The unintended consequences (and benefits) of high energy costs

Gasoline prices at the pump are off their all-time highs, but they remain well above prices just six months ago. Filling an SUV gas tank can run well over $100. People are feeling the pain and looking for ways to balance their budget as fuel costs are taking a bigger chunk out of their paychecks. 

Yet, economic laws influence decisions, and when prices go up, demand may fall, particularly if the commodity is discretionary, captured by the elasticity of demand. For some, transportation is a necessity, which means that demand may be tempered, but not eliminated. 

So, what are some unintended consequences of surging oil prices? 

Better personal health: Discretionary travel can be undertaken by alternative modes of transportation. This means walking, cycling and public transit, all of which require more physical activity. The net benefit of people moving out from behind the wheel is more personal energy expended and the associated weight reduction. Getting people moving has numerous health benefits, which can eventually lead to reduced healthcare costs and improved well-being. This is a choice that anyone can make anytime. Yet, most of us place a premium on travel time, so using modes of transportation that require less time are desirable and preferred. Nonetheless, when feasible, people will spend less time in their car so that they can spend less money at the pump — and perhaps even less time at the doctor’s office.

Permanent remote work: One benefit of remote work is no commuting time, and no commuting costs. More companies, which began to welcome their employees back to their offices as the COVID-19 risk subsided, may make an about-face on this issue. High gasoline prices will encourage teleworking as an employee benefit, which means that recruitment can be national with no relocation requirement. This may etch remote work into the nation’s business culture. It will also mean that empty office buildings will need to be repurposed as demand for office space remains weak.

However, there is no free lunch for teleworking. Home utility costs for heating and cooling, as well as electricity consumption for computers and other electronic devices will rise, tempering some of the benefits of remote work. Watch for companies to offer “utility” perks instead of transportation perks like parking spaces as an incentive to keep their employees happy and engaged.

Housing prices: Home prices have surged over the past year. Along with rising gasoline prices are higher natural gas prices used to heat homes in the winter and higher electricity prices used to cool homes in the summer. Just as Americans look to reduce their cost of driving, will they also look for ways to reduce their homeownership costs? This will place a premium on more energy-efficient homes and HVAC systems, as well as downsizing to smaller homes that requires less energy to heat and cool. Solar panel installation demand will also surge. The impact on housing prices could mean a premium placed on smaller, energy-efficient homes, while large spacious leaky homes will be less desirable.

The biggest unknown is whether the current jump in energy prices is temporary or permanent. If the increase is temporary, many will ride out the wave of higher prices. If it appears to become ingrained in our economy, then electric and hybrid vehicles, solar panels and energy-efficient living will become the norm. Of course, higher demand for everything energy efficient will push their prices higher, dampening some of their promised savings.

What has become clear is that low energy prices were a luxury that most of us took for granted. Recall when the marginal value of a barrel of oil fell below $0 in the early days of the COVID-19 pandemic due to supply far exceeding demand, with no available space to store excess capacity. Fast forward two years, with the energy cost switch flicked from astonishing lows to unimaginable highs, making us all rethink how we travel and live. 

Other unintended consequences of higher energy costs will emerge. What remains to be seen is how consumers will respond, and how market forces will adapt during this transient period.

Sheldon H. Jacobson, Ph.D., is a professor in Computer Science and the Carle Illinois College of Medicine at the University of Illinois Urbana-Champaign. A data scientist, he applies his expertise in data-driven risk-based decision-making to evaluate and inform public policy.