Low-Energy Fridays: Will high oil prices induce a shift to clean energy?
Every time energy prices spike due to conflict or some other reason, commentators renew calls to increase the uptake of alternative energy sources. Such talk is politically popular, as it offers a solution to higher costs of living. But do these aspirations align with economic practicality? While higher prices for one type of energy create market advantages for competitors, switching to new energy sources is not always simple.
Many factors influence what forms of energy people use and in what quantities compared to alternatives. For simplicity’s sake, let’s focus on whether the ongoing war with Iran will appreciably accelerate shifts to oil alternatives. Two big factors influence this: One is whether alternative energy sources can easily replace oil, and the other is how quickly we replace products we use that require oil.
On the first point, most oil is consumed for transportation fuel. In the United States, 68 percent of petroleum consumption is for transportation (27 percent for industrial and 5 percent for electricity). Most fuel switching in recent years has occurred in the electric power sector, where it is relatively easy to switch to new sources for the same energy type. (Electricity is the same whether it comes from coal or solar panels.) Interestingly, a major reason so much coal is used for electricity is because a spike in oil prices in the 1970s necessitated a shift away from oil-fired generation. Shifts are complicated in the transportation sector because few alternatives exist other than electric vehicles (EVs).
This means oil customers (which includes practically everyone) face three choices: drive less (e.g., carpool, public transportation, remote work), pay more, or switch to an alternative (likely electric) vehicle. Driving less is an attractive option, but transportation demand is relatively “inelastic” in economic terms. People might be able to do a little less driving than normal under higher prices, but a lot of their driving isn’t optional. They can’t easily stop commuting, taking their kids to school, or going grocery shopping. For the most part, people just have to pay more—which is why oil prices tend to cause major economic pain for customers.
Regarding alternative vehicles, while wider adoption seems an obvious solution, it’s not so simple economically. EV fuel costs are far lower, so rising gas prices make them comparatively more attractive to own. However, vehicle purchase choices rarely boil down to gasoline prices. Part of this is because temporary, short-lived economic conditions don’t necessarily motivate a shift away from petroleum; the other part is that (as I’ve explained in other pieces) people don’t always prefer EVs, even when they’re apparently cheaper.
Perhaps the most important thing for policymakers to keep in mind is what economists refer to as “capital stock rollover”—a fancy way of describing the gradual replacement of existing assets. Someone who bought a brand new gas-powered car last year will not come out ahead financially if they buy a new EV this year, even if the EV is cheaper to operate. This is why the rate of replacement for vehicles must be considered. Consumers typically buy new vehicles only when their old ones need to be replaced. Currently, there are approximately 290 million light-duty vehicles (LDVs) registered in the United States (of which 250 million are gasoline or diesel), and about 13 million new LDVs are sold each year. This means that replacing all fossil-fuel-powered LDVs with electric ones would take 19 years—roughly in line with the median lifespan of a car (about 17 to 25 years).
Of course, EVs do not come close to fully replacing new LDV sales, as only about 22 percent of LDVs sold in 2024 were EVs or hybrid. While higher oil prices are expected to increase the market share of EVs, potentially limited supply may put a ceiling on how many EVs can be easily sold. Simply, while people can talk about a shift away from oil and cars, such a scenario is far different from Americans’ current transportation habits.
Beyond economic theory, real-world data can tell us whether higher fossil fuel prices induce big shifts to clean energy. For example, when Russia invaded Ukraine, many European policymakers pushed to reduce their reliance on imports of Russian fossil fuel as much as possible. While higher energy prices and policies did accelerate the uptake of alternative energy sources in Europe, they did not lead to a rapid reduction of fossil fuel consumption. Natural gas consumption in Europe only declined about 20 percent between 2021 and 2023. This is especially notable when considering there are more opportunities to shift away from natural gas (to renewables or coal) than to move away from oil— indicating that higher oil prices may be less effective at accelerating EV uptake. Generally, research has found that the Ukraine war has had a measurable effect on clean energy growth in Europe; however, they are still far from eliminating reliance on imported fossil fuels.
Ultimately, we can expect that high oil prices will motivate a further uptake of EVs or other oil alternatives because there will be many marginal economic cases in which the improved comparable value of EVs make them an attractive option. That said, the slow rate at which capital stock turns over makes it more economical for many people to endure higher petroleum prices than to purchase a new vehicle. Consequently, policymakers should expect that while alternative energy sources can partially mitigate the downsides of higher oil prices, the capital intensity of transportation and energy keep many customers reliant on petroleum—at any price.