I just paid $3 a gallon to fill up my car and the price of oil has just hit $75 per barrel. I'm coming across all sorts of doomster survivalist writing in the effects of expensive oil:
John P. is heading for Idaho with his partner, Sultry Susuun, for some low-cost Snake River electricity and a more sustainable lifestyle, more walking, less driving. Says he: "Idaho is the place to be when the Night of the Long Knives comes. Guess you could call us energy refugees."
When the talking heads on TV prattle on about the meaning of Peak Oil, that is exactly what that term means: The cheap oil party is over, no more big fields are out there, economists of all stripes are beginning to agree. And that means $100-a-barrel oil, unemployment and the collapse of auto tourism.
The guy wants to move from sunny warmer Arizona to Idaho to survive declining oil production. Does that make sense? Maybe winds blow hard where he's moving and he expects to build a wind tower to get energy. Or maybe his imagination has taken off into full flight.
As for the writer's claim about a coming collapse in auto tourism: I do not buy it. There'll be a reduction in driving due to higher prices. But a collapse? Suppose the price of gasoline doubles to $6 a gallon. Imagine you want to drive across the United States and back again in a 6000 mile trip and you want to cruise in comfort in a large automobile. A 2006 Lincoln Town Car gets 17 mpg city and 25 mpg highway. Suppose you get only 20 mpg on the cross country highway trip. That's 300 gallons to do the 6000 mile trip. At $6 per gallon that's $1800. The car costs about $50k and depreciates each year by a lot more than $1800. Even the far more affordable but same mpg Mercury Grand Marquis depreciates by thousands of dollars in its first year of ownership. So I do not expect to see Lincoln drivers all abandon the open road should the price of oil rise to $150 or $200 per barrel.
If the Lincoln driver wanted to economize and still hit the open road in comfort then the Mercury Grand Marquis with same physical size as the Town Car comes at under $30,000 with the same mpg. The cost savings would pay for the gasoline for 10 trips back and forth across the United States.
Of course, given $6 per gallon gasoline people will respond by buying much more fuel efficient cars. A Jetta TDI diesel will get 36/41 mpg city/highway for about $22,000. Your fuel costs cross country with $6 per gallon diesel would probably fall below $1000. For a working couple with dual incomes that's quite affordable for a vacation. Hotel rooms and food during a few week trip will probably cost much more than the gasoline or diesel fuel.
You can go further up the scale in fuel efficiency with a Toyota Prius for about $22,000 and make an even cheaper cross country trip. So life lived on the open road will go on. Given $6 per gallon gasoline more car features that increase fuel efficiency will become cost justified. For example, Chrysler's Multi-Displacement System dynamically turns on and off the use of cylinders for a net gain of 10% to 20% more fuel efficiency and other car makers have similar technologies in the pipeline. So a doubling of gasoline prices will not double the cost of travel per mile at equivalent levels of comfort.
Noted oil prognosticator Jan Lundberg says expect panic buying and huge disruptions.
Global Public Media "When you say Petrocollapse, what do you mean?"
Jan Lundberg: "Petrocollapse is a term I coined to describe the effects of Peak Oil. Peak Oil in itself is a geological phenomenon that affects the market, and how we have depleted the stores of oil in the earth. But the actual process of coping with peak oil and its effects on the economy, on society -- that's a different matter than just a geological theory. So we have to look at the likely effect of the oil market on our supplies of energy and how people intend to keep living their normal lives as consumers and using so much energy.
"So if we have sudden shortage that is exacerbated by the market and people start hoarding -- which is our experience from the 1970s, when we only had a 9% shortfall in 1979 when my firm Lundberg Survey predicted the second oil shock -- I anticipate that we're going to see some very sudden, difficult times that will snowball rather rapidly. Because when prices skyrocket and it's very difficult to get fuel because everybody wants to get it right now so that it won't be more expensive or completely unavailable tomorrow, then the eventual effect of this after a few days is that people cannot get to work, and next we'll see the trucks not rolling into Walmart and Safeway.
"This is probably going to take down the whole economy, and that's because there is no Plan B, as Matthew Simmons has pointed out. When the alternative energies are not online and cannot even be implemented on the scale required, people are going to be without the usual means to get to work or attain food. And then we have to look at the other uses of oil and how we'll be impacted, and then by extension we can look at natural gas, which is a petroleum also. And the natural gas situation is comparable to oil, roughly, in terms of the supply pinch and our dependence on it."
I do not buy this argument. If the government does something stupid like in the 1970s and puts price controls on gasoline then, yes, we could have shortages and lines at pumps. But if prices are allowed to rise then any sudden spike in demand due to panic buying will be met with a spike in prices. People will learn to refrain from buying in a panic because prices will ultimately subside after panics. Panic, what panic? To really mess up our economy in response to "Peak Oil" we'd need to put Jimmy Carter back in the White House and regulate oil distribution through a federal agency. Barring such idiocy panic buying won't bring a collapse of civilization.
Matthew Simmons, a Houston oil investment banker and author of a pessimistic book about the size of Saudi oil reserves (Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy), told an Irish newspaper that peak oil production will not cause an economic collapse.
Global reserves expert Simmons also said expensive oil will not create economic collapse. He said his concern was that a shortage could be created by wasteful overuse of low-cost oil and that yesterday’s $74 a barrel high was good news.
Simmons sees high current oil prices as a needed signal that we need to get serious about increased energy efficiency and the development of alternatives. I agree.
High oil prices lower living standards. But high oil prices do not lower living standards by more than the amount of additional money we pay to buy the fuel. At 21 million barrels a day the United States would spend about $153 billion per year for oil. Quadruple that price to $80 per barrel (and we may be there soon) and the United States would spend about $613 billion per year. On an over $12 trillion per year economy the increase in fuel costs works out to about 5%. So our living standards drop by at most 5%. If the price of oil doubles again then our living standards drop by maybe 11%. But we will adjust to the high prices and gradually living standards will rise up again.
Granted that a 10% drop in living standards is not fun. But it does not rise to the level of "lets go live on a remote mountain in Idaho with lots of traps and gunshells for hunting and for keeping out Mad Max".
I doubt that a rise of oil prices to $160 per barrel is sustainable for long in any case. Such a high price would trigger the development of substitutes such as oil shale and coal-to-liquid (CTL) using variations on the Fischer-Tropsch process. The big question we face at this point is just what are the real costs for oil alternatives? For example, at what price of oil would CTL become cost competitive? What is the real cost today for CTL?
|Share |||By Randall Parker at 2006 April 23 11:52 AM Economics Energy|