A new slowdown in Spain

The government wants motorists to reduce their speed to cut Spain’s fuel bill amid rising oil prices. But will forcing drivers to go 10 kph slower save anyone any money and, more to the point, cushion the impact of the North African uprisings on the Spanish economy, as the government evidently hopes?

Though physics dictates that drivers would indeed see some savings, economics, unlike physics, is not an exact science and chances are that the lower speed limit on Spain’s highways, effective from today, will do little to protect the economy from rising energy costs. Instead, the rush to impose a new law reducing the highway speed limit from 120 kph to 110 kph smacks of desperation. Not desperation because Spain’s energy supply is at risk –the government has made a point of stressing that it is not– but rather, desperation that the government must be seen to be “doing something” to counter rising energy costs.

Deputy Prime Minister Alfredo Perez Rubalcaba argued that lowering the highway speed limit will increase fuel economy by around 15 percent. That may be an optimistic claim. Widely recognized studies on fuel efficiency across different makes and models of cars indicate that the reduction in fuel consumption at 110 kph compared to 120 kph would be a much more modest 7 or 8 percent at best. Besides which, highways only account for 60 percent of the total number of kilometres Spaniards drive each year.

“There is no risk to the supply, but we have an (energy) bill that is going up because of the crisis in North Africa, not just in Libya but also in Egypt,” Rubalcaba said.

The move mimics the steps taken by the United States during the 1970s oil crisis, when sharply lower supplies led to a unified highway speed limit across all states of 55 mph (88 kph) and specific schedules limiting when motorists could visit the pump.  Given that the fuel economy of most cars peaks at between 65 kph and 90 kph, any increase in speed beyond that level causes an exponential increase in fuel consumption – by up to 30 percent at 120 kph compared to 90 kph.

Driving slower clearly saves fuel, as any driver who is conscious of their wallet knows, and conscientious drivers drive slower of their own accord anyway; or, particularly when fuel prices rise, they drive less, which in turn reduces demand. It is a straightforward example of market economics: less supply –or in this case fear of less supply– drives up prices and consumers react by consuming less, thereby helping balance supply and demand. Fuel prices, which in the case of unleaded gasoline now exceed €1.30 a litre nationwide (the most expensive since the oil and commodity spike of 2008 but still cheaper than most of Europe), will ultimately do more to curtail consumption than any new law. So is one really necessary?

“Gas prices are at highs and that in itself reduces consumption. We won’t be able to tell how much (consumption) drops because of the measures or because of the evolution of demand,” argues Pedro Linares, a professor of industry at Comillas Pontific University.

A visionary measure, or a “Soviet” one?

Industry Ministry figures –based on the optimistic estimates voiced by Rubalcaba– suggest that the lower speed limit will save Spain more than €1.5 billion a year from oil imports at current oil prices of near $120 a barrel. However, any savings are likely to be offset by increased spending on new road signs, information campaigns and the like, especially as, initially at least, the measure is being introduced on a temporary basis and is being coupled with reductions in fares for some public transport and increased blending of more expensive bio-fuels. On top of that there is the additional externality cost of slowing down freight transport and travellers – probably the reason why the government has not opted for a more drastic reduction in the speed limit that would save more fuel, and instead has chosen to introduce a law that, in the greater scheme of things, is little more than a symbolic gesture.

Critics, among them the main opposition conservative Popular Party, have dubbed the law “Soviet-like” and “paternalistic.”

Even celebrities have come out against the move: “I’m completely against it because there are much more efficient ways to reduce consumption than going from 120 kph to 110 kph,” Spanish Formula 1 racing car driver Fernando Alonso was quoted as saying. For a man used to driving cars at more than 300 kph, he also reasoned –a little perplexingly it has to be said– that it would be harder for drivers to concentrate and “stay awake” behind the wheel.

Despite the criticisms of Alonso and some motorists’ groups that the law will reduce rather than improve road safety, slower drivers will probably mean fewer road deaths and certainly lower emissions. But from a purely economic point of view, any net financial benefit (and that, after all, is being trumpeted as the main reason behind the move) will probably be small, even taking into account the opportunity –much maligned by motorists’ organisations– for the government to reap more revenue from speeding tickets. And in the long term and even if the law is made permanent, the small reduction in the speed limit will have a minimal impact on Spain’s exposure to higher energy costs.

“The more I think about it, the sillier it sounds,” says Javier Diaz-Gimenez, professor of economics at IESE Business School in Madrid.

The most immediate worry about that exposure is higher inflation, which could force the European Central Bank to hike interest rates, undermining the fragile economic recovery particularly in the bloc’s more troubled members, Spain among them.

The unrest in Libya, from where Spain gets 13 percent of its oil, and other North African and Middle Eastern countries is the main factor behind the recent spike in global oil prices as markets price in fears of possible disruptions in supply. But how easily that “fear premium” has been triggered is a symptom of a much broader problem: increasingly tight global energy markets in which supply of limited fossil fuels and oil, in particular, is struggling to keep up with escalating global demand. Oil and its derivatives cover half of Spain’s energy needs, compared to an EU average of 37 percent, and imports cost more than €25 billion last year, €10 billion more than in 2009, making the country especially vulnerable.

Individual governments –especially of countries like Spain that are dependent on imported fuel (80 percent of Spain’s energy comes from abroad)– can do little to protect consumers from the long-term effects of the global trend toward more expensive energy. Less so if they expend their own energies on piecemeal gestures rather than comprehensive efforts to move toward a new, more efficient energy economy.