After President Bush's SOTU address last night, his Energy Initiative may not be what gets the mainstream excited. After all, every President since Nixon has announced a desire to free America from dependence on foreign oil, and while there have been tiny steps of progress towards this, it has taken so long that few will believe that it will be any different this time.
However, I will come out and say that the next 10 years will, in fact, be different. Here's why.
When oil spiked in 1973 after the Yom Kippur War to a price that would be the equivalent of $90/barrel today, this caused a world-wide recession, including a very deep recession in the US. Most of the US economy was still dependent on manufacturing, with information technology being a miniscule sector.
However, at $67/barrel today, we are only seeing a slight economic slowdown, and even if prices were to rise to $90/barrel today, we still would not dip into recession through that alone, as the US economy has evolved to the extent of being only about one-third as intrinsically bound to oil consumption as 32 years ago.
The US economy produces 2.5 times as much economic output per barrel of oil, as in 1973.
We are already evolving towards making our vulnerability to oil prices an asymptotically dwindling problem. This is accelerating as advances in information technology accelerate. This is why world economic growth is accelerating at ever-increasing speeds.
High oil prices today are not triggering one solution to the problem, but many. At a sustained $70/barrel, numerous alternatives, like ethanol, Canadian tar sands, Colorado oil shale, solar power, etc. become much closer to cost-competitiveness. They were not options in 1973.
In addition, this market force has caused the stagnant innovation we have seen in automobile technology during the era of cheap gasoline to awake from its slumber. The real story behind all the buzz behind hybird vehicles is that the cost delta between a hybrid and traditional vehicle is now under 15% of the vehicle's price, and dropping. In about 10 years, the term 'hybrid' will not exist at all, as that technology will merely be a standard feature in all cars.
Credit goes to President Bush for increasing funding for basic research in energy technology. While this will not deliver benefits during his remaining time in office, it will bring us large dividends by 2015.
Prediction : Despite several scares in the next 2-4 years, by 2015, oil prices will not worry people nearly as much anymore, whatever the price of oil at the time. A much smaller portion of the US economy will be tied to oil prices. This new reality will be visible in many places, such as the typical 2015-model family car yielding 60 MPG (highway) despite having a 240 hp engine.
Gas at $4/gallon is not so bad, if you only need 5 gallons a week.
Turn that frown upside down. :)