How $100 Oil Could Help

Pricey crude hurts in all sorts of fiscal ways—but it could also spur crucial investment in alternative fuels

by Moira Herbst

Crude oil prices are again creeping toward triple digits. With the dollar hitting a new low against the euro Nov. 20 and OPEC saying it won't boost production, the price of a barrel of West Texas Intermediate spiked $3.39, to a settlement record of $98.03. In overnight electronic trading, crude futures broke the previous trading record, reaching $99.29 a barrel. It was the third consecutive day of rising prices, which are up 61% so far in 2007.

As speculative fervor continues to test the $100 mark, fears that expensive oil could spur inflation and cripple consumer spending is spreading. Pricey oil—coupled with the subprime crash, shaky credit markets, Wall Street turbulence, tensions with Iran and a feeble dollar—could be the catalyst that topples the U.S. economy into recession.

Which Horse to Back?

But doom and gloom is not the only upshot of $100 oil. In fact, many analysts see pricey oil as the jolt the economy needs to cut greenhouse gas emissions and foster more energy efficiency. That's because as oil gets costlier, the incentives rise for new investments in energy efficiency and renewable options. Initiatives such as plug-in hybrid cars or cellulosic ethanol become more cost-competitive. Higher oil prices also ratchet up the pressure on Congress for new laws supporting renewable, cleaner energy sources on a larger scale.

"The top line point about expensive oil is that it gins up everyone's desire to do something about it," says Josh Dorner, a spokesman for the Sierra Club. "The task is to figure what [energy] policy works best for the environment and consumers alike, and to invigorate the search for alternatives."

There is wide disagreement on which alternative energies would help meet demand as oil prices remain high. Advocates of corn ethanol say it's cleaner than gasoline, and that more production can help revitalize the U.S. corn belt. But while the government has provided vigorous support of corn ethanol, it is losing ground in terms of public perception because of the fuel's economic and environmental costs. More promising, experts say, is ethanol produced from sources like sugar cane and wood chips, which is more energy efficient and better overall for the environment. Other energy alternatives that stand to gain from oil's price surge are plug-in hybrid vehicles, power co-generation (combined heat and power), and fuel cell technologies.

Which energies get support depends in part on how policy helps shape the marketplace. This summer both the Senate and the House of Representatives passed energy bills that include provisions like raising the renewable fuel standard and boosting energy efficiency. Dorner and others say those bills could win more favor in an era of $100 oil, especially as consumers are squeezed.

But experts warn against hasty and imprudent policies: "$100 creates a 'Don't just stand there, do something' attitude," says Craig Pirrong, professor of finance and energy markets at the University of Houston's Bauer College of Business. "My worry is that politicians throw money at everything and lurch toward policies that aren't practicable. They could direct the money based on a political calculus, not an economic one."

Business Stays Ahead of Policy

Some advocates of renewable energies warn that staking changes in energy policy on $100 oil is impractical, given that market's volatility. "Oil prices have been perfectly random for 148 years—get used to it," says Amory Lovins, chairman and chief scientist of the Rocky Mountain Institute, an energy research laboratory in Snowmass, Colo. "One-hundred-dollar oil would be psychologically helpful but you don't need it; we can get off the stuff at $15.