companies by boosting output was likely accurate, but it probably didn’t include the Saudi-UAE response. Russian officials have said companies can probably <a href="https://oilprice.com/Energy/Crude-Oil/Oil-Price-War-Escalates-As-OPECs-No3-Boosts-Production.html">raise production</a> by around 200,000 to 300,000 barrels per day in the short term, with the <a href="https://oilprice.com/Energy/Crude-Oil/Russia-Fires-Back-Could-Boost-Oil-Production-By-500000-Bpd.html">Kremlin claiming 500,000 barrels a day later in 2020</a>. My own estimates suggest that, together, the Saudis and Emiratis can boost flows by as much as 3.5 million barrels per day – possibly 10 times the Russian volume – over the rest of this year, with about 2 million barrels in the short term.</p>
<p>Even without any of these increases, there was already a glut of oil globally. According to the International Energy Agency’s <a href="https://www.iea.org/reports/oil-market-report-march-2020">Oil Market Report for March 2020</a>, the fall in demand and rise in shale production would have left the global market oversupplied by more than 3 million barrels per day unless OPEC made big cuts. This surplus now looks modest compared to what the year seems likely to bring.</p>
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<h2>Broad and deep global impacts</h2>
<p>History may not repeat itself, but it does provide analogies. In <a href="https://www.bloomberg.com/news/articles/2014-11-26/oil-bust-of-1986-reminds-u-s-drillers-of-price-war-risks">1986, the Saudis opened the spigots</a> against rising production from the North Sea and, more importantly, the Soviet Union. The result was a generation of cheap oil that lasted until Chinese demand <a href="https://doi.org/10.4000/chinaperspectives.2783">forced prices higher starting in 2004</a>. During this era of <a href="https://EconPapers.repec.org/RePEc:bin:bpeajo:v:17:y:1986:i:1986-2:p:237-284">low oil prices</a>, the U.S. had little development of alternative energy sources; increased consumption; a <a href="https://theconversation.com/how-the-federal-government-came-to-control-your-cars-fuel-economy-94467">decline in fuel economy</a>; saw the <a href="https://www.wsj.com/articles/america-has-fallen-out-of-love-with-the-sedan-1535169698">surge of the SUV</a>; and growth in oil imports to the U.S. That period also saw U.S. military intervention in the Middle East. </p>
<p>Can all this happen again? No. And the direction of prices could, of course, change course. But an era of very low prices, say less than $40 per barrel as exists right now, would bring new negatives, perhaps even more worrisome. </p>
<p>Like what? This is, of course, speculation, but I could imagine the following trends emerging:</p>
<ul>
<li><p>Significant economic damage in oil-producing countries beyond OPEC and Russia, including Argentina, Brazil, Guyana, Ivory Coast, Malaysia, Indonesia, Azerbaijan, Kazakhstan.</p></li>
<li><p>Major economic and possibly social disruption in nations with fragile democracies, like Iraq, Algeria, Nigeria, Gabon. Iraq is a particular worry, given its partial emergence from war and insurgency.</p></li>
<li><p>Bankruptcies, unemployment, rural decay, elevated drug use, “deaths of despair” likely in U.S. states where the oil boom is active, such as Texas, New Mexico, Utah, Colorado, North Dakota, Alaska, Ohio, among others.</p></li>
<li><p>Ultra-cheap carbon fuels might turn public interest and vehicle manufacturer incentives away from higher fuel economy and efficiency, including nontransport uses.</p></li>
<li><p>Cheap fuel could become a possible hurdle to all-electric transport, which is now at a critical period, as major car and truck manufacturers bring out <a href="https://www.businessinsider.com/promises-carmakers-have-made-about-their-future-electric-vehicles-2020-1#toyota-1">full lines of electric vehicles</a> through 2025.</p></li>
<li><p>Major decline in the value of recyclable plastics as manufacturing new plastic becomes cheaper than the cost of recycling.</p></li>
<li><p>Even more importance on government policy to advance action on lowering emissions, therefore on politics, which has not yet proven reliable in this sphere. </p></li>
<li><p>Low-price oil could become especially attractive to less developed nations (transport, power generation, heating) now undergoing energy modernization and lacking in income.</p></li>
</ul>
<h2>Cheap gas isn’t everything</h2>
<p>The current shock is not yet over at this writing, and more big changes may lie ahead. What can be said with some assurance is that the effects of mega-cheap oil are bound to be diverse and, in some ways, nuanced. But they are not likely to be beneficial. Yes, there will be some perks for consumers if fuel prices are at basement levels for longer than a few months. Food and heating oil, for example, will be variably cheaper.</p>
<p>But ultra-cheap oil is not the world’s friend. There are too many reasons to move away from dependence on petroleum in the domain of fuel. I’ve suggested only some in the list above. Such a move will be a massive undertaking, to say the least. It will not be aided by another era in which oil is more affordable than bottled water.</p>
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<p class="fine-print"><em><span>Scott L. Montgomery does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Has the world entered an era of ultra-low prices? An energy scholar argues that a long period of low oil prices will set the U.S. – and globe – back on the economy and the environment.Scott L. Montgomery, Lecturer, Jackson School of International Studies, University of WashingtonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/698322016-12-12T03:40:27Z2016-12-12T03:40:27ZWhy OPEC’s gambit to raise oil prices might not work<p>After months of speculation by oil market watchers, the Organization of the Petroleum Exporting Countries (OPEC) <a href="http://www.opec.org/opec_web/static_files_project/media/downloads/press_room/OPEC%20agreement.pdf">recently announced a six-month production cut</a> of 1.2 million barrels per day (b/d) with the aim of driving up the price. It’s set to take effect on Jan. 1. </p>
<p>Saudi Arabia will be responsible for a little less than half of the total, or just under 500,000 b/d, followed by 210,000 for Iraq and about 135,000 for Kuwait and the United Arab Emirates each. A nonmember, Russia, pledged to cut about 300,000 b/d as part of the deal. </p>
<p>The move, which could be extended for another six months, was in response to the expected continuation of weak oil market conditions: too much supply and too little demand. The result was that for the first time since 1998, OPEC reported a <a href="http://www.opec.org/opec_web/static_files_project/media/downloads/publications/ASB2016.pdf">collective current account deficit of almost US$100 billion in 2015</a>, compared with a surplus of $238 billion in 2014.</p>
<p>The crude oil price reacted as intended by <a href="http://www.reuters.com/article/us-global-oil-idUSKBN13R02L">climbing 15 percent</a> almost immediately, <a href="http://www.macrotrends.net/1369/crude-oil-price-history-chart">settling at about $51</a>. That’s up from a low of less than $30 earlier this year.</p>
<p>The planned cuts and market reaction raise a lot of questions, however, such as why the oil price increased even though the reductions have yet to take effect and whether it will continue to rise. As an energy economist, I believe the best way to answer these and other important questions is by exploring a fundamental concept of my field: supply and demand. </p>
<h2>Economics 101</h2>
<p>Oil markets are notoriously difficult to predict because <a href="http://www.beg.utexas.edu/energyecon/thinkcorner/Think%20Corner%20factors%20impacting%20oil%20price.pdf">there are so many factors</a> that affect the price.</p>
<p>Supply-side factors include crude quality, cost of resource development and production, access to resources, availability of infrastructure, environmental and economic regulations, and the behavior of suppliers such as OPEC. </p>
<p>Probably more complex are demand-side factors: demand growth in various markets for various petroleum products, the state of the refining industry, pricing policies (taxes and subsidies) for different products in different countries, environmental regulations for end use, and energy policies regarding efficiency and alternatives.</p>
<p>While financial trading is the most important factor influencing the oil price in the short-term, whether the price continues to rise or not in the coming weeks and months will depend on fundamental supply/demand dynamics. </p>
<h2>Will members comply?</h2>
<p>First, OPEC members have a mixed record complying with previous agreements to cut production levels. </p>
<p>When OPEC first started the quota system in the early 1980s, Saudi Arabia had to reduce production by up to 6 million b/d to maintain the organization’s quota as other members flouted their commitments. From 2009 to 2013, OPEC production has been typically <a href="https://assets.bwbx.io/images/users/iqjWHBFdfxIU/ip0Au96J5o_8/v4/-1x-1.png">1 million to 2 million b/d above the quota</a>. </p>
<p>Thus verification of compliance with the cuts will be important if markets will have any faith that they’ll actually materialize. </p>
<p>Also, oil data, especially short-term production and storage data by state-owned entities, tend to be opaque. The “reference” production levels for some countries (e.g., Iran, Iraq, Venezuela) might be higher than how much they can sustainably produce. The reference level is the base amount from which cuts will be made. </p>
<p>Although Iran’s October production was reported at about 3.7 million b/d, for example, the reference level was accepted as 3.975 million b/d, the <a href="http://www.arabtimesonline.com/news/opec-deal-expected-tighten-oil-market-2017-production-cut-750000-1-million-bpd-seen/">amount it produced at its peak in 2005</a>. </p>
<p>Russian production – which won’t be subject to monitoring – may be down during the winter months due to scheduled maintenance or by focusing on drilling.</p>
<p>In other words, cuts may appear to be compliant with the agreement, but the actual supply to global markets may not be much different than what it would be without it.</p>
<h2>Will the US get back in the game?</h2>
<p>Second, whether U.S. producers of unconventional oil fields like shale in North Dakota are capable and willing to respond to higher prices by drilling more wells and increasing production is crucial. </p>
<p>Coincidentally, U.S. production fell a little over 1 million b/d after the price of oil plunged early last year. So if they do boost production to take advantage of higher prices, the increase could make the cuts a wash. The question then becomes, would a higher price tempt them to begin drilling again? </p>
<p>Since the price collapse, drilling in the U.S. has focused on the Permian Basin in west Texas and New Mexico. The number of rigs operating in the Permian has increased by about 100 since April to reach 235, or <a href="http://phx.corporate-ir.net/phoenix.zhtml?c=79687&p=irol-reportsother">a little under half of the 477 rigs actively drilling for oil across the U.S.</a> Another 119 rigs are drilling for gas. At the peak in October 2014, <a href="http://fuelfix.com/blog/2016/08/12/permian-basin-leads-big-jump-in-rig-count/">1,609 rigs were operating in oil basins</a> in the U.S.</p>
<p>Sustained prices above $50 should encourage more drilling.</p>
<p>However, “upstream” operators (explorers and producers), oilfield services companies and “midstream” transportation and storage businesses have been going through a period of adjustment, having idled hundreds of rigs and laid off <a href="http://www.houstonchronicle.com/business/energy/article/Fed-U-S-oil-job-cuts-reach-about-118-000-7237605.php">tens of thousands of employees</a>. It will not be easy to mobilize these resources quickly. Nor is it clear that it makes financial sense to do so. </p>
<p>The availability of cheap loans during the post-financial crisis era of ultra-low interest rates was instrumental in encouraging too many companies to drill too many wells too quickly, which led to the collapse of <a href="http://www.eia.gov/dnav/ng/ng_pri_fut_s1_d.htm">natural gas prices in the U.S. in the early 2010s</a> and that of <a href="http://www.eia.gov/dnav/pet/pet_pri_spt_s1_d.htm">oil prices in late 2014</a>. Many companies are still burdened by those debts. </p>
<p>If prices fall after billions of dollars of new investment, the financial recovery of many companies will be stunted. Combined with the uncertainty associated with the expected rise in interest rates and the high costs of remobilization rigs and crews, it is difficult to imagine U.S. oil companies overreacting to the OPEC cuts.</p>
<h2>Libya and Nigeria</h2>
<p>Third, Libya and Nigeria, though members of OPEC, are not part of the announced agreement. </p>
<p>Libyan production has been recovering from 250,000 b/d in August and reached almost 600,000 b/d in late November. Libya’s <a href="https://www.eia.gov/beta/international/analysis_includes/countries_long/Libya/images/crude_oil_production.png">long-term goal</a> is to pump 1.6 million b/d, the level before the ousting of Muammar Gaddafi, and the country might be able to pass the halfway mark next year.</p>
<p>Nigeria should be capable of producing close to 2 million b/d, but pipeline disruptions caused by conflict in the Niger Delta have reduced that to 1.5 million. The resolution of the conflict, albeit not an easy task given the longevity of it, could bring more supplies to the market and thus undercut prices.</p>
<h2>Macroeconomic malaise</h2>
<p>Finally, the world economy has been anemic in recent years despite low oil prices, which have historically been a driver of economic growth. Oil demand growth has been muted.</p>
<p>One potential reason is the reduction in fuel subsidies in recent years in some key countries <a href="https://www.chinadialogue.net/article/show/single/en/8709-Prices-at-China-s-petrol-pumps-stoke-debate-on-fossil-fuel-subsidy-reform-">such as China</a>. So consumers in many countries may be paying the same price for petroleum products now as they did in 2014 when the oil was $90 a barrel and will continue to do so unless governments reinstitute some subsidies. This might be difficult because macroeconomic policies in many countries seem to be failing to stimulate their economies. </p>
<p>Also, years of supporting energy efficiency and alternative fuels or technologies along with regulating emissions might be dampening oil demand growth in some countries. One can only speculate that a sustained and significant increase in the price of oil would encourage these policies. </p>
<p>Overall, OPEC’s production cuts are not building on strong demand growth. To the extent it succeeds in raising the price, it can end up undermining demand. </p>
<h2>Back to the fundamentals</h2>
<p>It is difficult to do justice to the complexity of oil market dynamics in such a short article. </p>
<p>In short, though, the planned OPEC cuts have already provided some respite for oil producers, in terms of higher prices, thanks to the eagerness of financial traders. But once the excitement of the news passes, these and other demand-supply fundamentals will once again govern the oil price.</p>
<p>Although these higher prices will enhance producer revenues and slow the buildup of oil inventories, they can also dampen demand growth and encourage too much production too soon.</p><img src="https://counter.theconversation.com/content/69832/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Gürcan Gülen works for a university research unit that receives funding from various organizations. For details see <a href="http://www.beg.utexas.edu/energyecon/">http://www.beg.utexas.edu/energyecon/</a>.</span></em></p>To see why, one must only consider the core economic principle of supply and demand.Gürcan Gülen, Research Scientist, The University of Texas at AustinLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/656222016-09-26T01:33:43Z2016-09-26T01:33:43ZAddicted to oil: US gasoline consumption is higher than ever<figure><img src="https://images.theconversation.com/files/139066/original/image-20160924-29889-18mi4tb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Gas is cheap and Americans are back on in their cars and trucks.</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/viriyincy/2914531798/in/photolist-5rxJLf-9MY44A-8Y5as3-7xHGUk-mvZ26U-6LAbC1-4zTP3F-4VGnju-avRvez-pAAehJ-4mcexJ-4xf1cd-keNU5z-hdG76U-fNFkWg-nXureH-6MDptH-9vvQC6-deJ4jY-H27gNS-7vvt19-987sPF-pdcCSt-9zyrQ5-cZ75r7-ck6LF7-dHSozf-9BxfaB-gmz647-btS2uw-az7oSz-jFwe9S-4rjVCP-8aPZrx-g86KCx-BWcnhD-abTW37-bAHR5K-aza3qG-nMe1hf-295w6Q-7T57km-8mRboj-AYFrBQ-9bmPYV-6i14LJ-azPY1w-7t4XBF-p3FW1j-9zvv9B">viriyincy/flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span></figcaption></figure><p>August was the biggest month ever for U.S. gasoline consumption. Americans used a staggering <a href="http://www.eia.gov/dnav/pet/pet_cons_wpsup_k_w.htm">9.7 million barrels per day</a>. That’s more than a gallon per day for every U.S. man, woman and child. </p>
<p>The new peak comes as <a href="http://www.eia.gov/todayinenergy/detail.cfm?id=25072">a surprise</a> to many. In 2012, energy expert Daniel Yergin <a href="http://www.npr.org/2012/03/22/149061105/whats-making-americans-less-hungry-for-gasoline">said</a>, “The U.S. has already reached what we can call`peak demand.” Many others <a href="http://knkx.org/post/whats-making-americans-less-hungry-gasoline">agreed</a>. The U.S. Department of Energy <a href="http://www.eia.gov/forecasts/archive/aeo12/">forecast</a> in 2012 that U.S. gasoline consumption would steadily decline for the foreseeable future.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/138831/original/image-20160922-22514-fwpal2.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/138831/original/image-20160922-22514-fwpal2.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/138831/original/image-20160922-22514-fwpal2.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=434&fit=crop&dpr=1 600w, https://images.theconversation.com/files/138831/original/image-20160922-22514-fwpal2.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=434&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/138831/original/image-20160922-22514-fwpal2.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=434&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/138831/original/image-20160922-22514-fwpal2.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=545&fit=crop&dpr=1 754w, https://images.theconversation.com/files/138831/original/image-20160922-22514-fwpal2.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=545&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/138831/original/image-20160922-22514-fwpal2.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=545&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">Source: Constructed by Lucas Davis (UC Berkeley) using EIA data 'Motor Gasoline, 4-Week Averages.'</span></span>
</figcaption>
</figure>
<p>This seemed to make sense at the time. U.S. gasoline consumption had declined for five years in a row and, in 2012, was a million barrels per day below its July 2007 peak. Also in August 2012, President Obama had just <a href="https://www.whitehouse.gov/the-press-office/2012/08/28/obama-administration-finalizes-historic-545-mpg-fuel-efficiency-standard">announced</a> aggressive new fuel economy standards that would push average vehicle fuel economy to 54 miles per gallon. </p>
<p>Fast forward to 2016, and U.S. gasoline consumption has increased steadily four years in a row. We now have a new peak. This dramatic reversal has important consequences for petroleum markets, the environment and the U.S. economy. </p>
<p>How did we get here? There were a number of factors, including the the Great Recession and a spike in gasoline prices at the end of the last decade, which are unlikely to be repeated any time soon. But it should come as no surprise. With incomes <a href="http://www.nytimes.com/2016/09/14/business/economy/us-census-household-income-poverty-wealth-2015.html?_r=0">increasing again</a> and low gasoline prices, Americans are back to buying big cars and driving more miles than ever before. </p>
<h2>The Great Recession</h2>
<p>The slowdown in U.S. gasoline consumption between 2007 and 2012 occurred during the worst global recession since World War II. The <a href="http://www.nber.org/cycles/cyclesmain.html">National Bureau of Economic Research</a> dates the Great Recession as beginning December 2007, exactly at the beginning of the slowdown in gasoline consumption. The economy remained anemic, with unemployment above 7 percent through 2013, just about when gasoline consumption started to increase again.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/138836/original/image-20160922-22530-ntux9f.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/138836/original/image-20160922-22530-ntux9f.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=334&fit=crop&dpr=1 600w, https://images.theconversation.com/files/138836/original/image-20160922-22530-ntux9f.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=334&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/138836/original/image-20160922-22530-ntux9f.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=334&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/138836/original/image-20160922-22530-ntux9f.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=419&fit=crop&dpr=1 754w, https://images.theconversation.com/files/138836/original/image-20160922-22530-ntux9f.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=419&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/138836/original/image-20160922-22530-ntux9f.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=419&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<p>Economists have <a href="http://www.sciencedirect.com/science/article/pii/S0140988314002734">shown</a> in <a href="https://ideas.repec.org/a/eee/enepol/v41y2012icp2-13.html">dozens</a> of <a href="https://www.jstor.org/stable/41323125?seq=1#page_scan_tab_contents">studies</a> that there is a robust positive relationship between income and gasoline consumption – when people have more to spend, gasoline usage goes up. During the Great Recession, Americans traded in their vehicles for <a href="https://www.aeaweb.org/articles?id=10.1257/aer.103.1.220">more fuel-efficient models</a>, and drove fewer miles. But now, as incomes are increasing again, Americans are <a href="http://www.npr.org/2016/05/09/477301486/why-americans-are-buying-more-trucks-and-suvs-than-cars">buying bigger cars and trucks</a> with <a href="http://web.mit.edu/knittel/www/papers/steroids_latest.pdf">bigger engines</a>, and driving <a href="http://www.sciencedirect.com/science/article/pii/S004727270200186X">more total miles</a>.</p>
<h2>Gasoline prices</h2>
<p>The other important explanation is gasoline prices. During the first half of 2008, gasoline prices increased sharply. It is hard to remember now, but U.S. gasoline prices <a href="https://blog.gasbuddy.com/Retail_Price_Chart.aspx">peaked</a> during the summer of 2008 above US$4.00 gallon, driven by crude oil prices that had topped out above $140/barrel.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/139043/original/image-20160923-29919-mgydvs.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/139043/original/image-20160923-29919-mgydvs.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/139043/original/image-20160923-29919-mgydvs.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/139043/original/image-20160923-29919-mgydvs.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/139043/original/image-20160923-29919-mgydvs.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/139043/original/image-20160923-29919-mgydvs.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/139043/original/image-20160923-29919-mgydvs.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/139043/original/image-20160923-29919-mgydvs.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Gasoline prices in Washington D.C. top $4 a gallon in 2008.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/brownpau/2478365614/in/photolist-4SVxhQ-bGnpk2-AZfhU-4HfG1z-4M1gKC-4PtunA-buKRH4-9Sdb9R-bCMthM-4HvSC5-5BKNWw-4V5uTM-8eW3Zq-9AggZH-5gamtJ-izu3p5-5vSQeZ-okcxJz-dfydyS-yBrpQo-5xGMMd-58PbLd">brownpau/flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/138839/original/image-20160922-22502-1134ahw.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/138839/original/image-20160922-22502-1134ahw.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=305&fit=crop&dpr=1 600w, https://images.theconversation.com/files/138839/original/image-20160922-22502-1134ahw.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=305&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/138839/original/image-20160922-22502-1134ahw.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=305&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/138839/original/image-20160922-22502-1134ahw.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=383&fit=crop&dpr=1 754w, https://images.theconversation.com/files/138839/original/image-20160922-22502-1134ahw.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=383&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/138839/original/image-20160922-22502-1134ahw.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=383&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">retail.</span>
</figcaption>
</figure>
<p>These $4.00+ prices were short-lived, but gasoline prices nonetheless remained steep during most of 2010 to 2014, before falling sharply during 2014. Indeed, it was these high prices that contributed to the decrease in U.S. gasoline consumption between 2007 and 2012. Demand curves, after all, do slope down. Economists have shown that Americans are getting <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=930730">less sensitive</a> to gasoline prices, but there is still a strong negative relationship between prices and gasoline consumption.</p>
<p>Moreover, since gasoline prices plummeted in the last few months of 2014, Americans have been buying gasoline like crazy. Last year was the <a href="http://www.autonews.com/article/20160105/RETAIL01/160109995/u.s.-auto-sales-break-record-in-2015">biggest year ever</a> for U.S. vehicle sales, with trucks and SUVs leading the charge. This summer Americans took to the roads in record numbers. The U.S. average retail price for gasoline was $2.24 per gallon on August 29, 2016, <a href="https://www.eia.gov/todayinenergy/detail.cfm?id=27792">the lowest Labor Day price in 12 years</a>. No wonder Americans are driving more.</p>
<h2>Can fuel economy standards turn the tide?</h2>
<p>It’s hard to make predictions. Still, in retrospect, it seems clear that the years of the Great Recession were highly unusual. For decades U.S. gasoline consumption has gone up and up – driven by rising incomes – and it appears that we are now very much back on that path.</p>
<p>This all illustrates the deep challenge of reducing fossil fuel use in transportation. U.S. electricity generation, in contrast, has become considerably greener over this same period, with enormous <a href="https://theconversation.com/king-coal-is-dethroned-in-the-us-and-thats-good-news-for-the-environment-63910">declines in U.S. coal consumption</a>. Reducing gasoline consumption is harder, however. The available substitutes, such as electric vehicles and biofuels, are <a href="http://web.mit.edu/knittel/www/papers/JEP_hydro_latest.pdf">expensive</a> and <a href="http://pubs.acs.org/doi/abs/10.1021/es4045677">not necessarily less carbon-intensive</a>. For example, electric vehicles can actually <a href="http://www.dartmouth.edu/%7Emansur/papers/Holland_Mansur_Muller_Yates_ElecCarSubsidy.pdf">increase overall carbon emissions</a> in states with mostly coal-fired electricity.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/139118/original/image-20160925-13532-10la60y.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/139118/original/image-20160925-13532-10la60y.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/139118/original/image-20160925-13532-10la60y.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/139118/original/image-20160925-13532-10la60y.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/139118/original/image-20160925-13532-10la60y.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/139118/original/image-20160925-13532-10la60y.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/139118/original/image-20160925-13532-10la60y.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/139118/original/image-20160925-13532-10la60y.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">How we roll: Americans are buying less fuel-efficient vehicles, such as SUVs, as gas prices go down.</span>
<span class="attribution"><span class="source">gas pump from www.shutterstock.com</span></span>
</figcaption>
</figure>
<p>Can new fuel economy standards turn the tide? Perhaps, but the new “<a href="https://energyathaas.wordpress.com/2016/01/25/new-cafe-standards-the-good-the-bad-and-the-ugly/">footprint</a>”-based rules are yielding <a href="http://www.nytimes.com/2016/07/19/business/demand-for-big-vehicles-threatens-emissions-targets.html?_r=0">smaller</a> fuel economy gains than was expected. With the new rules, the fuel economy target for each vehicle depends on its overall size (i.e., its “footprint”); so as Americans have purchased more trucks, SUVs and other large vehicles, this relaxes the overall stringency of the standard. So, yes, fuel economy <a href="http://www.umich.edu/%7Eumtriswt/EDI_sales-weighted-mpg.html">has improved</a>, but much less than it would have without this mechanism.</p>
<p>Also, automakers are <a href="http://www.nytimes.com/2016/03/23/business/energy-environment/low-gas-prices-create-a-detour-on-the-road-to-greater-fuel-economy.html?_r=0">pushing back</a> hard, arguing that low gasoline prices make the standards <a href="https://energyathaas.wordpress.com/2016/04/11/automakers-complain-but-cafe-loopholes-make-standards-easier-to-meet/">too hard to meet</a>. Some lawmakers have raised <a href="http://thehill.com/policy/transportation/297349-lawmakers-press-concerns-over-fuel-efficiency-rules">similar concerns</a>. The EPA’s comment window for the standards’ <a href="https://www3.epa.gov/otaq/climate/mte.htm">midterm review</a> ends Sept. 26, so we will soon have a better idea what the standards will look like moving forward.</p>
<p>Regardless of what happens, fuel economy standards have a fatal flaw that fundamentally limits their effectiveness. They can increase fuel economy, but they don’t increase the cost per mile of driving. Americans will drive <a href="http://www.fhwa.dot.gov/policyinformation/travel_monitoring/16jultvt/page2.cfm">3.2 trillion</a> miles in 2016, <a href="http://www.scientificamerican.com/article/americans-are-driving-more-than-ever1/">more miles than ever before</a>. Why wouldn’t we? Gas is cheap.</p><img src="https://counter.theconversation.com/content/65622/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Lucas Davis does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Many people thought U.S. gasoline consumption had already peaked. They were wrong. What happened?Lucas Davis, Associate Professor, University of California, BerkeleyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/595022016-05-18T16:36:23Z2016-05-18T16:36:23ZA tale of two oil and gas boomtowns – a boost to the economy, a tricky landing<figure><img src="https://images.theconversation.com/files/122910/original/image-20160517-9501-1ksf6x5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Drilling on a farm in North Dakota, site of a huge economic upswing from the oil and gas industry.</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/timevanson/9287130523/in/photolist-f9EYm4-pP5hkr-4z9P3Y-nqXwio-a1d3Xz-g1EDcJ-8LUBER-8cpZNF-9mSoEK-8ySdo9-s4Zw8z-vMQG5J-awLDwh-4z5yTe-bGiLVp-54reeK-mLrGMb-2woE4b-s4UYNt-4z9PtS-BtcWbK-pJnH44-f9HdZk-nHq89w-BZDiAg-btoXcj-f9Hecp-awLD7S-9bNFfd-9dCNBf-6XRA84-9iDJdh-nGRA9g-4z5uUX-qj4hDK-7osrY1-9K46xU-jXtiMZ-nG2Seu-fbdE6G-KJwZK-4z5wVp-4z9SCb-6mePeu-f9HfgX-8CqH3f-4z5yqD-fEtAjo-f9HeKc-3zPrCX">timevanson/flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span></figcaption></figure><p>Over roughly the past 10 years, the United States has experienced remarkable growth in the <a href="https://www.eia.gov/totalenergy/data/monthly/pdf/sec1_5.pdf">production of natural gas and oil</a>. This growth has taken place across dozens of regions, from the scrub of west Texas to the plains of North Dakota to the pastoral hills of Appalachia. It has sparked economic growth, raised environmental concerns and reduced energy prices.</p>
<p>But how does the oil and gas industry affect the financial well-being of the communities where it operates? Over the past three years, we have looked deeply into this question, traveling to 21 regions across the top 16 oil- and gas-producing states. We interviewed more than 200 officials from over 150 local governments (mostly cities and counties), analyzed financial records from each of these government entities and examined how policies have shaped their experiences.</p>
<p><a href="http://energy.duke.edu/shalepublicfinance">Our results</a> illustrate the difficulty of generalizing from one region to another, as each community experiences oil- and gas-driven growth differently. Despite the differences, our findings can offer lessons for regions where oil and gas activity – an industry marked by booms and busts – is likely to play a major role in the economy for decades to come.</p>
<h2>A tale of two boomtowns</h2>
<p>Most coverage of the recent boom and subsequent downturn of U.S. oil and gas production has focused on parts of North Dakota, Pennsylvania and Texas. But several other regions experienced similar booms just a few years earlier, and the diverging stories of two cities – Rifle, Colorado and Farmington, New Mexico – offer insights into what may lie ahead for other regions.</p>
<p>Rifle lies along Interstate 70 on the Western Slope of the Rocky Mountains. Incorporated just after 1900, the city grew with the expansion of the railroad, becoming a regional hub for cattle ranchers during the first half of the 20th century. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/122905/original/image-20160517-9458-1o1eni.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/122905/original/image-20160517-9458-1o1eni.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/122905/original/image-20160517-9458-1o1eni.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/122905/original/image-20160517-9458-1o1eni.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/122905/original/image-20160517-9458-1o1eni.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/122905/original/image-20160517-9458-1o1eni.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/122905/original/image-20160517-9458-1o1eni.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/122905/original/image-20160517-9458-1o1eni.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">An oil well in Rifle, Colorado.</span>
<span class="attribution"><span class="source">Daniel Raimi</span>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>Garfield County, which encompasses Rifle, also has a long history of energy production, and has experienced <a href="http://www.gjsentinel.com/news/articles/black-sunday-still-reverberates-30-years-later/">booms and busts before</a>. Most recently, technological advancements allowed companies in the early 2000s to tap the region’s vast reserves of natural gas trapped in previously unprofitable “<a href="http://www.rigzone.com/training/insight.asp?insight_id=346">tight sands</a>,” rock formations with low permeability. </p>
<p>In the year 2000, roughly 150 wells were completed each year in Garfield County. In 2005, that number grew to 800. By 2008, more than 2,000 wells were completed and Rifle was bursting at the seams. Thousands of workers were moving to the region to participate in the new industry, and studies commissioned by the county <a href="http://www.rifleco.org/DocumentCenter/View/1113">projected population growth</a> to continue rapidly for years to come.</p>
<p>Looking to the future, Rifle borrowed more than US$40 million to expand and upgrade its water and wastewater infrastructure. The city was growing: new homes, restaurants and shopping centers were concrete signs of Rifle’s economic vitality.</p>
<p>Then came the financial crisis, housing bust and recession of 2008-2009. Well completions dropped by more than half. As the national economy recovered and commodity prices rebounded, oil and gas companies shifted their focus to extracting natural gas from shale rock deposits, known as <a href="https://www.eia.gov/dnav/ng/ng_prod_shalegas_s1_a.htm">shale plays</a>, in Pennsylvania and elsewhere, further decreasing activity in Rifle. In 2015, just 71 wells were completed in Garfield County.</p>
<p>In the aftermath of the bust, the millions of dollars of investment in Rifle’s infrastructure, which seemed a wise investment a decade earlier, has become a burden. With population well below levels projected during the boom, remaining residents have shouldered the costs. Wastewater rates have more than doubled, water rates have risen by <a href="http://energy.duke.edu/shalepublicfinance">roughly 50 percent</a> and voters approved a new sales tax of 0.75 percent to finance the debt incurred for these new systems.</p>
<h2>San Juan Basin</h2>
<p>About 250 miles south of Rifle, through dusty mesas, lush national forests and windy mountain roads, sits Farmington, New Mexico. Farmington has the feeling of high desert, with snowy peaks in the distance and scrubby brush adorning the suburban roadways. The largest city in the “Four Corners” region, Farmington is the hub for oil and gas companies operating in the rich <a href="https://www.eia.gov/dnav/ng/ng_prod_coalbed_s1_a.htm">coalbed methane</a> fields that produce natural gas from coal seams.</p>
<p>Like Rifle, Farmington experienced a boom in drilling activity in the early and middle decade of the 2000s. Long a hub of industry activity, the number of new wells entering production in San Juan County, of which Farmington is the seat, nearly doubled, from 435 in 2000 to 799 in 2006. But like the area around Rifle, industry activity rapidly declined in the following years, falling to just <a href="http://info.drillinginfo.com/">60 new wells in 2015</a>. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/122909/original/image-20160517-9501-lx5wbq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/122909/original/image-20160517-9501-lx5wbq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/122909/original/image-20160517-9501-lx5wbq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/122909/original/image-20160517-9501-lx5wbq.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/122909/original/image-20160517-9501-lx5wbq.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/122909/original/image-20160517-9501-lx5wbq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/122909/original/image-20160517-9501-lx5wbq.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/122909/original/image-20160517-9501-lx5wbq.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">A drilling rig in San Juan County, New Mexico.</span>
<span class="attribution"><span class="source">Daniel Raimi</span>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>However, Farmington’s downturn has been far less severe, and the city did not need to dramatically expand its services to accommodate the boom. Because it is the region’s largest city, Farmington has become a commercial hub for the surrounding Four Corners area, attracting shoppers from nearby parts of Arizona, Colorado, New Mexico, Utah and the nearby Navajo Nation.</p>
<p>In addition, the region has seen large-scale drilling activity for a longer period of time than Rifle, and the industry has grown deeper roots. Thousands of workers in pickup trucks owned by <a href="http://www.yellowpages.com/farmington-nm/oil-companies">oilfield service companies</a> continue to traverse the region, checking on the status of old and new wells, making repairs and supporting the local economy.</p>
<h2>On the whole, net economic benefits</h2>
<p>Much like the different experiences of Rifle and Farmington, we found the effect of the oil and gas boom varied across the country, depending on the nature of a community’s location, policy structure and economy. </p>
<p>Overall, though, based on our interviews and analysis of financial data, it appears that a substantial majority of local governments across the United States have experienced net fiscal benefits from increased oil and gas production. They have seen growth in demand for public services, but increased revenue from a variety of sources has in most cases been more than enough to offset new costs.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/122904/original/image-20160517-9491-12d4fyq.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/122904/original/image-20160517-9491-12d4fyq.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/122904/original/image-20160517-9491-12d4fyq.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=328&fit=crop&dpr=1 600w, https://images.theconversation.com/files/122904/original/image-20160517-9491-12d4fyq.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=328&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/122904/original/image-20160517-9491-12d4fyq.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=328&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/122904/original/image-20160517-9491-12d4fyq.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=412&fit=crop&dpr=1 754w, https://images.theconversation.com/files/122904/original/image-20160517-9491-12d4fyq.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=412&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/122904/original/image-20160517-9491-12d4fyq.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=412&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Map illustrates oil and gas permits issued in the 90 days leading up to Feb. 20, 2015. Permit data not available for Alaska.</span>
<span class="attribution"><span class="source">DI Desktop. Annotations by Daniel Raimi and Richard Newell.</span>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>Local governments raise revenue from oil and gas activity in a variety of ways. In most states, county governments collect property taxes based on the value of the oil and gas produced (or in some cases the value of the underground reserves), leading to large upswings in revenue. For city governments, we found that sales taxes have been the largest growth source, spurred by increased populations and economic activity associated with the industry.</p>
<p>In addition, many state governments allocate a substantial share of oil and gas revenues to the local level. These revenues come from state <a href="http://www.mineralweb.com/owners-guide/leased-and-producing/royalty-taxes/oil-severance-tax/">severance taxes</a> paid by oil and gas producers, along with royalties and other sources derived from production on state and federal lands. Figure 2 shows how four key revenue sources flow to local governments in the 16 states we examined.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/122903/original/image-20160517-9476-77fqdb.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/122903/original/image-20160517-9476-77fqdb.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=279&fit=crop&dpr=1 600w, https://images.theconversation.com/files/122903/original/image-20160517-9476-77fqdb.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=279&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/122903/original/image-20160517-9476-77fqdb.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=279&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/122903/original/image-20160517-9476-77fqdb.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=350&fit=crop&dpr=1 754w, https://images.theconversation.com/files/122903/original/image-20160517-9476-77fqdb.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=350&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/122903/original/image-20160517-9476-77fqdb.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=350&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Figure 2: Oil and gas revenue flows to local governments in fiscal year 2013 in millions of dollars.</span>
<span class="attribution"><span class="source">Raimi and Newell 2016</span>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<h2>Some highly rural regions have faced challenges</h2>
<p>Not all local governments, however, have seen net fiscal benefits from oil and gas production. Some regions, particularly rural areas like Rifle experiencing rapid industry growth, have struggled to provide services for a booming population. The leading challenges for these local governments have been maintaining <a href="http://journalistsresource.org/studies/government/infrastructure-government/costs-shale-natural-gas-extraction-local-roads">roads impacted</a> by the large volume of heavy vehicle traffic, expanding water and wastewater infrastructure, and retaining government staff attracted to <a href="http://www.cnbc.com/2015/07/22/oil-and-gas-jobs-pay-is-still-big-but-not-booming.html">high-paying opportunities</a> in the oil and gas sector.</p>
<p>For some cities and counties, particularly those in North Dakota and Montana’s Bakken region, local populations grew by 50 percent or more over just a few years, creating challenges that any local government would struggle to manage. </p>
<p>With <a href="http://www.eia.gov/dnav/pet/pet_pri_spt_s1_a.htm">oil</a> and <a href="http://www.eia.gov/dnav/ng/ng_pri_fut_s1_a.htm">natural gas</a> prices falling by more than half since early 2014, many regions that experienced rapid growth driven by oil and gas activity face an uncertain future. </p>
<p>Population growth has slowed or reversed and revenues from industry have fallen. Some local governments invested tens or hundreds of millions of dollars to serve an increased population that may never arrive.</p>
<h2>Boomtown lessons: big or small, plan carefully</h2>
<p>Farmington’s population is roughly four times that of Rifle’s, and its economy is more diverse, able to attract economic activity from surrounding areas. For the small cities of Texas, North Dakota, Pennsylvania and other regions that have experienced rapid growth from the more recent boom, Rifle offers a cautionary note about the risks of rapid expansion driven by volatile oil and gas activity.</p>
<p>For larger cities with a more diverse economic base, the downturn in oil and gas activity will create economic challenges, but they are unlikely to be as dramatic as those experienced in regions that depend predominately on the oil and gas sector.</p>
<p>A larger lesson, one learned over decades by some oil- and gas-rich countries like <a href="http://www.swfinstitute.org/fund-rankings/">Norway and Saudi Arabia</a>, is that an economy tied to <a href="http://www.imf.org/external/pubs/ft/fm/2015/02/pdf/fm1502.pdf">extractive industries</a> is well-served by saving money during the good times, and preparing for the inevitable hard times that come with the next downturn.</p>
<p>Some U.S. states including <a href="http://www.eia.gov/todayinenergy/detail.cfm?id=21032">Alaska, New Mexico, North Dakota and Wyoming</a> have applied these lessons by establishing large savings funds that can support government services when belts tighten. But even Alaska, which boasts the largest state savings fund, is <a href="http://www.theatlantic.com/business/archive/2015/08/alaska-budget-crisis/402775/">struggling to manage its budget</a> during the current downturn. </p>
<p>In the long run, all communities heavily dependent on oil- and gas-related revenues will face the need to diversify or shrink, a major challenge when regional economies have come to thrive on the extraction of finite resources.</p><img src="https://counter.theconversation.com/content/59502/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Daniel Raimi received funding from the Alfred P. Sloan Foundation for the relevant research underpinning this article. </span></em></p><p class="fine-print"><em><span>Richard G Newell received funding from the Alfred P. Sloan Foundation for the relevant research underpinning this article.</span></em></p>The boom in oil and gas development has brought new revenues to many communities in the U.S., but rural areas in particular have struggled to handle the rapid downturn in prices.Daniel Raimi, Lecturer on Public Policy (UM Ford School), Research Specialist (UM Energy Institute), Associate in Research (Duke Univ. Energy Initiative), University of MichiganRichard G. Newell, Professor of Energy and Environmental Economics, Duke UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/571712016-04-06T09:46:55Z2016-04-06T09:46:55ZWill the Tesla Model 3 recharge the U.S. electric vehicle market?<figure><img src="https://images.theconversation.com/files/117537/original/image-20160405-29010-12p4qqz.png?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Tesla Model 3: cheaper than its predecessors, but is $35,000 really within reach of 'mainstream' buyers?</span> <span class="attribution"><span class="source">Tesla Motors</span></span></figcaption></figure><p>Few product launches in recent memory have captured as much attention as last week’s unveiling of the Tesla Model 3 electric vehicle (EV), Tesla’s first vehicle pitched at the mass market. </p>
<p>Orders were flooding in even before Tesla CEO Elon Musk revealed the car to a giddy audience last Thursday evening, with prospective buyers queuing at Tesla stores throughout the day to place a deposit on a vehicle they might not even receive for two years or more. </p>
<p>Musk made the case for EVs being “<a href="https://vimeo.com/161138986">really important for the future of the world</a>,” combating rising greenhouse gas emissions and air pollution. </p>
<p>The Model 3 is really important for the future of Tesla and the future of EVs. It promises the sales growth that automotive wunderkind Tesla needs to survive and renews interest in a technology that is yet to have significant real-world impact. Yet even with the introduction of Tesla’s flashy new sedan, more pieces need to be in place before the EV market goes truly mainstream. </p>
<h2>Battery prices dropping</h2>
<p>When the Chevrolet Volt plug-in hybrid and Nissan Leaf battery-electric vehicle hit U.S. showrooms in December 2010, the price of gasoline was rising, and so were expectations for the future of EVs. </p>
<p>Shortly after, President Obama articulated the goal of <a href="https://www.whitehouse.gov/sites/default/files/other/fact-sheet-one-million-advanced-technology-vehicles.pdf">having one million EVs on U.S. roads</a> by 2015, and committed billions of investment in EV manufacturing capacity, recharging infrastructure deployment and vehicle purchase incentives. </p>
<p>Five years later, the reality is somewhat different, with the market for hybrid and electric vehicles stagnating (see figure below). Only 415,000 plug-in hybrid and battery-electric vehicles have been sold to date, achieving no more than one percent of new vehicle sales, and conventional hybrid vehicles have fared little better, following the price of gasoline down over the past two years. </p>
<p>With gas cheap, sales of <a href="https://theconversation.com/what-should-america-do-with-its-2-per-gallon-gas-windfall-52258">SUVs and pickups are booming</a>, and all evidence suggests that mainstream car buyers simply do not want the green vehicles that are available currently.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/117529/original/image-20160405-28940-1yp0566.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/117529/original/image-20160405-28940-1yp0566.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/117529/original/image-20160405-28940-1yp0566.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=409&fit=crop&dpr=1 600w, https://images.theconversation.com/files/117529/original/image-20160405-28940-1yp0566.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=409&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/117529/original/image-20160405-28940-1yp0566.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=409&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/117529/original/image-20160405-28940-1yp0566.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=514&fit=crop&dpr=1 754w, https://images.theconversation.com/files/117529/original/image-20160405-28940-1yp0566.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=514&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/117529/original/image-20160405-28940-1yp0566.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=514&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">After rising during a period of high gas prices, sales of hybrids and electric cars have started to plateau and fall.</span>
<span class="attribution"><span class="source">HybridCars.com, U.S. Energy Information Administration</span>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>Why then might prospects for EVs be different looking forward? The answer lies in the rapid reductions in lithium-ion battery prices that are being achieved, falling 70 percent since 2007 to <a href="http://www.nature.com/nclimate/journal/v5/n4/full/nclimate2564.html?WT.ec_id=NCLIMATE-201504">US$300 per kWh</a>. </p>
<p>These battery improvements have the potential to significantly affect EV performance compared to gasoline-powered cars. The next wave of electric vehicles, led by the Tesla Model 3 and Chevrolet Bolt, promise more than 200 miles of electric range for $35,000, which advocates hope will be a sweet spot for consumers. </p>
<p>To say that $35,000 for a midsize car is affordable for mass-market consumers, as some have suggested, is optimistic to say the least. However, continued development of these second-generation EVs could soon challenge (again) the gasoline/internal-combustion regime that has dominated global automotive markets for the past 100 years.</p>
<h2>Not just for techies and treehuggers</h2>
<p>But when a mass-market transition to EVs may occur remains uncertain even with falling battery prices. </p>
<p>A recent report by <a href="http://about.bnef.com/press-releases/electric-vehicles-to-be-35-of-global-new-car-sales-by-2040/">Bloomberg New Energy Finance</a> received widespread attention for suggesting that EVs would be cost-competitive with gasoline vehicles by 2025. Significant further advances with batteries would be needed for that to occur. </p>
<p>Even so, building a market for EVs that is ecologically and economically sustainable requires more than just cheap batteries. EVs will go mainstream only when everyday car buyers understand the technology, have a wide range of EV makes, models and body styles to choose from, and have access to a ubiquitous network of fast charging stations for long trips. </p>
<p>Only Tesla can claim to offer significant charging infrastructure coverage today with their growing network of proprietary Supercharger stations, and Tesla faces other challenges internally as they learn to manufacture vehicles at scale with high quality.</p>
<p>The greatest impact of the Model 3, then, to the benefit of the entire EV industry, may be in convincing consumers that EVs are no longer just for treehuggers and techies. </p>
<p>In launching presales far in advance of production, Tesla has empowered 275,000 people (and counting) to tell everyone they know that their next car will be electric, long before the first Model 3 hits the road. For the struggling field of electric cars, that’s a real vote of confidence.</p><img src="https://counter.theconversation.com/content/57171/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>David Keith receives funding from the MIT Energy Initiative, whose financial partners and advisory board members include energy, automotive, technology and consulting companies, utilities and non-profit organizations.</span></em></p>Tesla Motors again struck a chord with the sleek Model 3 electric car but it’s still not enough to compete on price and convenience with mass market gas-powered cars, says auto tech researcher.David Keith, Assistant Professor of System Dynamics, Massachusetts Institute of Technology (MIT)Licensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/564822016-03-24T10:07:17Z2016-03-24T10:07:17ZCheap gas could delay America’s efficiency targets for cars and trucks<p>Cars and trucks in the United States are supposed to achieve great fuel efficiency gains over the next decade. But now that gasoline prices have plunged, those plans may be delayed.</p>
<p>In 2012, the National Highway and Traffic Safety Administration (NHTSA), in collaboration with the Environmental Protection Agency (EPA), issued regulations that require automakers to meet progressively more stringent fuel standards to reduce greenhouse gas (GHG) emissions. The regulations, which cover cars and light trucks from model years 2017 to 2025, will require automakers to reach a corporate average fuel efficiency (CAFE) standard of 41 miles per gallon by model year 2021. Then, the average fuel efficiency for automakers’ vehicles needs to reach 54.5 MPG by model year 2025.</p>
<p>But the exact details of rules and the timing of their implementation are not cast in stone. Next year, the initial set of targets will come up for review, and executives at car companies have <a href="http://www.wsj.com/articles/auto-makers-regulators-on-fuel-economy-collision-course-1421174452?cb=logged0.9301889809816075">already suggested</a> pushing out the <a href="http://www.nytimes.com/2016/03/23/business/energy-environment/low-gas-prices-create-a-detour-on-the-road-to-greater-fuel-economy.html?ref=business&_r=0">timetable for complying</a>.</p>
<p>As this midterm review approaches, the key questions to consider are: first, how have fuel price projections changed since the period in which regulations were initially developed (2009-2012), and, second, what are the implications of these changes on regulatory implementation? </p>
<p>In a <a href="https://spea.indiana.edu/doc/research/working-groups/fuel-economy-policy-022016.pdf">recently published study</a>, my colleagues and I suggest how to reevaluate vehicle fuel economy and greenhouse gas regulations in the upcoming midterm review in light of the dramatic changes in the price of gasoline. </p>
<p>Among our suggestions is that fuel economy standards should be reevaluated during the midterm review to take into account expected lower fuel price and how low prices affect consumer interest in fuel-efficient vehicles. </p>
<h2>Crash in gasoline prices</h2>
<p>As anyone who has filled up lately knows, there has been a significant decrease in fuel prices since the federal CAFE and vehicle GHG regulations were developed. As a result, <a href="https://www.eia.gov/forecasts/aeo/section_energyprod.cfm#petroleum">official government projections</a> of fuel prices have been revised downward and remain relatively low through 2030.</p>
<p>Back when the regulations were being formed, the NHTSA and EPA used gasoline price projections based on the early release of the 2012 Annual Energy Outlook of the Energy Information Administration (EIA) to estimate monetary savings under the regulatory program. The projection path included the following assumptions for the price per gallon of gasoline: US$3.53 in 2015, $3.76 in 2020, $4.04 in 2030 and $4.57 in 2050.</p>
<p>Since then, the world oil market has undergone significant changes. Prices have fallen, with the national <a href="http://energy.gov/eere/vehicles/fact-915-march-7-2016-average-historical-annual-gasoline-pump-price-1929-2015">average price</a> in 2015 being $2.31. EIA has revised its forecasts and <a href="http://www.eia.gov/forecasts/steo/">now expects</a> the average national price of fuel at $2.74 in 2020 and $3.20 in 2030. </p>
<iframe src="https://datawrapper.dwcdn.net/QNEV5/2/" frameborder="0" allowtransparency="true" allowfullscreen="allowfullscreen" webkitallowfullscreen="webkitallowfullscreen" mozallowfullscreen="mozallowfullscreen" oallowfullscreen="oallowfullscreen" msallowfullscreen="msallowfullscreen" width="100%" height="500"></iframe>
<p>These changes in the fuel price environment are noteworthy because consumer interest in fuel-efficient vehicles wanes with lower fuel prices and rises when prices at the pump are higher. </p>
<p>Also, automakers’ costs of complying with more stringent vehicle standards are often passed on to the consumer. Because very fuel-efficient vehicles are expected to be more expensive than their less efficient counterparts, the consumer payback period for a fuel-efficient vehicle is considerably longer in a low-fuel price environment. </p>
<p>A longer payback period can translate to lower consumer interest and, ultimately, lower vehicle sales. Sales of the hybrid Toyota Prius, for example, <a href="http://247wallst.com/autos/2016/01/21/toyota-prius-sales-drop-11/">fell for the first time in 2015</a>.</p>
<p>Consumer interest in fuel-efficient vehicles matters because an auto manufacturer’s ability to meet federal CAFE and vehicle GHG standards over time is contingent upon consumers purchasing its vehicles. Clearly, it is not enough for manufacturers to design and produce highly fuel-efficient vehicles to meet regulatory standards – consumers must also prefer these vehicles to their less fuel-efficient, more powerful models.</p>
<p>New vehicle sales matter because the automotive industry plays a central role in the health of the U.S. economy. The rate of new vehicle sales is also important because it affects the achievement of the regulations’ environmental objectives, since the rate of new vehicle sales influences the pace of retirement of old vehicles from the fleet. </p>
<p>Thus, in light of changes to fuel price projections, and related expectations about consumer payback periods and new vehicles sales, my colleagues and I concluded that federal CAFE and vehicle greenhouse gas regulations should be reevaluated during midterm reviews. </p>
<h2>Linking gas prices to regulations</h2>
<p>How should regulators alter the fuel efficiency targets in a way that considers environmental goals, consumer interest and the economic impact of vehicle sales? </p>
<p>Regulators could link the pace of the efficiency targets to EIA forecasts of fuel prices for model years 2022-2025. EIA will publish forecasts of 2025 fuel prices annually between now and 2025, drawing from the best available information on global oil markets and other factors that influence fuel prices in the U.S. </p>
<p>Using those data, regulators could adjust the requirements for complying with the regulations.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/116104/original/image-20160322-32291-adxsej.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/116104/original/image-20160322-32291-adxsej.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/116104/original/image-20160322-32291-adxsej.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/116104/original/image-20160322-32291-adxsej.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/116104/original/image-20160322-32291-adxsej.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/116104/original/image-20160322-32291-adxsej.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/116104/original/image-20160322-32291-adxsej.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/116104/original/image-20160322-32291-adxsej.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">As gas prices have gone down, American consumers have started driving more and buying bigger, less fuel-efficient cars and trucks.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/librariesrock/16378928540/in/photolist-qXmhPE-rLRH7r-BnFwbX-rxbcxg-raWezm-rYsRcQ-BEYTzt-qKbrgr-qodSpx-AYFBUy-qL9EzW-rzHxCz-rS4LwQ-rhogKT-rcFHHJ-rMT7dY-qUbMcN-qJHHPm-rbZ3yP-CVF2RM-qFNGdC-qPrfEf-r7HJm5-rQfjCA-CWe7yr-qpNjT8-ri7s1E-ALuA5T-qYft4H-s2dFRU-r4v2wE-AKv9MB-CDBhZB-B6DCmr-qKVhp6-qGf7K8-pNZtk1-qNjyM4-zNBF8x-BZfH3S-qLkm1L-rtDYcv-qNabun-BB4nZf-qaCPeq-sg5sBx-BMxCJn-ra7bJf-rbM1kX-s29NSq">librariesrock/flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>The NHTSA and EPA should not adjust regulatory requirements annually, since manufacturers need sufficient lead time – four to six years for a new model – to adjust their product plans for new regulatory requirements. But, EPA and NHTSA could design, in the midterm review process, a planned linkage between fuel forecasts for 2025 and the 2022-2025 regulatory requirements. </p>
<p>Here is a hypothetical illustration of how fuel-price forecasts might be linked to regulatory requirements. If EIA’s fuel price forecasts for 2025 rise significantly above $4 per gallon by 2020, then the federal requirements for model years 2022 to 2025 might remain as currently scheduled. </p>
<p>If those fuel price forecasts for 2025 are less than $3 per gallon, then the ramp-up should be slowed considerably, possibly stretched out to 2035. If fuel price forecasts for 2025 land between $3 and $4 per gallon, then a stretch-out to 2030 might be appropriate.</p>
<p>The review process formally kicks off in mid-2016 when the NHTSA and EPA publish a draft technical assessment report. Given how much has changed since the rules were first written, it makes sense for regulators to reconsider these rules. A good way to do that would be to explicitly link gas prices with fuel efficiency mandates. Although this linkage could delay the rules’ implementation, this method ultimately achieves both environmental and economic goals.</p><img src="https://counter.theconversation.com/content/56482/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Saba Siddiki receives funding from the Alliance of Automobile Manufacturers.</span></em></p>Faced with stringent fuel economy standards but cheap gas, automakers may seek to delay CAFE rules. What’s the best way to reevaluate these emissions-cutting rules?Saba Siddiki, Assistant Professor of Public and Environmental Affairs, IUPUILicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/544462016-03-17T10:07:38Z2016-03-17T10:07:38ZWill cheap gas at the pump stall progress on car emissions?<figure><img src="https://images.theconversation.com/files/115160/original/image-20160315-9235-1re09d6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Americans like big vehicles – a serious challenge to reducing emissions. </span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/chrisgold/10920277215/in/photolist-hCZgXD-7zbBcL-dLttDu-5yd8Zx-BA5dw-oD2njn-dQCkth-7dcVJR-dU832k-nNeKZ-pRZyoT-fJQjzx-9Yz2-9f4xjS-mfZKSf-XYfcn-3hoDC2-hHu1AK-5KQS7G-79UQCP-hzr9Az-em4o6F-dxMAGd-ifeWpG-n9Zrub-3da45P-7ZV59S-6FC398-4Vm6cX-7x3MEy-8M8Q8-dvNip7-oBA99-7fQ6qB-7qFeSQ-9ZHcJG-eGfjef-DEQU7-3ih8Y-6yHKtj-kZtFC-d9H9mZ-bMuNr2-GaAzi-nsxmRv-bQjTfp-bofoWD-aSe9Mz-7JLWV-ce6U">chrisgold/flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc/4.0/">CC BY-NC</a></span></figcaption></figure><p>Retail gasoline prices are now as low as they were in the “roaring ‘90s.” The 1990s, that is, when the energy crisis of the 1970s had faded from American consumers’ memories, the economy was strong and the market share of sport utility vehicles (SUVs) had <a href="http://nepis.epa.gov/Exe/ZyPDF.cgi/P100MHPK.PDF?Dockey=P100MHPK.PDF">more than tripled over the decade</a>.</p>
<p>As in the 1990s, low-cost gasoline is changing consumers’ habits, encouraging them to drive more and purchase less fuel-efficient vehicles. What’s different now is that U.S. automakers face far more stringent fuel-economy standards. The rules, which require automakers to have a fleet-wide, on-road average of roughly 40 miles per gallon by 2025, are the country’s primary policy for reducing carbon dioxide (CO₂) emissions from motor vehicles. </p>
<p>However, fuel prices have plummeted since these rules were put in place. What does cheap gasoline mean for the country’s progress in reducing emissions? </p>
<p>To answer this question, we need to look at the interplay between gas prices and consumer behavior. We also need to consider the impact that technology and policy can have – and cannot have – on reducing emissions from motor vehicles.</p>
<h2>Deja vu all over again</h2>
<p>When pump prices are high, consumers are motivated to drive less and choose fuel-efficient vehicles. As prices moderate, there is a weaker financial motive to economize on gas, making emissions reduction more difficult. This puts a greater burden on policy to sustain progress in spite of consumer disinterest. </p>
<p>Petroleum is the <a href="http://www.eia.gov/totalenergy/data/monthly/index.cfm">largest source</a> of CO₂ emissions in the United States and, after coal, the <a href="http://www.globalcarbonproject.org/carbonbudget/">second largest globally</a>. Petroleum use is driven by demand for motor fuels, of which cars and personal light trucks consume the <a href="http://cta.ornl.gov/data/tedb34/Spreadsheets/Figure2_06.xls">largest share</a>. Because a car’s CO₂ emissions are <a href="http://www.fueleconomy.gov/feg/climate.shtml">directly linked</a> to its fuel economy, any gain in fuel efficiency results in lower CO₂. </p>
<p>For example, an SUV that gets 20 mpg emits 5.3 metric tons of CO₂ during a typical 12,000 miles per year of driving, while a 30 mpg sedan emits 3.6 tons to cover the same distance. </p>
<p>For over a year now, the national average fuel price has been <a href="http://fuelgaugereport.aaa.com/todays-gas-prices/">much lower</a> than the roughly US$3.50 per gallon average of the previous few years, let alone the brief spike to over $4.00 per gallon in summer 2008. </p>
<p>The University of Michigan Energy Survey’s <a href="http://www.energy.umich.edu/news-events/news/2016/02/17/energy-survey-how-affordable-our-energy-heres-what-consumers-say-october">affordability index</a> earlier this year found that consumers feel gasoline is twice as affordable as it was before oil prices began sliding in mid-2014. </p>
<p>It’s no surprise, then, that new vehicle sales are at a <a href="http://www.reuters.com/article/us-usa-autos-idUSKBN0UJ1C620160105">record high</a> while the sales mix has shifted away from compact segments and <a href="http://www.nytimes.com/2016/03/02/business/auto-sales-rose-in-february-as-americans-replace-older-models.html">back to trucks</a>, <a href="http://mediaroom.kbb.com/record-new-car-transaction-prices-reported-december-2015">larger SUVs and more luxurious cars</a>. </p>
<p>The amount of <a href="http://www.transtats.bts.gov/OSEA/SeasonalAdjustment/">driving is up again</a> as well. We’ve seen this situation before when the <a href="http://www.nytimes.com/2011/05/01/opinion/01Straight.html">energy crisis</a> of a generation ago gave way to a resumption of consumption after oil prices tumbled in 1986. </p>
<p>The adjoining graph compares the average fuel economy of new cars and light trucks to the nominal (“dollars of the day”) and real (inflated to 2015 dollars) price of gasoline since 1970. As the graph shows, fuel economy ratchets up as fuel prices rise. Conversely, low and stable fuel prices can cause fuel economy to backslide, which occurred from the late 1980s until a decade ago. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/114240/original/image-20160308-15334-1wkk6bl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/114240/original/image-20160308-15334-1wkk6bl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/114240/original/image-20160308-15334-1wkk6bl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=396&fit=crop&dpr=1 600w, https://images.theconversation.com/files/114240/original/image-20160308-15334-1wkk6bl.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=396&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/114240/original/image-20160308-15334-1wkk6bl.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=396&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/114240/original/image-20160308-15334-1wkk6bl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=498&fit=crop&dpr=1 754w, https://images.theconversation.com/files/114240/original/image-20160308-15334-1wkk6bl.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=498&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/114240/original/image-20160308-15334-1wkk6bl.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=498&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">U.S. average retail gasoline prices and new light duty vehicle fuel economy since 1970.</span>
</figcaption>
</figure>
<p>During the 1990s, overall vehicle efficiency eroded as consumer tastes and automaker sales strategies fostered a shift to light trucks (vans, SUVs and pickups), which are regulated more leniently than the cars (sedans, coupes and station wagons) they displaced. </p>
<p>A similar shift is again under way now, reflecting the tension between consumer buying habits and the need to cut carbon. </p>
<h2>Technology and importance of scale</h2>
<p>The relation between technology and efficiency, meanwhile, is more subtle than it might seem to observers outside the industry. </p>
<p>The graph seems to suggest that technological progress for better fuel efficiency happened in spurts triggered by periods of rising fuel price. </p>
<p>In fact, as measured by engineering metrics, the rate of technology change has been remarkably steady throughout this whole time period from the 1970s to date, as documented in a <a href="http://dx.doi.org/10.4271/2007-01-1325">paper</a> I coauthored a decade ago and <a href="http://dx.doi.org/10.1016/j.apenergy.2014.12.083">confirmed more recently</a> by colleagues from MIT. That is to say, automakers are continually improving the engineering of vehicles whether or not the improvements are used to raise fuel economy. </p>
<p>In other words, regardless of the fuel price situation, there is always a latent potential to improve efficiency as vehicles are routinely redesigned and new models are introduced. But the extent to which the potential is realized depends on the priority given to higher fuel economy relative to other features customers value and automakers can readily sell. </p>
<p>This means that modest changes in how much consumers prioritize fuel efficiency can significantly affect CO₂ emissions, for either better or worse. If millions of consumers choose a larger or smaller vehicle, or select a higher or lower horsepower engine, it will have a far greater impact than a small niche of eco-minded consumers who purchase battery-electric or hydrogen vehicles. </p>
<h2>Whither electric vehicles?</h2>
<p>In an <a href="http://www.reuters.com/article/us-autos-electric-moniz-idUSKCN0UZ2MK">interview</a> about recent auto market trends, U.S. Secretary of Energy Ernest Moniz conceded that electric vehicle (EV) sales were well behind the Administration’s goal of putting a million plug-in cars on the road by last year. Moniz seemed unconcerned about the shift back to SUVs and instead emphasized the importance of a “long-term view.” </p>
<p>How do slowing sales of EVs, due at least in part to cheap gasoline, affect emissions? </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/115164/original/image-20160315-9235-16nek4f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/115164/original/image-20160315-9235-16nek4f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/115164/original/image-20160315-9235-16nek4f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=411&fit=crop&dpr=1 600w, https://images.theconversation.com/files/115164/original/image-20160315-9235-16nek4f.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=411&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/115164/original/image-20160315-9235-16nek4f.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=411&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/115164/original/image-20160315-9235-16nek4f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=516&fit=crop&dpr=1 754w, https://images.theconversation.com/files/115164/original/image-20160315-9235-16nek4f.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=516&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/115164/original/image-20160315-9235-16nek4f.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=516&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Plug-in electric vehicles are cleaner, but because volumes are relatively low, their impact on emissions reductions is much lower than any gains in the giant gasoline-engine market.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/portlandgeneralelectric/5180303728/in/photolist-8TLpPw-8THjga-bvsL6A-sgBwuq-bsBAtk-ffoscB-bvsLnw-bJnxPD-bJnxkz-bvsLK9-bJnxDz-bvsLsQ-bvsLqy-bvsLEU-bJnx5t-nZBbFB-9oKVB5-aGMduR-bmc74i-bvsLaW-noxtSS-bd89iV-9k1HcQ-bSYRNp-9jXFAk-iQesfG-oNgr2b-8mkQi2-7gVrkj-ao4zpD-8THiPc-r3XSyF-eb7TV5-pMdAPf-f72cu1-7MAU9i-6AWLZr-bmc8np-dyiwS-dhZmDo-dCoRvC-bvsLij-bJnxwr-bvsLdC-8WvPx1-bWCEKC-bmd2kZ-dnuUDn-bPRx5t-p972Ck">portlandgeneralelectric/flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
</figcaption>
</figure>
<p>It is instructive to compare the effect of mainstream market shifts to the sales of EVs such as the Nissan Leaf (a battery-only car) or Chevy Volt (a plug-in hybrid with a small gasoline engine to extend its range). The EV market got a boost in 2008, which saw the launch of the high-profile Tesla Roadster along with spiking oil prices. </p>
<p>Bolstered by tax credits and other generous subsidies, plug-in car sales grew rapidly and there are now <a href="http://www.hybridcars.com/electric-car/">over two dozen</a> models available that charge from the electric grid for some or all of their energy. <a href="http://insideevs.com/monthly-plug-in-sales-scorecard/">EV sales</a> reached just over 122,000 by 2014, but have since fallen in the face of lower fuel prices, dropping to 116,000 in 2015 even as overall auto sales hit a new high. </p>
<p>EVs directly emit no CO₂ when running on battery power alone. Accounting for power plant emissions but recognizing that <a href="http://www.hybridcars.com/californians-bought-more-plug-in-cars-than-china-last-year/">most EV sales</a> have occurred in California and other states with cleaner-than-average electric grids, the typical electric car <a href="http://autoecorating.com/what-goes-into-my-ev/">emits only about one-fourth</a> of the CO₂ of a similarly sized gasoline car. </p>
<p>Based on that assumption and sales data, I estimate that the new EVs sold in 2015 cut CO₂ emissions by roughly 0.26 million metric tons per year. </p>
<p>On the other hand, the market share of vehicles that EPA classifies as light trucks for regulatory purposes <a href="https://www3.epa.gov/otaq/fetrends.htm">rose from 33 percent to 40 percent</a> over the past six years. That seven-point shift from relatively efficient cars to less efficient light trucks implies a CO₂ emissions increase of 1.76 million metric tons per year, more than six times the emissions reduction from EVs. </p>
<p>In other words, waning interest in fuel economy across the mainstream market slows climate progress much more than lagging sales of electric cars. </p>
<h2>Social challenge</h2>
<p>Unfortunately, efforts to promote more fuel-efficient vehicles across the entire market are not nearly as robust as the social marketing, to say nothing of monetary incentives, directed at the electric and other alternative fuel niches. </p>
<p>A <a href="http://www.nap.edu/catalog.php?record_id=18264">2013 study</a> published by the National Academy of Sciences (for which I was a committee member) concluded that even for several decades ahead, the most substantial and lowest-cost ways to cut automobile CO₂ emissions will still be ongoing improvements of gasoline vehicles. The study also found that even with good progress in battery technology, it will not be feasible to electrify most SUVs and other light trucks, which emit a disproportionate amount of CO₂. Trying to run larger vehicles from a battery results in a vicious cycle of heavier weight and higher costs that would render the resulting vehicle both impractical and exorbitantly expensive. </p>
<p>Automakers are regulated by a combination of Corporate Average Fuel Economy (<a href="http://www.nhtsa.gov/fuel-economy">CAFE</a>) standards and <a href="http://www3.epa.gov/otaq/climate/regulations.htm">greenhouse gas (GHG) emissions standards</a>, which, relative to the 2015 level, target a further 40 percent cut in the new fleet-average CO₂ emissions rate of both cars and light trucks by 2025. A National Academy <a href="http://www.nap.edu/catalog/21744/cost-effectiveness-and-deployment-of-fuel-economy-technologies-for-light-duty-vehicles">study published last year</a> found that ample technology is available to meet the 2025 target. </p>
<p>As these regulations come up for review next year, the greater challenge will be weak consumer interest in efficiency, which makes it more profitable for automakers to offer still higher horsepower, larger vehicles and other features that trade off against fuel economy. </p>
<p>The question, then, is whether ways can be found to bolster consumer interest in fuel economy for environmental rather than economic reasons, so that progress can be maintained even when fuel prices are low. </p>
<p>Indeed, the misalignment between consumer interest and the need for ongoing efficiency gains may only grow in the years ahead. Periods of high oil prices are likely to be transient for the foreseeable future if not indefinitely. This situation will require new approaches by policymakers, automakers and environmental advocates, as well as creative social science research. </p>
<p>Successfully confronting the social challenge of encouraging consumers to prioritize fuel efficiency – across the broad market of gasoline-powered personal vehicles – will open the door to greater progress on the car part of the climate challenge than can be achieved through technology alone.</p><img src="https://counter.theconversation.com/content/54446/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John DeCicco's work is supported by the University of Michigan Energy Institute, whose financial partners and advisory board members include federal agencies, national laboratories, energy, financial, automotive and other manufacturing companies and nonprofit organizations.</span></em></p>American consumers just aren’t prioritizing fuel efficiency in a time of low gasoline prices. Is there a way to reverse the trend and make progress on climate change?John DeCicco, Research Professor, University of MichiganLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/554742016-03-08T11:12:17Z2016-03-08T11:12:17ZCrash in oil prices will hurt the U.S. economy from Texas to Wall Street<p>Traditionally, low oil prices have been a boost to economic growth in the U.S. The crash in oil prices over the past two years, however, has produced a decidedly mixed picture – with potentially worrying implications for the economy as a whole. </p>
<p>When oil prices fall, consumers spend less on gasoline and have more disposable income to spend on other goods, which contributes to economic growth. Conversely, as oil prices have gone up, consumers have less disposable income to spend on other things, such as new cars, going out to eat, entertainment and new clothes. </p>
<p>Consider the average family who logs 15,000 miles a year and owns a vehicle that gets 20-25 miles per gallon. If prices at the pump are US$3.80 per gallon, this family would need to spend $2,280 to $2,850 per year, but if gasoline prices fall to $1.80 per gallon, then this same family would spend less than half that, saving $1,200 to $1,500 per year. This is a significant increase in disposable income, given that per capita household income in the United States is <a href="http://www.statista.com/statistics/200838/median-household-income-in-the-united-states/">around $55,000</a> per year! </p>
<p>This savings from lower oil prices is compounded by lower prices in other goods such as milk, beer, electronics and clothing, which all cost less to produce and transport with lower energy and fuel prices. </p>
<p>But things are different this time. The U.S. is now the <a href="http://money.cnn.com/interactive/news/economy/worlds-biggest-oil-producers/">largest producer of oil</a> in the world, which means domestic oil and gas companies – and the states they operate in – are hurt by low prices. </p>
<p>What is less appreciated is that continued cheap oil has the potential to wreak havoc in the financial markets. When times were better, oil companies took out bank loans and hedging contracts against big swings in oil prices, which will come due in the months and years ahead. Bad outcomes from these past financial bets could have a ripple effect far beyond oil and gas. </p>
<h2>Oil and gas now a bigger part of our economy</h2>
<p>The notion that cheap oil helps the economy is based on the assumption that the United States is a net importer of oil and gas. In other words, the U.S. gains from lower oil prices with very little of the losses. </p>
<p>Over the past 10 years, though, the oil and gas industry has <a href="http://www.cfr.org/united-states/shale-gas-tight-oil-boom-us-states-economic-gains-vulnerabilities/p31568">changed dramatically</a>. <a href="http://www.eia.gov/dnav/pet/pet_crd_crpdn_adc_mbbl_m.htm">North Dakota now produces more oil than Alaska</a>. Combined with the exploding growth of the natural gas industry from fracking, the U.S. is currently producing a much larger percentage of our oil consumption and we are <a href="http://www.eia.gov/beta/MER/?tbl=T01.01#/?f=A">virtually self-sufficient in our use of natural gas</a>. </p>
<p>When energy prices drop, geographic areas heavily reliant on the oil and gas industry may suffer as companies <a href="http://marketrealist.com/2016/02/chesapeake-energys-2015-operational-highlights-2016-guidance/?utm_source=yahoo&utm_medium=feed&utm_content=toc-2&utm_campaign=chesapeake-energys-4q15-earnings-line-estimates">stop investment and expansion, idle production and curtail jobs.</a> And that’s exactly what’s happening: with the recent drop in oil prices, oil service companies such as <a href="http://www.cnbc.com/2016/02/25/halliburton-to-cut-5000-jobs-in-new-round-of-layoffs.html">Schlumberger and Halliburton have cut nearly 25 percent of their workforces</a>. </p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/113912/original/image-20160304-17744-n5itij.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/113912/original/image-20160304-17744-n5itij.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/113912/original/image-20160304-17744-n5itij.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=1065&fit=crop&dpr=1 600w, https://images.theconversation.com/files/113912/original/image-20160304-17744-n5itij.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=1065&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/113912/original/image-20160304-17744-n5itij.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=1065&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/113912/original/image-20160304-17744-n5itij.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1339&fit=crop&dpr=1 754w, https://images.theconversation.com/files/113912/original/image-20160304-17744-n5itij.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1339&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/113912/original/image-20160304-17744-n5itij.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1339&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Gas has been cheap at the pump – good for consumer spending but not all parts of the economy.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/leebennett/22942022581/in/photolist-zUDL3o-ADcAXr-AXiS2t">leebennett/flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-sa/4.0/">CC BY-NC-SA</a></span>
</figcaption>
</figure>
<p>The results of these cutbacks and layoffs are not limited to those directly working in the oil and gas industries, but also with the businesses where they buy equipment and modernize their facilities. Layoffs also impact the business where employees spend their money buying housing, cars, food and entertainment. <a href="http://www.energytomorrow.org/jobs-growth-and-security">More than 10 million jobs</a> are now tied to the oil and gas industry in the U.S.</p>
<p>For American consumers, then, there’s a yin and yang effect: we are saving at the pump, but we feel the chilling effects of a hurting oil and gas industry. Despite the savings of lower energy prices, the overall effect may be a net negative as industry slows investments in drilling operations, followed by less spending on their day-to-day operations and layoffs. </p>
<p>The impact is uneven geographically: regions like the large populations of the East and West Coasts, which have economies that are less dependent on the oil and gas industry, will benefit from cheap oil. At the same time, regions more dependent on the oil industry, including Texas, North Dakota and Alaska, have suffered. As recently as 2014 all 50 states were creating jobs. Now oil price reductions threaten many of those new jobs in Texas, Louisiana, Wyoming and North Dakota, potentially moving those states <a href="http://www.bloomberg.com/news/articles/2016-02-22/recession-already-reality-in-spots-from-west-virginia-to-wyoming">back toward recession</a>.</p>
<p>Meanwhile, oil-producing countries around the world are keeping the spigots open, creating a market glut that has driven prices from <a href="http://www.cnbc.com/2016/02/23/saudi-arabia-struggles-with-cheap-oil.html">$100 per barrel in 2014 to under $30.</a> </p>
<p>With oil companies suggesting their true cost of production to be near <a href="https://theconversation.com/how-saudi-arabias-grip-on-oil-prices-could-bring-russia-to-its-knees-52879">$50 per barrel</a>, they and their suppliers are burning through cash reserves at an extremely fast rate. </p>
<h2>Hedging helps for now</h2>
<p>As painful as the downturn is in the oil and gas industry, the worst may be yet to come as bets placed by banks and commodity traders play out. </p>
<p>Both buyers and sellers of commodities utilize the futures markets in an attempt to reduce price risk. Buyers of commodities purchase future contracts – called <a href="http://www.mercatusenergy.com/blog/bid/86597/The-Fundamentals-of-Oil-Gas-Hedging-Futures">hedging</a> – on the open market, essentially betting that prices for what they will need to buy in the future will go up. </p>
<p>This is like buying car insurance. Your premium is essentially a bet that you will get in a wreck. The insurance company is betting you will not. If you do get in a wreck, your losses are covered. If you don’t, the insurance company keeps your premiums. You are out the premium in any case but happy for the peace of mind. </p>
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<p>Buyers of futures contracts are essentially buying insurance against price increases. If prices do go up, they buy at the lower rates on the contracts. If the prices stay below the contract, they are out the premiums but are happy for the peace of mind. </p>
<p>In a similar way, oil companies can buy future contracts to sell (rather than buy) at a given price, essentially betting that prices will fall. For example, an oil company could buy a future contract to sell at $60 per barrel and know it will be profitable even if prices drop below that price.</p>
<p>Most oil companies regularly purchase these contracts a year or two at the most into the future. This means that they can still get $50-$60 per barrel for the oil they sell until those contracts run out. For now, oil and gas industry losses due to plunging prices are mitigated by the hedges. </p>
<p>With prices hovering around $35 per barrel, who takes the losses from these hedges? In effect, the oil companies transferred their current operating losses to those market traders who sold them the contracts, or “took the bet.”</p>
<p>But hedges are usually short-term in nature – no more than one to two years out – and many of the contracts are expiring. With much of the industry unhedged beyond one or two years, oil and gas companies are now likely to see significant losses. Why? The cost of production is greater than current and <a href="http://www.cnbc.com/2016/02/22/yergin-at-ceraweek-talks-about-oil-prices-and-oil-market.html">near-term expected prices</a> and companies no longer have hedging contracts to shield them.</p>
<p>Many U.S.-based oil companies also sell natural gas, but that, too, remains very cheap and abundant, causing the same <a href="http://www.cnbc.com/2016/02/25/us-exports-of-liquified-natural-gas-mark-a-turning-point-in-the-energy-market.html">profitability challenges</a> as the oil supply glut. </p>
<h2>Banks getting worried</h2>
<p>Banks, too, are vulnerable to a financial reckoning at oil and gas firms. </p>
<p>Like the housing boom of the early 2000s, no one thought the price of oil could fall in a sustained or significant way. With prices peaking over <a href="http://www.eia.gov/beta/MER/?tbl=T01.01#/?f=A">$100 per barrel in the spring of 2008</a> after the housing crisis, banks were looking for a safe industries to invest in. </p>
<p>In response, banks loaned hundreds of billions of dollars to oil and gas companies to invest in <a href="http://money.cnn.com/2016/01/18/investing/oil-crash-wall-street-banks-jpmorgan/">domestic oil infrastructure.</a></p>
<p>But things have obviously changed. If the prices stay low as expected, and the hedge contracts expire, how much exposure do the banks have to very risky oil industry debt? How will it compare with the housing bust/debacle? </p>
<p>Several financial institutions are already building reserves to offset the fallout. JP Morgan and Wells Fargo just set aside <a href="http://www.investors.com/news/wells-fargo-has-1-2-bil-reasons-to-worry-about-oil-prices/">$2.5 billion</a> in additional reserves in <a href="http://www.wsj.com/articles/canadian-banks-cap-strong-earnings-season-amid-criticism-over-reserves-1456869318">anticipation of losses on oil and gas loans</a>.</p>
<p>Internationally, some suggest that low oil prices <a href="http://www.cnbc.com/2016/02/23/how-saudis-can-cut-oil-production-commentary.html">keep pressure on Russia, Iran and Venezuela and potentially force political change</a>, but these low prices could do more harm than good when it comes to the domestic economy.</p>
<p>For those of us happy with lower prices at the pump, the law of unintended consequences could be huge.</p><img src="https://counter.theconversation.com/content/55474/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Cheap gas is traditionally a boost for the U.S. economy but this time the economy could be badly hurt because of the domestic drilling boom and financial bets made by the oil & gas industry.W. Rocky Newman, Professor of Management, Farmer School of Business, Miami UniversityJohn R. Bowblis, Associate Professor of Economics, Miami UniversityLicensed as Creative Commons – attribution, no derivatives.