There’s nothing like a crisis—pandemic, natural disaster, or war—to show you where your weaknesses lie. In the case of the war in Ukraine, it’s our dependence on fossil fuels (and the authoritarian regimes that produce it) that have been highlighted as oil prices soar to heights not seen since before the 2008 Recession. The decision by western nations to reduce their reliance on Russian oil and natural gas, and thereby undercut the regime’s ability to wage war, is prudent and just, but it also comes with real pain—both for markets and consumers who rely on cheap oil and gas to get around and heat their homes. High energy costs can sink the global economy and steer the results of elections, and are therefore high up on any politician’s list of priorities. In the case of the Biden administration, that’s meant dialoging with oil suppliers, exhorting them to increase production, and, when that fails, releasing enough oil from the country’s Strategic Reserve to fuel the national economy for… thirty-six hours.
The fact is, finding enough oil to sate the world’s ever-growing thirst is a hard enough job, sending prospectors to the North Pole and deep into the seas; finding even more than the usual and on such short notice is close to impossible, limited as it is by long lead times to develop wells, the immense capital required, and the convoluted geopolitical intrigue that engulfs it all. Simply put, there are no good options for lowering energy costs through a supply increase. Fortunately, however, there’s more than one way to skin a cat: governments could potentially crash the price of oil merely by reducing the demand for (and dependence on) oil.
How it’s done
According to the IMF, a mere five percent drop in oil demand would result in an over fifty percent price discount. We all saw how this worked in 2020 at the onset of the Covid-19 pandemic: when people stopped driving, the price of oil collapsed, even going negative for a brief moment in April. Now imagine a similar drop in demand, but this time led by electric vehicles, renewable energy, and smart city planning. Focusing on EVs—each one supplants about fifteen barrels of oil demand per year it’s on the road, or about three hundred barrels over the car’s lifetime. Multiply that by the number of EVs that could soon be driving around and we’re suddenly looking at a very different oil market: instead of supply trying to keep up with an unsatiable thirst, oil producers will be left with a glut of oil that no one wants, crashing oil prices. With enough EVs, we could soon be back below three dollars per gallon at the pump.
Eventually, this will happen: EVs will replace gas- and diesel-powered vehicles and oil will fall below $40 per barrel. But with further government support—purchase agreements and guarantees, tax incentives and rebates, project-manager-style coordination and charging stations—the road to cheap oil (and cheap gas) could be much, much shorter. However we get there, the crucial point is that investing in EVs and renewable energy now is one of the easiest and most potent ways to counteract high gas prices and weaken authoritarian petrol states (to say nothing of climate change!). Any plan to address high oil prices should include incentives for electric vehicle manufactures and consumers.
The war in Ukraine has made one thing clear—the world’s dependence on fossil fuels is a liability we can ill afford. The rapid substitution of fossil fuels for EVs and renewables is a fitting response.