My last commentary introduced what I considered a “skunk at the picnic” argument - namely that the interdiction of oil shipments through the Strait of Hormuz was a good thing for the long term survival of humanity. My argument was that we need to stop consuming fossil fuels as quickly as possible - yesterday would not have been soon enough.
If Trump and the Iranians do not quickly figure out a way to compromise and let the shipments of oil start flowing immediately, the world-wide shortage of oil (economist Paul Krugman estimates it to be a 15 % shortage) will result in a deep recession. His reasoning was and remains that there are no easy short-term switches from oil-based products. It’s not like switching from eating beef to eating chicken if there were a fall in cattle production - it’s not like eating less eggs when avian flu causes a reduction in chicken flocks. If you need to drive to get to work or school, what’s your alternative? (Very few cities have well developed mass transit systems as does New York.) Absent a good public transportation system, most workers need to drive. And over a few months, it is not possible to think of a massive shift to electrically driven cars.
[I strongly recommend Paul Krugman’s substack for people who want evidence-based arguments about current economic and political issues. Even folks without a background in economics can understand his arguments, though an ability to read two dimensional graphs is pretty much essential.]
So the world wide shortages will produce very significant price increases and only those very high prices will force people to cut back. More people will carpool. Families will take shorter or fewer vacations. Businesses will cut back on using fuel which means they will cut back production and people will be laid off.
[The Economic Policy Institute did a quick study to predict the actual year-long changes in prices and economic activity caused by a prolonged shortage and came up with an analysis Things are worse in other parts of the world. Countries much more dependent than we in the U.S. are on oil from the Persian Gulf, are reducing work weeks and taking other short-run efforts to reduce demand for oil. See for example an article in the Economist, “Iran War Puts Asia in Energy Panic.”]
Only after a high enough price rise forces a significant cutback in production, which will then lead to a recession, will the demand for oil fall to the level of supply. This is a very important point – a recession is really the only way to decrease the demand for oil enough to meet the decline in supply. And we shouldn’t be put off by the fact that the United States is not dependent on Persian Gulf oil. The world oil market is integrated and there are world-wide prices that all consumers must pay.
As I began to argue in that previous commentary, the potential recession has a silver lining - it will help speed up the changes that should have occurred decades ago to head off the increases in world temperatures. As long ago as 1974, the economist Robert L. Heilbroner published An Inquiry into the Human Prospect. That book was published right after the first oil embargo that began the rapid increase in world oil prices during the middle 1970s. In that context, the book became a best seller. In it, the author discussed the scientific predictions of global warming created by the burning of fossil fuels. If the leadership of the world’s advanced countries had heeded the warnings of the scientific community about the long run damage that would be done by global warming, we humans might have been able to head off the disaster of a 2 or even 4-degree (Celsius) increase in global temperatures over the next 50 to 70 years. But we didn’t – despite international conferences and even international agreements.
[For one set of estimates as to the impact of a 4-degree increase by the year 2100, see https://www.greenfacts.org/en/impacts-global-warming/l-2/index.htm]
Unfortunately, the fossil fuel industry used junk science and hired climate skeptics to convince the public that the scientific consensus about the human causes of global warming and the long run impacts of that warming. And they have found willing listeners among those of us who don’t want to be “inconvenienced” by, for example, a stiff tax on the use of gasoline and home heating oil. And of course, the heads of companies that make billions selling the rest of us oil-based products want to keep the money flowing in as long as possible - no matter what damage it does to the earth’s ecosystems.
The Reagan Administration reversed even the small changes that his predecessor, Jimmy Carter had introduced. (Carter had solar collectors installed on the roof of the White House. Reagan removed them - both those actions were symbolic, of course, but indicative.)
But as the current price of gasoline at the pump continues to rise, consumers will for forced to find ways to, well, economize. The switch to electrically-powered vehicles is already under way but a deep recession caused by a large spike in the price of oil will speed that up.
The changes that have to occur will be sped up dramatically the worse the oil shortage gets. The longer the price of gasoline stays elevated - the longer a resulting recession lasts - the more pressure there will be on consumers and businesses to change their behavior. This cannot be done overnight of course but it can speed up when people and businesses are faced with serious economic consequences. Car companies will increase their capacity to produce electric vehicles. More charging stations will be installed at major transportation stops. People will get rid of their gasoline-only cars more quickly.
Perhaps places that have turned their nose up at rail passenger service (like the U.S.) will actually re-think such policies. Perhaps more cities will expand bus service and dedicated bus lanes for faster transport around cities such as New York has done. There are many ways to speed up the transition and the deep recession and economic difficulties associated with it will force all sorts of changes that have already started but are going much too slowly.
Now - I know that such a deep recession and so many dislocations that people are already beginning to experience will cause real pain. And much of the pain will be felt by people who have not caused the long run problem. The problem was caused by those propagandizing in favor of continued reliance on fossil fuels to generate electricity and move goods and people around the country and around the world.
Political leaders like President Trump continue to make things worse by getting rid of incentives to adopt more sustainable ways to generate power and increasing government subsidies to fossil-fuel based energy.
The continued resistance of industrial and political leaders to necessary change is why I believe the current oil shortage is a good thing, because it will speed up necessary changes.
Michael Meeropol is professor emeritus of Economics at Western New England University. He is the author with Howard and Paul Sherman of the recently published second edition of Principles of Macroeconomics: Activist vs. Austerity Policies.
The views expressed by commentators are solely those of the authors. They do not necessarily reflect the views of this station or its management.
