Who Says a Consumers’ Cartel Would Work?

A number of economic models suggest that a consumers’ cartel would be effective at reducing world oil use and lowering the price of oil.

The U.S. Department of Energy (DOE). As I discuss in the first two chapters of this book, DOE’s 1998 report on the impacts of the Kyoto Protocol estimated that it would reduce oil use, which would in turn lower the world price of oil: “Because of lower petroleum demand in the United States and in other developed countries that are committed to reducing emissions under the Kyoto Protocol, world oil prices are lower by between 4 and 16 percent in 2010, relative to the reference case price of $20.77 per barrel.”

The 16 percent drop in the world price of oil corresponds to maximum compliance with the Kyoto Protocol and to about a 13 percent reduction in U.S. oil use. But I am interested in global effects, so I need a figure for the global change in use, not just the change in U.S. oil use. The 16 percent drop in the global price of oil corresponds to only a 3 percent drop in the global demand for oil. So the percentage price drop is five times larger than the percentage drop in global demand for oil. That’s an oil-change ratio of 1-to-5. (The oil use by “other developed countries” affects this calculation very little.)

Wharton Economic Forecasting Associates. Lawrence R. Klein, winner of the Nobel Memorial Prize in Economic Sciences, founded this economics forecasting organization, which was associated with the Wharton School of the University of Pennsylvania. Its prediction of the impact of the Kyoto Protocol also included a prediction of its impact on the world price of oil, which the DOE included in its report on Kyoto. The Wharton group predicted only a 13 percent drop in world oil prices under the same circumstances that the DOE used in its model. That’s an oil-change ratio of 1-to-4.

The Electric Power Research Institute (EPRI). EPRI, the research arm of the electricity industry, predicted a 15 percent drop in the world price of oil under the same circumstance as those in the previous two models. So EPRI essentially agrees with the DOE’s estimate of a 1-5 ratio. All three models predict that a small reduction in demand causes a relatively large reduction in price.

The Massachusetts Institute of Technology Joint Program on the Science and Policy of Global Change. This group reported on a study of congressional cap-and-trade proposals in April 2007. It found that these proposals, when combined with weaker greenhouse gas initiatives in the rest of the world, would lower the world oil price by between 34 percent and 47 percent by 2050. Because the study does not report world oil use, I cannot compute the magnitude of the oil-change ratio it uses. However, the study assumes the world oil price would be $90 per barrel in 2050 without a climate policy and predicts that a strict policy would push the price down to $48 (in 2006 dollars).