How the 2014 Oil Price Collapse Threatens Sustainability

1980 was the last time we had an oil price collapse. Americans buying fuel-efficient vehicles created the 1980 oil price collapse, just as they have contributed to today's oil price collapse. But what consumers did in response to lower pump prices during the 1980s does not bode well for today’s pursuit of sustainable solutions for our economy and climate change.

Will history repeat itself, where the 2014 oil price collapse undercuts our adoption of sustainable technologies?

1974 energy crisis sparks energy efficiency

America got acquainted with vehicle fuel efficiency in 1974, when the Organization of Petroleum Countries (OPEC) embargoed oil imports to the U.S. At the start of 1974, the U.S. was importing almost half of its oil supply. Overnight the price at the pump jumped to $1 per gallon. America’s gas pumps literally could not handle these higher prices. They were designed to record prices only up to 99 cents.

The 1974 oil embargo sparked an auto industry technology revolution in pursuit of vehicles that had both higher fuel efficiency and acceptable performance. Unfortunately, American manufacturers were unprepared to compete. U.S. auto companies launched some of the worst cars they ever produced including the Pinto, Vega and Gremlin. The technology leadership failure of American automakers opened the sales door to the Japanese auto industry selling cool and fuel-efficient cars like the Accord, Corolla and 280Z. The end results were:

1. A government financial bail-out of the U.S. auto industry


2. Explosive growth in Japan's economy


3. A gradual fall in gas prices as more Americans began driving higher MPG vehicles.

1980 “Oil Glut” rekindled America’s love for big vehicles

America’s mass adoption of more fuel-efficient automobiles, combined with reduced economic growth caused by record high oil prices, resulted in a dramatic reduction in oil demand that cut U.S. oil imports in half. By the mid-1980s, the major news outlets were proclaiming an “oil glut” from oil supplies exceeding oil demand. In competitive response, the oil producers slashed the price of oil from $80 per barrel to below $30 per barrel to win market share. The result was a dramatic drop in pump prices.

Lower pump prices rekindled America’s love for bigger vehicles. Lower pump prices also enabled increased economic growth from increased consumer buying power. The boomer generation, enjoying more buying power plus the start of their families, began buying “mini-vans,” SUVs and full-size pick-up trucks. The government aided this shift to less fuel-efficient vehicles by applying a lower fuel milage requirement for “light trucks” that included SUVs, full-size pick-up trucks and mini-vans. By 1999, the sale of SUVs had jumped up 75 percent from 1994. The price of gasoline escalated with the increased sale of less fuel-efficient vehicles. Gas prices steadily rose from $1+ per gallon in the 1990s to a $3.50 to $4+ per gallon price range in the 2000s.

Will the U.S. repeat its mistakes?

The American consumer appears to be on the threshold of repeating their 1980s consumption mistakes in response to lower gasoline prices. Sales are soaring for full-size vehicles. The sales of fuel-efficient automobiles are lagging.

Today's CAFE vehicle fuel regulations might save America from Americans repeating their 1980s consumption of light-duty trucks that operate with lower fuel efficiency. CAFE regulations mandate a “fleet fuel efficiency” level for vehicle manufacturers. Today’s manufacturers have strong incentives to sell a fuel-efficient mix of vehicles compared to their 1980s unbridled ability to sell “light-duty” vehicles. But a potential emerging political threat to vehicle fuel efficiency is whether Americans will continue to support CAFE fuel standards in the face of lower pump prices.

Energy technology crossroads

The world faces an energy technology crossroads. The success of vehicle fuel efficiency achieved through technology leaps in engine and vehicle designs has delivered lower pump prices. Hybrid-electric and electric vehicles are now offered by Tesla, BMW, Porsche and Ferrari that deliver screaming performance and superior fuel efficiency. Achieving economies of scale is the path to reduced prices and mass-market adoption of hybrid-electric and electric vehicles. This is a path that offers sustained restoration of jobs, our economy and the environment.

California is now experiencing the economic and environmental benefits from achieving economies of scale in sustainable technologies. When I first began developing solar power in California, it was so costly that California taxpayers had to subsidize installation costs. With economies of scale, the industry no longer receives state subsidies. The cost of solar has fallen so much that California homeowners are buying rooftop solar systems to cut their electric bills by approximately 40 percent. In addition, an increasing number of rooftop solar homeowners are discovering that they can more than pay for the lease on an electric vehicle through gasoline cost savings achieved by fueling their electric cars from their home’s solar system. The net result for California is an increase in local jobs, a reduction in climate changing emissions and lower consumer costs.

America’s question is: Will it will repeat its mistakes from the 1980s? Right now it is not looking good, as consumers delight in buying less fuel-efficient, gasoline-powered vehicles now that pump prices have fallen. History has proven that this path will lead to higher pump prices from consumers reigniting oil demand. This path lays the seeds for another cyclical economic decline plus irreversible climate change.

History does not have to repeat itself. A path is in place for achieving economies of scale in technologies that can deliver a sustainable future generating local jobs, increased U.S. economic growth, sustained reduced consumer costs and a restored environment. It is now in the hands of the America consumer.

Image credit: Flickr/emdot

Bill Roth is an economist and the Founder of Earth 2017. He coaches business owners and leaders on proven best practices in pricing, marketing and operations that make money and create a positive difference. His book, The Secret Green Sauce, profiles business case studies of pioneering best practices that are proven to win customers and grow product revenues. Follow him on Twitter: @earth2017