On Earth Day, Obama Focuses on Cutting Oil Consumption, Which Could Mean Lower Long-Term Prices

(image: seattlepi.com)

At an Earth Day appearance at an Iowa plant that manufactures wind turbine towers, President Obama reiterated his Administration’s commitment to reducing US oil consumption through support of alternative technologies. If the administration’s bold new energy policies are successful, we can look forward to a cleaner country and a stronger economy as well as lower long-term prices for petroleum products like heating oil.

Here’s what different members of the administration had to say on Earth Day:

• In his speech, the President himself offered a “choice between prosperity and decline,” saying that we “can remain the world’s leading importer of oil, or we can become the world’s leading exporter of clean energy.” He said that for a variety of reasons, including economic (such as creating jobs in new green technology) and environmental (reducing pollution and greenhouse gases), a major priority of his Administration would be to push the development of alternative fuels and green electricity generation while reducing usage of fossil fuels. President Obama used the occasion to push for caps on carbon emissions. Over time, the caps—or allowable amount of pollution—would decline. While some of that decline would come from better anti-pollution technology, some would also come about from burning less fossil fuel.

• Vice President Joe Biden’s office put out a press release announcing $300 million in funding for state and local governments, plus transit authorities, to expand the nation’s fleet of alternative fuel and hybrid vehicles, as well building the infrastructure necessary to support them. The press release cited the Maryland Transit Authority’s plan to convert their entire bus fleet to hybrid-electric buses as exactly what the government wants to encourage.

• At the same time, Secretary of Energy Steven Chu and Secretary of Labor Hilda Solis published an op-ed piece called “Building the American Clean Energy Economy.” In it, the two Secretaries underlined and put an exclamation mark after the President’s plan to reduce dependence on fossil fuel (especially imported oil), saying “[t]hat’s not just an economic and environment imperative, it’s also a national security imperative.”

What does this have to do with the price of home heating oil? Remember supply-and-demand from a social studies or economics class? Price is determined by the intersection or interaction of supply and demand. If you increase the demand, so that more people want a good, price goes up; it also increases if you decrease the supply, so that the same number of people are bidding against each other for a smaller quantity. And conversely, you will decrease the price if either the supply increases or the demand decreases.

Home heating oil is not one of the fuels that will be directly impacted by the President’s policies. The focus is on electrical generation (such as with wind and solar), reducing industrial use of fossil fuels (by capping emissions), and reducing use of gasoline (by encouraging alternative fuel and hybrid vehicles). Home heating systems are not one of the technologies directly impacted.

However, the key word above is directly. Home heating oil is just one of the many things made out of crude oil. In fact, out of the typical 42-gallon barrel of oil, less than 1.75 gallons of home heating oil are made, or less than 4 percent. (See the Department of Energy’s Energy Information Administration Kid’s Page for a colorful discussion of the uses to which each barrel of oil is put. The main use for oil in the US is transportation: a bit over 19 gallons of gasoline and a little over 9 gallons of diesel (used mostly for trucks, ships, and trains, etc.) are made from each barrel of oil. That means that two-thirds of oil usage in the United States is for transportation. And while oil is not a primary source of electrical power generation in the United States, some is used for that purpose. Oil is also used to generate heat and power by industry, such as in manufacturing.

Hybrid or alternative fuel cars and trucks can reduce the consumption of gasoline. Capping carbon emissions may encourage industry to become more efficient in its usage of fossil fuels, including oil. Wind, solar, and other alternative ways to generate electricity could reduce the amount of oil used there, too. Overall, the Obama’s Administration’s plans, if they come to fruition, will reduce the total amount of oil consumed by this country.

The market for oil is, of course, an international market, and the United States is not the world—though it is a major portion, at least in terms of oil consumption. The United States in 2007 accounted for 24 percent of total oil consumption. Making a measurable dent in U.S. consumption will make a measurable dent in world consumption—i.e. in world demand.

As The Heat Zone has previously discussed, oil pricing is complex, and is affected by many factors, including the strength of the U.S. dollar. However, one of those factors—possibly the chief factor—is the interplay of supply and demand. That’s why oil prices have fallen over the last year on news that a weakened global economy has reduced the demand for oil. And that is also why any successful actions to reduce oil usage—even if they do not directly impact home heating—should also act to reduce the price of home heating oil.
But don’t go dumping your oil company stocks yet! Or celebrating by buying a lobster dinner with your savings—developing new technologies, implementing them, and changing behavior takes time. So while the Administration’s plans are good news for longer term oil costs, savings are not going to show up in your bank account next month.