Energy Efficiency: A Passing Fad?

With gas prices skyrocketing, conservation is back in style. Here's a look at how the trend is playing out and whether it's here to stay

by Moira Herbst

David McNew/Getty Images

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After years of consuming ever more gasoline and other petroleum products, Americans are slowly starting to change their ways. Sour economic forecasts and soaring energy prices are now leading consumers to pump less gasoline, buy fewer and smaller cars, and use public transport at the highest rates in 50 years. At the same time, companies are looking to cut costs by becoming more energy-efficient, and the next President could oversee the first federal tax on carbon emissions.

"We've been ratcheting down every demand forecast for the year," says Doug MacIntyre, an analyst for the Energy Information Administration of the Energy Dept., referring to figures for gasoline demand. "Consumers are showing they can't handle these prices."

At the Pump

The big question is whether consumers and companies will maintain efforts to cut down on oil and gasoline or if the changes are a temporary response to economic woes. The last time Americans cut consumption was during the aftermath of the 1973 oil embargo that led to oil shortages and gas-price spikes. In the years that followed, car companies developed small models like the Chevrolet Vega, the U.S. government passed fuel-efficiency standards, and conservation gained some ground. The impact has been real; the U.S. economy is now twice as energy-efficient per gross-domestic-product dollar than it was 40 years ago.

The problem is that as energy prices started to fall in the 1980s, consumption jumped up again. That creates a dilemma for policymakers. "It's the conservation conundrum," says John Kingston, director of oil for Platts, an energy information service that, like BusinessWeek is a unit of The McGraw-Hill Companies (MHP). "If you start a lot of conservation and drive prices down, demand heads up again." Kingston says European countries solve the cyclical demand-price problem by maintaining a high tax on gasoline to discourage consumption. That hasn't been a politically viable choice in the U.S. up to now, but Kingston warns that policymakers must start factoring energy prices into their conversation efforts: "Any efforts designed for conservation that ignore the price function are doomed to fail."

For now, energy costs are stretching the pocketbooks of consumers and businesses alike. Crude oil prices are at an all-time high, with the price of a barrel of West Texas Intermediate crude oil hitting a trading high of $109.72 on Mar. 11 on the New York Mercantile Exchange (NMX). Prices for diesel fuel, jet fuel, home heating oil, and gasoline are following suit, causing inflation on everything from fruits and vegetables to airline tickets. The most visible price surge is at the pump, where the average retail price of a gallon of gasoline reached an all-time high of $3.23 on Mar. 11, according to the American Automobile Assn.

On the Lot

Drivers are reacting by pumping less gasoline. Demand for gas was down 1.3% for the week ended Feb. 29, marking a departure from years of increases in demand, according to the Energy Dept. Meanwhile, Americans are taking more public transportation. On Mar. 10, the nonprofit American Public Transportation Assn. announced that Americans took 10.3 billion trips on public transportation in 2007, the highest level in 50 years and a 2.1% increase over the previous year.

Americans are buying fewer cars, but when they do go to the auto lot they're choosing more fuel-efficient models. Overall, U.S. light vehicle sales fell 6.3% in February compared with the same month last year, following a 4% decline in January. At the same time, sales for more fuel-efficient and environmentally friendly cars like hybrids and subcompact cars have risen sharply. Sales of the subcompact Honda (HMC) Fit were up 62% in February compared to a year ago and 88% so far in 2008; sales of the Toyota (TM) Yaris were up 64% from a year ago and 48% in 2008.