Jan
24
Does It Hurt Enough Yet?
January 24, 2008 | 11 Comments
Are the world’s largest consumers of oil products feeling the oil price stress enough to adapt or has living large gotten to be such an important personal identity prize that U.S. consumers will plunge on driving the oil market to higher prices?
There are suggestions offered that the fueling costs are close to being at the tipping point leading to reduction in consumption. A Congressional Budget Office study offers that prices have persuaded California drivers to drive a minuscule amount less and slower. Last week the Energy Information Administration released data that shows America closer to the peak retail gas price of 1981 than people are thinking. What is overlooked is that the good years since 1981 have made more U.S. households homeowners that are more widespread and transport fuel is larger share of family expense than ever before. The lower the income level the higher the fuel cost share is. This is just the hard economic fact that economists and news reporters tend to overlook.
With the week’s main news involving the slide into recession the cost of fuels has played an important role driving incomes away from other parts of the economy. Everyone only gets to spend money once, and when a segment of the budget rapidly increases its share the other segments loose out. Should a recession come to pass, the obvious cause is going to be the growth of the cost share for fuels.
The method to remove the pain is simple but a little hard to grasp, so I’ll cover it another way. An item you need to regularly buy increases from $1 to a $1.50, a 50% increase. To restore your financial integrity you need reduce the amount you purchase by 33% so that you still spend $1.00. That explains easily, but in practice s much harder to do. If those dollars are for your medications, food, housing, utilities, and fuel costs the amount reduced is a serious problem. The technical term is elasticity, or inelasticity, the ability to shift those dollars around to keep one’s life intact. The problem many face today and more will face in the coming weeks and month’s is the inelasticity.
Solving inelasticity requires alternatives to choose from. Worldwide, consumers have invested in tools that consume fossil fuels to do work. As the growth in demand and the other market players come in to the market driving prices higher, the investment value in those tools goes down. This is illustrated by the drop in new sales of SUVs, light trucks and their used values. That drop in value makes investing in higher efficiency even more difficult.
The quick response is to drive less, drive slower, more importantly drive with less acceleration and braking all of which are free and can reduce the quantity of fuel used by as much as 30%. You might be abusing the impatient to becoming crazy as the true cost.
The other alternatives that will mean improvements to the economy are capital investments in research, development, factory construction, marketing and overcoming the mindsets of investors, executives and consumers alike. The benefits will be seen in a healthy economy, increasing living standards and new and exciting choices of tools to do our work. It’s a tall order.
Usually oil executives avoid talk of geological limits, but some concede the industry is in fundamental difficulty. Some expect output will never exceed 100 million barrels per day, including Christophe de Margerie, chief executive of France’s Total, and James Mulva, CEO of U.S. based ConocoPhillips. Sadad al-Huseini, who until 2004 formerly ran exploration and production for Saudi Aramco, recently stated global oil production has already reached its ultimate plateau and that output will start to fall within 15 years.
For all the perceived power and profits, the world’s biggest oil companies are in trouble with production already falling. Most are struggling to replace the oil they do produce with new discoveries – although not for lack of trying. Recently a study by analyst John S Herold showed that the world’s 230 biggest oil companies raised their upstream spending by 45 per cent to over $400 billion in 2006, but oil and gas reserves crept up by just 2 per cent. With more than 75% of the planet’s territory out of bounds and controlled by national companies beholden to government interests the risks to consumers are extreme.
These harsh realities make blaming and other popular assaults on the free world’s oil companies a waste of time and an insult to the informed. They know and we can understand that huge effort to displace the energy consumed that is sourced from petroleum products would drive down the prices of petroleum, perhaps so low as to imperil the investments made in alternatives. This is the problem that no one talks about. A big breakthrough in fusion or solar would crush trillions of dollars in values in the whole sector from the mineral rights owner to the car in your garage.
The pool of talent and skill in the energy companies of every kind is astonishing. All are keeping that worry in the back of their minds. For consumers and people everywhere America will have to decide that a nexus point is reached and decide to make a transition or take the risks that the changes coming in petroleum will just play out, come what may to everyone. These are the choices that are not getting play in the blog sphere, the mass media or in politics.
Regular readers will know that energy isn’t the problem – it’s gathering or collecting it, storing and efficiently using it that are the challenges. To make incentives worthwhile the petroleum industry needs economic tools to broaden their focus to include the entire field of energy and fuel. At the same time they are way behind in being competitive, with fast acting and innovating genius in the hunt to seize the largest market in humankind’s history. A certain truth of economics is the energy of tomorrow will be more abundant and cheaper than anything we’ve experienced in the past.
What’s missing is the commitment as a society to choose to exit the current nexus point into lower priced sources of power for our lives. “Peak Oil,” “Global Warming” and other calls for action are convenient ideas to make the case that its time to build out to the next phase of energy and fuel.
A prime concern is there is no record, history or database from which we can explore an event where recession, fuel supplies and climate change are simultaneously threatening the economy. The tools to make good law, set sound policy, establish reasonable regulations, prepare effective financing and devise desirable products are not here. These realities tend to freeze the decision making process as the individual risks seem large. But many risks assumed by many over the whole field of energy, fuels, storage, and the tools we use mitigate the total loss and would be offset by the successes. Compared to the endless flow of shortages and the economic impacts that shortages force on an economy the choice would seem clear – get on with widespread risk assumption.
Alternatives are the only way into the future. Otherwise, we will face crisis after crises until a pork barrel filled “energy policy” happens. Prices are a means for the market to ration demand – now a few cannot afford to drive and over time that will grow to many. Americans have a mentality for shocks by doing what they want for as long as they can get away with it until compelled to act when they get government intervention that sets up massive programs hoping to fix everything in a few years. The pundit’s question, “What will people pay?” isn’t answered by everyone paying more, it’s answered by fewer people buying less. For a healthy economy, it must be answered by more people buying more.
Just how important are energy and fuel supplies to a modern economy? Try to live without electricity, diesel to bring you things, gasoline to get around. It would be a near total shutdown of virtually everything.
Triggering and sustaining a massive growth in alternative choices is the answer. I would suggest that policy would be incentives for everything from the ancient solar to the current geothermal on to any means to store by battery or fuel and on to efficiency and entropy recovery. All of it, on an equal footing. That means no income taxes, capital gains taxes or sales taxes. Lets see, how low can the cost get for our energy needs? How much better can the economy get? The answer is in moving from drawing on a finite source of fossil fuels to drawing on the inexhaustible energy all around us with humankind’s ingenuity creating the means to use it.
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I found your site on technorati and read a few of your other posts. Keep up the good work. I just added your RSS feed to my Google News Reader. Looking forward to reading more from you.
Allen Taylor
[…] Crunchy Con – Rod Dreher, Conservative blog, Beliefnet conservative politics and religion blog wrote an interesting post today on Does It Hurt Enough Yet?Here’s a quick excerpt…the blog sphere, the mass media or in politics. … a society to choose to exit the current nexus … from which we can explore an event where […]
Very perceptive article, thanks.
Rather than using “global warming” and “peak oil” as public fronts for a deeper problem, I would prefer to try to educate the public on the deeper problem.
There are more than enough potentially intelligent and creative minds in the world to largely solve any of the problems mentioned.
If we ever find a way to stop the schools and popular culture from killing the creativity of kids and youth, we might have a chance.
You’re right Al. I think it goes on beyond the schools into college and in the workplace. Popular culture has gotten so lazy and self centered that the “greatest generation” effort of my parents is coming apart,slowly but surely. Risk has been crushed in the hunt for monthly and quarterly profits, and I don’t just mean the stockholder owned, the financial community has really turned up the pressure on small business too.
The real saver is to eliminate the transmission and differential and go all electric.
The slight loss in efficiency is more than made up in weight reduction.
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I would like to say “wow” what a inspiring post. This is really great. Keep doing what you’re doing!!
I was just having a conversation over this I am glad I came across this it cleared some of the questions I had.
A different view:
http://www.singularity2050.com/2011/07/the-end-of-petrotyranny.html
This post makes a lot of sense !