We don't need all that oil

by Andrew Tylecote

Sir David King, the UK's chief scientific officer, recently said that global environmental change was a greater danger than terrorism. This must be right: terrorists may, heaven forbid, kill millions of people in the decades to come, but if our tinkering with the earth's thermostat gets out of hand, billions may die.
As the Amsterdam declaration of scientific experts said in 2001: "Human activities have the potential to switch the Earth System to alternative modes of operation that may prove irreversible and less hospitable to humans and other life."

There is, however, a connection between terrorism and the threat to the global environment: oil. It was Saudi oil wealth that gave the obscure and reactionary Wahhabi sect an influence within Islam which it had never had and would not otherwise have gained.
Oil has of course been at the centre of western policy towards the Middle East for more than half a century. It was Mussaddiq's nationalisation of western-owned oil which persuaded Britain and the United States in the early 50s that democracy was a luxury Iran could not be allowed. A similar threat in Iraq caused the CIA later to give crucial help to Saddam's Ba'ath party.

Later, oil wealth made Saddam dangerous; the threat he and his sons posed to the flow of oil may well have been the key reason for overthrowing him -- and thereby putting wind in al-Qaeda’s sails. As it is clear that central Asian oil will be needed as a supplement to Middle Eastern supplies, dictators there are being petted by the west while they create the social conditions experience shows breed terrorists.

Why do we need all that oil -- and gas? We are told, to drive the engines of our economies, literally and figuratively. Were we to make the reductions in the use of oil and other fossil fuels which would be required to go well beyond the Kyoto targets and really guard against those irreversible changes in the earth's thermostat, the economic penalty we would have to pay would be enormous and intolerable.
Rubbish! One thing economists seem to understand much better than others is how sensitive homo sapiens is to monetary incentives. The big surprise, to non-economists at least, after the introduction of the congestion charge in London was how sharply car use dropped.

Another thing they understand is how that sensitivity increases with time. The cheaper you make petrol, the more people favour cars that guzzle it; the cheaper you make motoring, the more people spread out in suburbs. Raise those prices and they will shift the other way, but you cannot change a country's car fleet between breakfast and lunch, still less its pattern of settlement.

Yet even many economists underestimate what may be called the third stage of adjustment to price, and that is technological change. It is no coincidence that it is in Europe and Japan, not the US, that most of the improvements have been made in the efficiency of car engines.
It is worth spending the money in those areas because the more efficient engines will sell. The world's enormous resources of technological ingenuity go where the money is. That is, they go either where there is government money to pay for the research and development, up front, or where private capitalists can see profit to be made.

Denmark, with 5 mm people, gained its leading position in wind power because 30 years ago the government tilted the tax system so that it paid to invest in wind. How much more progress would wind power have made worldwide in that time had those incentives been given to 500 mm people? How much more would it have made if during most of that time governments had not been pouring hundreds of times more money into the black hole of nuclear energy than they spent on renewables?
Response to price is marvellously multiplicative -- drive a third fewer miles in a car which uses a third less fuel per mile and get a third of your fuel from renewable sources, and your use of petroleum for personal transport is down by more than two-thirds. All those adjustments are rather easy, even without changes in living patterns or technological progress. Give the right price incentives for these, and wait 10 or 20 years, and you could easily cut again by as much, without so much as a dent being made in affluent lifestyles.

The same applies to energy use in the home and elsewhere. Quite modest differences in energy prices over many years account for most of the two-to-one difference in energy use per head between western Europe and the US, and they have access to all our energy-saving technological advances. We need to think long term, then, and give ourselves time. The same rises in taxes on fossil energy can ward off the dangers of drastic irreversible climate change and oil shortage.
And if western policymakers could stop worrying about oil shortages they might choose their friends in the Middle East and Central Asia on more prudent criteria than their willingness and ability to keep the taps turned on tomorrow.

Andrew Tylecote is professor of theeconomics and management of technological change at Sheffield University.