The Department of Energy estimates year-end domestic oil consumption will fall 5.4 percent. This is the steepest decline since 1980. Only a few months ago, seemingly relentless growth in China and India, combined with tight supplies, and a weak U.S. dollar, pushed oil to nearly $150 a barrel. Now concerns over a global recession have analysts talking seriously about $40 a barrel oil. Here are some implications.

Ironically, cheap oil will increase our dependence on supplies from the Persian Gulf, which accounts for about 16 percent of U.S. imports. Why? The reason is simple and clear. This oil is easy to find and cheap to extract. There is nothing we can do about this accident of geology. Lower prices will drive higher-cost production (i.e., from the Canadian tar sands and Brazilian deepwater fields) from the market. This is most unfortunate, as those particular sources are in politically stable countries.

The global market for oil is like one big pool, where oil from each nation is mixed before consumers buy it. We can’t selectively reduce demand from any one source. Even if we successfully reduced demand by, say 10 percent, the effect on the number of barrels of Mid-East oil consumed would likely be minimal. Why? Again, because this region holds the world’s cheapest oil. If we are going to reduce demand, it has to be for oil in general. This requires higher, not lower, prices. The least worst policy solution is to implement a stiff gasoline tax (phased in over time).

One benefit of cheaper oil is that it will (perhaps) drive a spike through the heart of the ethanol scam. The bankruptcy of VeraSun Energy, a North Dakota based ethanol producer, hints at the unsustainable nature of this government-mandated effort. At the time of its 2006 public offering, VeraSun’s price-to-earnings ratio (P/E) was 200. For comparison Valero, America’s biggest oil refiner, a company that actually makes products people want to buy, had a P/E ratio of about nine. (Google’s was 67.) Perhaps there is good reason for the government to intervene in our energy future. But the relevant question to ask is how does that look in reality and how does it work in practice?

Be on the alert for con artists offering simple fixes. Examples include politicians who believe they know what kind of cars Detroit should produce or pretend that ethanol is a serious alternative fuel, rather than a sop to mid-west corn growers. Our politicians are too weak to tell us that there are no cost-free solutions. If we expect them to hold an honest discussion about energy tradeoffs, we are like those entering a fourth marriage—hopes triumph over experience. There is just one honest answer—only sustained higher gasoline prices, likely over $4 a gallon at the pump, will put us on the path to change.

Renewables such as wind and solar face difficulties from falling oil prices. Even at $140 a barrel they were not cost competitive with oil. This inconvenient truth explains why lobbyists put such effort into securing subsidies. In 2007, the Federal Government spent $16.6 billion in energy subsidies. This represents a doubling since 1999. Per unit of energy generated, solar and wind received the highest subsidies, between $23 and $30 per megawatt hour. Coal, natural gas, and petroleum received (again, per unit of energy generated) less than $0.45 per megawatt hour.

Cheap oil will punish the big state run oil companies and the governments that depend on their revenues to buy domestic tranquility (e.g., Iran, Russia, and Venezuela.) These countries have little incentive to efficiently manage their oil resources. Instead they’ve shunned the best technologies and minds by closing out Western companies. In their calculus, geopolitical interests trump their citizens’ wellbeing.

The forces that brought gas over $4 a gallon still exist, but now lie temporarily dormant. The debate about the pace of our energy transition from fossil fuels to non-carbon sources has been oversold. A transition of this magnitude is a multigenerational affair. Progress cannot substantially be accelerated by either wishful thinking or government fiats.