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the green highway

After being warned repeatedly that the price of oil is going to $200 a barrel, you have no doubt noticed that the price has fallen about 25 per cent since the beginning of May and now stands at around $80. While it's true that this drop hasn't been fully reflected at the gas pumps, it will in due course and that will have a major impact on the kinds of vehicles consumers want to purchase. It's at times like these that I am very happy that I'm not responsible for product planning at a car company.

How quickly things change and how impossible it must be for auto makers to keep up. It was just two months ago that a survey (from the Consumer Reports National Research Center) discovered that Americans were identifying fuel economy as the most important consideration in the purchase of a new car. Ninety per cent of those surveyed said high gas prices were the reason why they wanted a more fuel-efficient vehicle.

The same thing happened when fuel prices soared in 2008. But then came a recession, oil prices tanked from $147 a barrel all the way to $40 and American interest in smaller cars evaporated. Is it going to happen again?

Many economists argue that the decline in oil prices is temporary due to stalled economic growth in Europe, China and the United States. However, a study from Harvard says there's been such a sharp increase in world oil production that the price of oil could "collapse" for the long term.

The report is by Leonardo Maugeri, a former oil company senior executive who is now at the Kennedy School's Belfer Center for Science and International Affairs. He analyzed all the world's major oil formations and exploration projects field-by-field. He concluded that oil production is growing so quickly in the United States and several other countries that global oil output capacity could grow by nearly 20 per cent from the current 93-million barrels per day to 110-million by 2020.

"The shale/tight oil boom in the United States is not a temporary bubble, but the most important revolution in the oil sector in decades," he says, while pointing out it will probably trigger similar exploration and development worldwide. His estimate is that the United States could still increase oil production by 3.5-million barrels per day and by 2020 become the second largest oil producer in the world after Saudi Arabia.

The report states that the four countries with the highest potential in terms of production capacity growth are – in order – Iraq, United States, Canada, and Brazil. Much of this increased capacity comes from "unconventional sources" such as U.S. shale/tight oils, Canadian oil sands, Venezuela's extra-heavy oils, and Brazil's pre-salt oils. Maugeri says the shale oil fields in North Dakota and Montana alone could become the equivalent of the Persian Gulf.

The report's bottom line is that the new production could lead to a sharp, long term drop in oil prices. Maugeri believes if oil prices remain above $70 per barrel, sufficient investment will occur to sustain continued growth in production, possibly leading to oil overproduction after 2015.

So, if you were in charge of product planning what kind of vehicles would you build? Will consumers forget about fuel economy and want to go back to the big guzzlers if gas is cheap again? Fuel economy improvements in new cars and trucks are so significant that it's possible to imagine the day when North American oil consumption declines year over year, putting further downward pressure on oil prices. In addition, I'm waiting for the day when batteries become cheaper and stronger, which will make electric vehicles all the more attractive, which will displace yet more oil. All this is without taking into account the new renewable liquid fuels which are in development.

The notion of a carbon tax to stabilize fuel prices, build infrastructure, reduce deficits and cut down CO2 will become all the more alluring if an unexpected era of cheap oil is just around the corner.