IEA forecasts higher gas prices are unavoidable

Canadian motorists are enduring high prices at the gas pump, but even bigger hikes will be needed to crimp consumption and tame global warming, according to a major report from the International Energy Agency. The study, documenting the past 30 years of fossil-fuel use in the industrialized world, contends that energy prices count far more than government regulatory moves in influencing consumption levels. It is the environmental equivalent of Buckley's cough syrup -- a cure that works, but is hard to swallow.
"We believe that oil prices in the seventies and eighties did more to reduce emissions and improve efficiency than what happened with the policies of the nineties," says Fridtjof Unander, a senior energy analyst at the IEA and the author of the report released earlier.

Even steep pump price increases will take years to push consumers into more fuel-efficient vehicles, the IEA warns, pointing to a painfully slow path to reducing greenhouse gas emissions in the transportation sector.
"There are no quick answers to transport," Mr Unander says. But prices are the key, he contends, pointing to the contrasting experiences of the 1973-90 period and 1990 onward within the membership of the Organization for Economic Co-operation and Development, which includes Canada and the other major industrialized nations of the world.

Starting with the oil embargo of late 1973, the price of crude oil began to shoot up. Not only that, it appeared that oil prices would persist at the new higher level. Western nations then became much more efficient in their use of energy, particularly in the transportation sector. Consumers shunned gas guzzlers, helped along by new government regulations for auto makers to improve fuel efficiency.
After 1990, the progress of OECD countries in improving energy efficiency in transportation stalled. Canada actually lost ground, mainly because drivers moved to less fuel-efficient vehicles such as SUVs.

Why the difference? Mr Unander blames it on cheaper fuel prices,a conclusion that would resonate with many environmentalists. But he goes a step further, contending that low prices mostly neutered regulatory efforts in the 1990s, even as the Kyoto Protocol was being negotiated. Indeed, the Canadian experience backs him up: Even with regulations essentially unchanged, energy efficiency in this country's transportation sector fell sharply, with low fuel prices exerting the stronger influence. In other words, pain at the pumps is needed for any gain in energy efficiency.
And while the federal government may be shying away from any move to increase the cost of gasoline, surging demand and constrained supply are doing so, driving pump prices to record levels in the United States, and threatening to do so here. Pump prices hit record levels a year ago, although when inflation is taken into consideration, a litre of gasoline was more costly in the early 1980s than today.

Still, prices are high, compared to the last decade, and likely to rise further this summer as demand for gasoline hits its peak in the driving season. The national weighted average cost for a litre of regular gasoline held steady at 74.1 cents, according to the most recent survey from M.J. Ervin & Associates Inc. Prices in key markets such as Toronto have surged markedly since that the survey, rising nearly 20 % in downtown locations.
The firm's president, Michael Ervin, says the summer could see prices breaching the record of 84.2 cents a litre set in mid-March last year, just before the start of the US-led war on Iraq. Besides history, the IEA study also points to the relationship between fuel prices and distances driven, as well as between price and fuel efficiency.

To Mr Unander's own surprise, he found that there is no strong correlation between prices and distances driven, suggesting that consumers' demand for fuel is extremely inelastic in the short term. Translated from economic jargon, that means that consumers are not very likely to dramatically change their driving patterns just because gasprices have risen. Morning commutes do not shrink merely because a tank of gas becomes more expensive.
His data, relating the weighted average price of fuel in 13 OECD countries to the distance driven per vehicle, reflect that common-sense idea. There was only a very loose relationship between the two.

The Japanese, for instance, drove less than half the amount that Australians did, even though the cost of fuel in the two countries was comparable. On the flip side, distances driven per vehicle were very similar in Germany and Finland, even though fuel prices were 25 % higher in the latter country.
But there is a much different picture when it comes to the relationship between prices and fuel intensity, or the number of litres used per 100 km driven. Within the 13 countries, the higher the price, the greater the fuel intensity of that nation's fleet of vehicles. Japan, which seems virtuous on the first measure, is clustered with Canada, Australia and the United States at the inefficient end of the scale.

Canada's own plan for meeting its Kyoto goals doesn't include any plans for higher fuel prices, although Environment Canada does say that a planned emissions-trading system could drive up the price of natural gas. Indeed, for the moment at least, the Kyoto plan doesn't even include new laws to boost fuel economy for new vehicles. Environment Minister David Anderson mulled publicly that Ottawa might legislate tougher standards for automobiles, rather than waiting for the auto industry to do so voluntarily, as is contemplated under Canada's Kyoto plan. Some environmental groups say regulatory action alone is sufficient for Canada to fulfil its Kyoto requirements.
"I think it's wrong to conclude that regulation and standards don't work," says Matthew Bramley, director of climate change for the Pembina Institute for Appropriate Development in Ottawa.
Neil MacLeod, director-general for the office of energy efficiency at Natural Resources Canada, said higher prices would create more consumer interest in conservation. But he added that current prices are high enough to spur conservation, and that governments' awareness efforts can add to that momentum.

Mr Unander says his report holds three lessons for policy makers.
The first is that consumers will respond decisively to higher prices, exchanging their gasoline guzzlers for more thrifty models, reducing their greenhouse gas emissions as a consequence.
The second is that regulations must work alongside changes in price, rather than governments attempting a solo act.
And the third lesson is that success will be a long time in coming. Consumers will shift to more fuel-efficient options only when it comes time to buy a new vehicle, meaning that even if high prices and new environmental regulations were to materialize today, their effects would not be felt for years, and only then if the higher prices were seen to be permanent.

Any effort to reverse the trend of slowing gains in energy efficiency means higher prices, a prospect equally distasteful for consumers and politicians, Mr Unander acknowledges.
"That clearly is going to pose a problem, for those countries that care about it, in meeting the Kyoto agreement," he says. "Governments certainly need to get their act together if they want to be serious about this."