The role of energy prices
Economists and energy experts want to increase prices in order to cure the energy problem. Everyone else seems to believe that high prices are the problem. This conflict over raising prices is at the very core of most of our energy policy arguments, and it merits a detailed examination of the underlying logic. The dialogue between economists and skeptics runs something like this.
Economist: "Higher energy prices create an incentive for people to reduce energy use."
Skeptic: "No, any price-induced conservation effects will be trivial because energy is a necessity."
Economist: "But look at Sweden. They produce a dollar's worth of GNP with only half our energy input. They have had high-priced energy for a long time, and so have adapted their technology and consumption to become more energy-efficient."
Skeptic: "Yes, they are more energy-efficient than we are, but only because the Swedes have a greater level of environmental consciousness. Their high energy prices are irrelevant; they are simply more virtuous than we."
So we have two competing explanations: comparative prices and comparative virtue. How do we resolve the issue? Well, the Swedes themselves attribute their energy-efficient behavior to self-interest rather than to ecological awareness: people buy fuel-efficient cars because gasoline is very expensive; industries choose energy-efficient processes because electricity is very expensive, and they use the surplus heat from their manufacturing processes to generate extra electricity (cogeneration) because high electricity prices provide an incentive to do so.
The skeptics try to counter the Swedish example by pointing out that higher oil prices have not had any effect in the United States. Unfortunately, their perception is confused by the effects of inflation. The reason there has been little conservation behavior is that the real price of gasoline (corrected for inflation) has dropped continuously since 1940, and was actually 5 percent lower in January 1979 than it was in 1960! The OPEC price jump did raise the real price of gasoline temporarily, which caused a substantial shift toward the purchase of fuel-efficient cars; but the subsequent inflation quickly reduced the real price back to the 1960s level, and consequently the market share of fuel-efficient cars began to fall again.
As an additional example, European countries have historically used high taxes and high import duties to keep their gasoline at two to three times the U.S. price. And the effect of these high prices is easy to see: the average European car had more than double the fuel-efficiency of the average American car in the pre-OPEC period.
The gasoline lines in Los Angeles in the spring provide a final example. On weekdays, gasoline was available in unlimited quantities to anyone who was willing to pay the additional price: waiting in line. But an increase in waiting time is, in fact, an increase in the real cost of gasoline: studies of transportation choice have established that commuters are willing to pay about 40 percent of an hour's wage to save an hour of travel time. That is, the increase in waiting time was equivalent to a real price increase of 50 to 100 percent, and motorists responded by reducing their weekday travel by about 15 percent. If this had continued, their long-term response would have been even greater since they would have had the time to make more important adjustments, such as changing automobiles or residences.