Oil shock hurts less in Info Age

Contrary to its SUV image, the economy is far more fuel-efficient now than in the '70s.

Minus the disco beat and bushy sideburns, it's starting to look like the 1970s all over again.

OPEC is riding high. American motorists feel gouged. And politicians have pushed oil back to center stage with proposals ranging from gas-tax relief to Al Gore's new energy policy, which would eclipse anything Jimmy Carter did.

But don't be fooled. Today's information-revved economy bears little resemblance to the gas-guzzling 1970s. In the New Economy, oil-price hikes don't pack the punch they used to.

And while progress toward energy efficiency has stalled in the most obvious place - cars and trucks - the nation is getting a boost from unexpected allies. Computers, telecommunications, and the Internet are not only making the United States more energy efficient, they appear to be doing it faster than all-out conservation efforts did 25 years ago.

The latest oil-price hikes will test the New Economy's resilience.

"We'll see how digitized it is, how new it is," says David Nemtzow, president of the Alliance to Save Energy, a nonprofit coalition of business, consumer, and environmental leaders in Washington.

Other observers say the evidence is already in. "It's clear the Internet economy is beginning to kick in," says John Laitner, senior economist for technology policy at the Environmental Protection Agency.

The trends are surprising.

After the first oil shock in 1973, the US began a concerted effort to reduce its dependence on oil. The federal government cut back speed limits and enacted higher fuel-efficiency standards. Automakers and other manufacturers responded. Between 1973 and 1986, the economy improved its energy efficiency an average 2.6 percent a year.

When oil prices slumped in the mid-1980s, efficiency gains tailed off. But in 1997, energy efficiency lurched forward again. The move surprised everyone, since oil prices continued to fall.

Efficiency accelerates

And the gains have continued.

Despite record-low oil prices, the economy has notched better than 3 percent efficiency gains for each of the past three years, Mr. Laitner says. As a result, it takes 40 percent less energy to generate a dollar of national output than in 1973 (adjusting for inflation).

"Our country is far less energy-dependent than it was 20 years ago," Gene Sperling, economic adviser to President Clinton, explained at a recent Monitor breakfast with reporters. He attributes the progress to America's shift to an information economy.

Firms like Intel and Cisco don't use as much energy as old-line manufacturers, experts note.

Then there's shopping. True, recent oil-price increases will boost the cost of shipping books and computers ordered online. Some Internet firms are eliminating free delivery. Nevertheless, it's still more efficient to ship a 10-pound box of books 1,000 miles by overnight air than to drive 20 miles round trip to pick it up at the mall. And if the Internet company ships by truck instead of plane, the online route is roughly 10 times more efficient; by rail (supplemented by truck) 30 times more efficient, calculates Joe Romm, executive director of the Center for Energy and Climate Solutions, a nonprofit group based in Annandale, Va.

"The Internet represents the first genuine alternative to a significant amount of oil-based transportation," Mr. Romm says.

The digital economy saves energy in other ways too. Employees who work at home use less energy than those who drive to work. A Dun & Bradstreet survey last year found that half of the nation's small-business owners work out of their homes, up from only 38 percent in 1997.

Despite these trends, oil-price hikes still affect the economy. Americans have stepped up their gasoline use by about 2 percent in the past year.

And a bevy of energy-intensive industries, including petrochemicals, are feeling the pinch. Transportation-intensive companies have been hit especially hard.

Every penny rise in the price of gasoline costs the US Postal Service an extra $5.6 million a year. Rising fuel prices have prompted Federal Express to impose a 3 percent fuel surcharge in February and add another 1 percent surcharge in April. Several trucking companies have done the same. And even small concerns - a small garage-door company here in suburban St. Louis - have begun charging an extra $10 for service calls outside the county.

"It's a big hit," says Ed Merlis, senior vice president of legislative and international affairs for the Air Transport Association in Washington. By March, when jet-fuel prices had climbed 65 percent in 12 months, airlines were spending $6 billion extra on fuel. To offset such increases, airlines by May had boosted fares an average 3 percent from a year ago.

While significant, such price hikes aren't likely to send the economy into a tailspin.

Airlines manage better

Thanks to more-efficient planes and sophisticated pricing programs that fill planes closer to capacity, today's airlines move passengers twice as efficiently as in the 1970s. As a result, oil-price increases have less effect.

Today, energy "is a small part of what people pay in their overall budget," says Kurt Karl, chief economist at WEFA Inc. in Eddystone, Pa.

But the price hikes, especially here in the Midwest, have touched off a political brouhaha. Republicans blame the increases on the environmental mandates of the Clinton-Gore administration. Democrats blame Big Oil and point to the contributions the industry has made to Republican presidential candidate George W. Bush. Several congressional committees begin investigating oil prices this week.

Vice President Gore, anxious to boost his own presidential hopes, especially in swing Midwestern states, outlined his energy policy on June 27. Among other things, he wants to use budget surpluses to fund tax credits promoting electric, hybrid-electric, and alternative-fuel cars - and mass transit.

The looming question is: What happens next? If oil prices decline this fall, which many observers believe is likely, Americans' interest in energy policy could wither quickly.

"I'm pretty convinced that you'll see prices ease off," says Joseph Stanislaw, president of Cambridge Energy Research Associates, an energy forecasting firm in Cambridge, Mass. By wintertime, average prices at the pump could fall 20 to 25 cents a gallon (although the country could see shortages of heating oil next winter, he adds).

But if oil prices stay high, they will fuel not only political debate but inflationary expectations. That's what happened in the 1970s. The oil shock of 1973, on top of an already overheated economy and increased government spending for the Vietnam War, boosted inflation and caused Americans to demand higher wages.

This time around, "it's probably an unlikely scenario," says David Ingram, senior economist with RFA Dismal Sciences, an economic consulting and forecasting firm in West Chester, Pa. Conservation and the economy's increasing efficiency and relative strength have dampened the effects of oil prices. "As long as people view these gasoline price shocks as transitory," he says, "people are going to take it in stride."

(c) Copyright 2000. The Christian Science Publishing Society

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