Interesting. Since the beginning of the Gulf of Mexico oil disaster, oil prices have fallen by about 20 percent. (It would have been even more, but oil prices unexpectedly rose about $3 while I was out at lunch. Go figure.)
Of course, the decline probably has very little to do with the ecological catastrophe in the Gulf, and almost everything to do with the European debt crisis and the sell-offs in the major stock markets. Still, it’s tempting to see this sort of decline as the market’s way of delivering a comeuppance to oil companies for their carelessness. Take that, BP!!
But that’s almost exactly backwards. The real lesson here is that, 35 days after the beginning of the worst oil spill in history, we’ve actually deepened our addiction to petroleum. All else being equal, falling oil prices will lead to higher consumption, and lower economic incentives for the kinds of structural changes that would help us wean ourselves from oil dependence.
Of course, big oil price swings give me a chance to feed my own personal addiction—looking at the implications of price changes on CO2 emissions. To wit: oil spot prices are now about $16 lower than they were on April 20; and since each barrel of oil that’s consumed releases a little over half a ton of CO2, that $16 per barrel works out to a bit over $32 per ton of CO2 emissions. So, economically speaking, the fall in prices since April 20 is the economic equivalent of lowering the cost of CO2 emissions from oil by $32 per ton. Yikes! By comparison, the EPA estimates that in the early years of a cap-and-trade system currently being considered in Congress, carbon prices would likely be in the range of $10-20 per ton. So the kind of near-term price impacts we’ll likely see under cap and trade (or a well-structured carbon tax, for that matter) are essentially background noise, given the volatility of today’s oil market.