The precipitous drop in oil prices creates a huge, once-in-a-lifetime opportunity for every person or group that is fighting the energy industry over environmental issues.  Before I reveal what that opportunity is, let me tell you that I followed and researched energy companies, primarily in North America, for almost two decades in my past job as a portfolio manager.  Thus I witnessed firsthand the growth of what some people call the shale ‘revolution’.  As a focused area of investment, my angle was to always be on the lookout for any disaster that could halt this growth, and the supposed profitability of shale. In doing so, I never encountered an environmental ‘smoking-gun’ that was so alarming that it could be used to sway public opinion, say in the manner of a nuclear meltdown.  Nevertheless, I was certainly aware of all the less-than-catastrophic destruction going on.

I was also amused watching the environmental and political fight over the XL pipeline last year.  Once again there really wasn’t a smoking-gun that could get anyone but those already in the environmental camp energized, plus a few farmers in a remote part of the country.  Several months ago I read how the real aim behind the fight to stop the pipeline was Tom Steyer’s desire to halt the importation and use of heavy oil from Canada, and the extraction and processing business in Western Canada as a whole. That sounds admirable, and he and others threw a lot of money and passion into it.  But in my mind what I really think killed it were the economics: between competing pipeline alternatives and logistical oil gluts, the companies pushing for it stopped pushing so hard once their profit motive turned worse.

I don’t mean to pooh-pooh in anyway the efforts of those fighting fracking and climate change, I just think it’s an uphill battle against those with greater resources and a profit motive, namely the energy companies, and the understandable unwillingness of citizens to care about the long-term consequences of that which they cannot see as they try to get on with their daily lives.  Throw in the argument that shale drilling keeps a lid on energy prices, true, and your job becomes almost insurmountable.

Fortunately, from the excesses of capitalism, comes the huge opportunity to which I alluded.  Because with gas prices way below $3 a gallon, now is the time for every environmental organization to direct all their efforts to increasing gasoline taxes.

Forget about fighting fracking and tar sands, it’s going to be dramatically curtailed anyway in the near future because of oil prices and the slashing of drilling budgets.  Furthermore, if the oil price does spike and lead to a resumption of drilling, how effective do you think you’ll be during a period that gas prices are rising and pocketbooks are being affected?

Right now is the time to change direction, because the window of opportunity probably won’t be very long.  Why?  On the supply side the drilling cutbacks will lead to less production over the next few years, and those cutbacks will be exacerbated and prolonged by all the investors  who lent huge amounts of money for what in hindsight will be seen as very low interest rates. These investors don’t want to be singed again …so soon anyway, and will thus cut off the main source of financing for shale drilling.

On the demand side we are already seeing some slippage from consumers:

“November auto sales surged 4.6 percent from a year earlier to an annualized rate of 17.2 million vehicles. The top three sellers were pickup trucks: the Ford F-150, Chevrolet Silverado and Dodge Ram.”

The inverse of this story, is a recent one from Business Week titled “With $2 Gas, the Toyota Prius is For Drivers Who Stink at Math.”

I don’t know if it’s one, two, or five years away, but the laws of supply and demand will come into effect, and oil will cross back over $100.  When that happens, the media frenzy in its desire to outdo each other, will talk about how it’s going to $150-200.  At that point, it will also be the first time since Pearl Harbor that Washington will be in complete unison on an issue: not raising gasoline taxes; and anyone fighting fracking will be vilified.

Now for the good news, the most obvious of which is sub-$3 a gallon gas creates a big tailwind for increasing gas taxes. Better yet, once these taxes are in place, they will be permanent as governments will become reliant on their revenues.  I wish I could say that about the permanency of conservation law.  There’s also a somewhat hidden economic transfer in higher taxes.  Higher gross gasoline prices (gas price + increased tax), lead to lower consumption due to the elasticity of demand for gasoline.  More units of gas will be consumed by the country at $2.75 than at $3, putting an overall damper on consumption.1

Furthermore, the U.S. would get credit for emission reduction due to the lowered demand created by artificially higher (via taxes) prices.

Wait there’s more good news.  Most talk about increasing gas taxes is in regards to doing it at the federal level.  That’s a good option, but there are a lot of sticky geopolitical considerations that come into play.  Instead, taking a page from the anti-abortion movement, the state level is where the real success could come.  First of all, many states really need the money.  New Jersey is a prime example, it has huge holes in its budget and extremely low gas taxes.  Several months ago I heard a radio spot for a group called Forward NJ.  It’s run by the head of the NJ Chamber of Commerce, a former banker, and one of the major fixes it is advocating for is an increase in the NJ gas tax.  You start with the weakest link, but these deficits are everywhere, and some smart (and timely) lobbying could be very, very effective in many places.

Finally, taxing gasoline and other fossil fuels for their “true” cost to the planet, is a much more efficient form of government intervention than alternative energy subsidies/financing/regulation and other measures such as CAFE requirements and coal power plant standards.  Taxes give all “new” energy companies a pricing umbrella under which to build, as opposed to the lobbying and favorable closed-door government side-deals which lead to inefficiency and bankruptcy.2  And quite frankly, if people still want to pay x + additional $y tax to drive a vehicle that gets 7 miles to the gallon, that’s just the American way.  Fortunately, it won’t be very profitable for Detroit and Japan to manufacture them for those few who do.

I know it’s easy for me to say “put everything else aside,” and a lot tougher for NextGen, the NRDC, and all the other environmental organizations to change strategy on a dime.  But the opportunity is right now, and when it’s gone it will render them less effective because they will be fighting against rising energy prices.  Do you hear me Tom Steyer?

1. Actually, that $3 would probably be more like $2.95, and the 5 cent saving, would accrue to the consumer, and be taken away from oil profits, be they American producers or Saudi [↩]
2. think Solyndra [↩]