Earlier this year when we spoke to Dr. David Cole, one of the risks that he mentioned of relying solely on fuel economy standards as a way to reduce oil consumption was the threat of oil prices dropping. If nothing is done to help create demand for more efficient vehicles, lower oil prices could keep drivers in their thirstier vehicles. Today OPEC released a report where they estimate slower world economic growth in 2008 easing pressure on demand for crude oil. The organization expects oil demand growth to be steady at an extra 1.3 million barrels per day compared to the 2.1 million barrel per day increase projected by the International Energy Agency.

While this may not be enough to dramatically reduce oil prices, the possibility of that happening at some point remains if OPEC feels threatened. In order to minimize the impact of such volatility on consumers and carmakers, Dr. Cole recommended setting a floor price for crude oil of $40-45 per barrel. If crude prices drop below that level taxes would be imposed to maintain that minimum. Given the recent run up to the $100 per barrel range, the floor could probably be reasonably set at at $75-80 a barrel without imposing too much pain on consumers. The tax provisions that were stripped out the energy bill to ensure passage would have had some of this effect. Of the $21 billion in increases, $13 would have come from repealing tax breaks for oil companies. This would surely have been passed along to consumers which would have the desired effect of raising fuel prices and promoting demand for more efficient vehicles.

[Source: Reuters, via Winding Road]

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