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Over the past four months, the price of crude oil plummeted 25 percent. That’s good news for everyone gassing up a car or buying heating oil for the winter. But it’s not so good when it comes to climate change.

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Obviously, lower oil prices mean less incentive to invest in energy-saving technology, at least for as long as the prices stay low—if you’re not gasping after filling up the tank on your SUV, you’re less likely to think about trading it in for a hybrid. But the situation for conservation is actually worse than that. A 2006 paper in the Energy Journal looking at industrial energy use found that it’s not just falling prices but any volatility in the price of oil that makes conservation a harder sell.

The idea, authors Gerard H. Kuper and Daan P. van Soest write, is that conservation measures cost money, and businesses won’t pay for them if they’re not sure they’ll be worth the investment.

“If a change in energy prices induces firms to adopt new technologies, one does not expect them to instantaneously undo the investment if the energy price change is reversed,” they write. “For example, insulation put in when energy prices increase is not pulled out when prices subsequently drop.”

To check how things play out in real life, Kuper and van Soest looked at nine industries in 15 countries, checking the prices they paid for energy, how much energy they used, and how much output they produced between 1978 and 1996. They found that rising prices led companies to reduce their energy use only a little, while a fall in prices encouraged them to use a lot more. Volatile prices made the difference even more pronounced, holding companies back from implementing conservation measures when prices rose and encouraging them to use more energy when they fell.

So, while we’re enjoying saving a few bucks on gas and setting the thermostat a few degrees higher, we should consider that something outside the oil markets—something like government policies—may be needed if we want to cut energy use.


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The Energy Journal, Vol. 27, No. 1 (2006), pp. 55-78
International Association for Energy Economics