Low fossil fuel prices embody their inherently risky volatility

Plunging oil and natural gas prices are creating elation at the pump, winter gas bill relief, and unpredictable swings in the stock market. They also serve as a sharp reminder of one of fossil fuels’ inherent characteristics — price volatility. Instead of basking in the temporary glow of cheap fuel, America should remember this volatility and direct current savings towards increasing efficiency and developing renewable energy resources with reliable and secure input costs.

The price of crude, which peaked above $100/barrel last summer, dropped more than half to below $45/barrel this winter, and is only now seeing a slight uptick in price.  Natural gas dropped by more than a third over the same timeframe.  We shouldn’t think of these prices as cheap, however — just volatile.   

{mosads}Individually and collectively, unfortunately, our decisions often do not acknowledge this inherent volatility in fossil fuels.  Sales of SUVs and trucks have been increasing since summer, which will leave consumers saddled with inefficient vehicles long after oil prices go up again.  On the level of the power grid, we also make shortsighted decisions. The drop in natural gas prices after the shale boom, for example, led states like New York to increase their dependence on natural gas for power. When last year’s polar vortex hit, this overdependence contributed to a fuel shortage that drove spot prices to a record $120/MMBtu, and residential electricity and heating bills spiked accordingly.  Both of these decisions reflect the ill-advised tendency to make long-term energy investments based on short-term prices.

It would of course behoove consumers to invest current energy savings in everything from efficient appliances and cars to building efficiency measures like insulation or geothermal heat pumps, providing protection against the next price spike.  However, given examples of consumer behavior, such as the recent rebound in inefficient vehicle purchases, the government has an important role to play in setting more stringent efficiency standards for everything from refrigerators to cars. California Gov. Jerry Brown (D) is leading the charge for states, announcing a target of 50 percent cuts in petroleum use in cars and trucks and a doubling in building efficiency by 2030.  These targets will greatly reduce the impact of volatile oil and gas prices.

Renewable electricity generation can also provide an important hedge against fossil price volatility.   Wind, solar and geothermal resources require capital investment, but their operating costs are predictable because they do not rely on fuel input.  From a planning perspective, wind and solar are valuable because they can be built quickly and incrementally to meet demand as needed, whereas new gas or coal plants require a large fixed investment based on unknown demand many years in the future.  In the coming years, states will be required to put together plans to meet the EPA’s Clean Power Plan targets to reduce carbon emissions from the power sector. States are technically allowed to meet these targets by switching generation from coal to natural gas, but New York’s recent experience serves as a reminder that meeting state targets with renewables will provide much better energy security and protection from inevitable price shocks.

Even in the short term, the recent drop in oil and gas prices has not been good for everyone.  Oil companies have begun their first round of layoffs, and there is much speculation that more may be coming.  At the same time, the solar industry has seen rapid jobs growth and shows no sign of retreat.  Jobs in efficiency are much harder to track, but given the widespread inefficiency across all sectors in our economy and the rapid return on investment in most efficiency projects, there should certainly be a demand for increased work in this area. We should be encouraging the development of jobs that promise to be integral to our clean energy future, rather than clinging to volatile jobs that come and go with changing demand.

Falling gasoline prices may be a boon for consumers and a bane for oil companies and their investors (a reversal of fortunes from the last few years), but in the big picture the U.S. would benefit from energy resources that don’t depend upon unpredictable supply chains.  Consumers would do well to invest savings from cheap oil in efficient vehicles and appliances to hedge against inevitable future price increases. In parallel, governments should continue to pursue aggressive efficiency and renewable portfolio standards across sectors.  In the power sector, investment in diverse renewable resources can provide domestic, reliable energy that reduces emissions and keeps prices stable for investors and consumers.

Krieger, PhD, is the director of the Renewable Energy Program at PSE Healthy Energy, an energy science think-tank based in California and New York.

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