changing. In his 2006 State of the Union Address, President George W. Bush denounced what he called the nation’s “addiction to oil.” And new players became engaged. The most notable group was the Energy Security Leadership Council, an affiliate of another group, SAFE—Securing America’s Future Energy. The council was chaired by P. X. Kelley, a former commandant of the Marine Corps, and Frederick Smith, the founder and CEO of FedEx. The members were retired military officers and corporate leaders, not exactly fitting the traditional mode of environmentalists and liberals who had traditionally campaigned for higher fuel-efficiency standards.
In December 2006 the council issued a report advocating a balanced energy policy. Raising auto-fuel standards was the first chapter. Five weeks later, to Detroit’s shock and notwithstanding opposition from within his own administration, Bush used his 2007 State of the Union to endorse a fuel-efficiency increase. A week later, Bush met with some of the council’s members. The president made clear the geopolitical thinking behind his energy policies. He wanted, he said, to get Iranian president Mahmoud Ahmadinejad and Venezuelan president Hugo Chávez “out of the Oval Office.”
The Council took its campaign to the Senate. At one hearing, council member Retired Admiral Dennis Blair, former commander of the Pacific Fleet (and later director of National Intelligence in the Obama administration), argued that excessive dependence on oil for transportation was “inconsistent with national security” and that nothing would do more than “strengthen fuel economy standards” to reduce that dependence.24
Fuel-efficiency standards were no longer a left-right issue. Now they were a national security and a broad economic issue. New standards flew though both houses of Congress. In December 2007, almost exactly one year to the day after the Energy Security Leadership Council’s report, Bush signed legislation raising fuel-efficiency standards—the first such increase in 32 years.
Of course, the new fuel-efficiency standards would take years to make a sizable impact. Automakers would have to retool, and then, in normal years, only about 8 percent of the vehicle fleet turns over annually. But when their impact was felt, it would be very large.
THE GREAT RECESSION
What was happening in the economy would also lower the demand for oil. The Great Recession, at least in the United States, is now reckoned to have begun in December 2007, well before most anybody had recognized it. It was primarily a credit recession, the result of too much debt, too much leverage, too many derivatives, too much cheap money, too much overconfidence—all of which engendered real estate and other asset bubbles in the United States and other parts of the world.
But the surge in oil prices was an important contributing factor to the downturn. Between June 2007 and June 2008, oil prices doubled—an increase of $66—in absolute terms, a far bigger increase in oil prices than had ever been seen in any of the previous oil shocks, going back to the 1970s. “The surge in oil prices was an important factor that contributed to the economic recession,” observed Professor James Hamilton, one of the leading students of the relation between energy and the economy. The oil price shock interacted with the housing slowdown to tip the economy into a recession. The sudden increase of prices at the pump took purchasing power away from lower-income groups, making it more difficult for many of them to make payments on their subprime mortgages and their other debts. The higher cost of the gasoline they needed to get to work meant trade-offs in terms of what else they could spend elsewhere. The effects also showed up, as Hamilton has noted, in “a deterioration in consumer sentiment and an overall slowdown in consumer spending.”
As gasoline prices rose, car sales nosedived. Discounting and rebates by auto dealers did little good. June 2008 was the worst month for sales for the auto industry in seventeen years.
“The auto industry was under siege,” said Rick Wagoner, the former CEO of General Motors. “While we had a comprehensive scenario planning process at GM, we had no scenarios in which oil prices went up so much, so fast. People weren’t coming into showrooms as oil prices skyrocketed in part because their disposable incomes were going down. The rate and size of the decline in auto sales was unprecedented. Demand was collapsing.” Wagoner continued, “The only question was how high oil prices would go and when they came down, to what level. Our view of the future was that it was either going to be difficult or very, very difficult.”25
The effects of the downturn in