My, how times have changed. In 1993, the Clinton administration proposed an energy tax equivalent to just $4 a barrel of oil. The proposal earned a prompt bipartisan slap-down. Even though most believed the tax would reduce oil demand, everyone worried the tax would hammer the economy. Instead, by 1999, oil collapsed briefly to $10 a barrel (how soon we forget), followed by the 600% rise to today's price. The economy? With the DOW at record highs, Wall Street hammered the forecasts of oil-economy pundits, and demand for oil actually rose modestly. What happened?
Technology happened, and not oil drilling technology. The dotcom-era techno-dweebs were right, even if a little early and hyperbolic. It is a new economy. Our gross domestic product is increasingly tech- and information-dominated. We are being assimilated by silicon. The effect is to remove the American economy's overall health ever farther from the cost of oil, and all raw fuels.
To be sure, high oil prices do matter, but nowadays it's less an issue of the oil price itself driving the rest of the economy, than that oil prices are, like any commodity, relevant at some level. High-priced oil takes money out of peoples' pockets, especially painful for lower incomes. High commodity prices ripple through an economy – a ripple, though, not a tsunami. In previous eras, the price of food and the agriculture sector utterly dominated national economies. While food still matters, fluctuating prices and agriculture vicissitudes can't drown an industrial economy any more than oil prices can drown a post-industrial, increasingly tech-based, economy.
To directly measure technology's assimilation of our economy, count electrons, not barrels. All the tools, machines, and appliances of the digital economy exclusively depend on electricity. Since the 1984 benchmark year when Apple introduced the Macintosh, American demand for electricity has risen some 65%. This growth was not a result of more lights, air conditioners, motors, and pool pumps, as it was during the post-World War Two industrial boom. There are more of all such, but engineers have made this class of mid-20th century appliances astoundingly more efficient. So much so that national electric demand should have, at best, stayed as flat as a Kansas horizon – unless there was something else new consuming electricity.
There is today a vast new constellation of electricity-consuming technologies – millions of devices from desktop to palmtop, from factory floor to shipping dock, and millions of watts of industrial technologies from "chip fabs" to "server farms," all plugged in to the electric grid, all part of the silicon revolution. Every square inch of silicon shipped, once rendered as some kind of device, ends up consuming, on average, something like one kilowatt-hour a year. Annually, we ship semiconductor-grade silicon measured in square miles.
Now, to measure our growing distance from the traditional energy economy – count barrels. Since the '84 Apple Macintosh Rubicon, American demand for oil has risen a modest 30%, far below the 65% growth in electricity use, even as the economy has doubled. This illustrates a remarkable if little noted trend that started with Thomas Edison, wherein more and more of the GDP depends on electricity, and less and less on oil or similar combustibles. When the first oil shock hit in 1973, 60% of GDP still depended on barrels of oil or the equivalent, the rest on electrons. By 1984, the electric share had risen to 50%, and today 60% of GDP depends on electricity, with 40% depending on barrels and equivalent combustible fuels. The barrel-electron roles have completely reversed.
While the price of oil matters a lot less now than it used to for most of our economy, it is still no less important for airplanes, ships, and cars. Fortunately, prices still matter for those who find and produce oil. High prices create obvious incentives for more exploration, production and implementation of new oil technologies. High prices also make viable many more oil-efficient technologies and fuel switching, whether to corn-alcohol or coal-liquids. The long-term availability of liquid fuels is hardly bleak. One need look no further than 3,000 billion barrels of oil in North American tar sands, coal, and oil shales – easily 10 times the Middle East's resources. As we tap into these gargantuan resources, supplies will continue to expand and prices will inevitably, eventually, soften.
In time, electrons will cross another energy Rubicon, eventually directly displacing barrels in our transportation sector. While barely noted outside of techno-circles five years ago, we now hear increasingly not just about hybrid cars, but about plug-in hybrids. The latter provides the option to choose the electric grid, when convenient, over the fuel in the tank, for urban driving. A pint of oil is displaced with every grid kilowatt-hour produced from domestic coal, wind, or uranium. This is no longer a fantasy given emerging battery technology – derived as well from the revolution of the silicon economy. The rap on hybrids is that they're more hype than hope. But consider that most of what makes today's hybrids expensive strongly resembles what initially made computers expensive, too: silicon.
This may be the last relevant secular cycle in oil, occurring as it does on the cusp of our transition to a new energy economy. Perhaps the days of $10 oil will never be seen again. Regardless, the days are numbered where we will worry about an economy whipsawed by oil prices.