Tuesday, July 8, 2008

The Ever-Increasing Price of Oil

I was talking to my sister on the phone Saturday afternoon. She had tickets to the Kenny Chesney concert, but her car was in the shop, so she was trying to figure out a way to get from her place in Tusculum to LP Field for the show (about 10 miles). I jokingly suggested that she should just hop on the streetcar and take it downtown, knowing full well that an efficient light rail system is about the last thing you'd ever see in Nashville, despite the fact that the city is the perfect size for dedicated streetcar lines (it turns out the MTA has buses, but my sis says that nobody seems to know anything about them).

This discussion about Nashville's lack of an adequate public transportation system invariably led to my asking the question: "What are people in Nashville going to do when gas gets to $10 a gallon?". My sister gasped at the thought, and after a few moments, asked: "You don't think gas will ever be $10 a gallon, do you?"

By all rights, my sister is one of the most sensible and intelligent people I know. And yet the following idea had never really occurred to her:

The price of oil is never coming down.

(Of course, as I write this, the price of oil has dropped $9 in the past two days. But I'm talking about the long range trend, looking at prices on a monthly chart)

Which got me to thinking that maybe that particular fact isn't as obvious as I assumed it was. The result of which is this entry. I am by no means a financial analyst, but you really don't need an economics or world politics degree to understand the way things are shaking out. I read a lot. I think a lot. And I'd like to think that I have a certain capacity for common sense. So we'll just go ahead and call this the seanmccallum.com Coles Notes guide to the ever-increasing price of oil.

(Editor's Note: As is the case with all Coles Notes guides, this is little more than a brief overview, and I urge you to do some of your own research and fact-finding)

Oil is a Finite Resource

I think we can all safely agree that there is a finite quantity of crude oil on this planet. Accepting this reality means that we have to accept that, at some juncture, we will one day reach the point where production peaks. At that point, production will begin to decline. The more oil we use, the less oil there is to be discovered and refined, meaning that every barrel being used is inevitably bringing us closer to the unavoidable conclusion whereby the entire world's supply has been depleted. (This "theory" is often referred to as The Hubbert Peak, or Peak Oil, although I fail to grasp how this is still considered a theory and not widely accepted as fact. If you only have a limited supply of something, there will come a point where you have used up more than half of it, and that supply will be in decline.)

It literally takes millions of years for the earth to naturally create fossil fuels (fossil fuels are created by the compression and heating of organic materials {ie, fossils} over a period of time that is almost impossible for the human mind to fathom), so rest assured, we aren't getting a fresh supply any time soon.

Many believe that we have already reached that peak. The recent spike in the price of oil would certainly support that notion. But the truth is, it doesn't really matter if we're past the peak, if we're standing at its precipice, or whether or not that peak is looming just over the horizon. The only thing you need to know is that there will come a time when there is less and less oil to be refined, and the oil that can be refined will become more and more difficult (ie, expensive) to get our hands on.

I believe that we can look to the Athabasca Tar Sands as exhibit A. Where we used to pump crude out of the ground for next to nothing, it now takes approximately 1 barrel's worth of oil in energy consumption for every 4 barrels of oil taken from the Tar Sands (for every barrel of synthetic crude, 4,500 lbs of tar sands have to be dug up and separated). From this point forward, that's about as good as it will get.

Supply and Demand

It is the fundamental model of economics. As noted above, the supply of crude will be declining in the coming years. When combined with the fact that it is becoming more and more costly to get our hands on that remaining oil, there is little doubt that we will continue to see an increase in the price of oil.

The demand for oil is increasing every day. China and India are experiencing a 21st century version of the industrial revolution that the Western world has been basking in for the past 150 years. The major difference between our revolution and theirs is that between China and India, their oil-fuelled industry will be revolutionizing close to 2.5 Billion people. That's a lot of people. And that's a lot of oil.

To give you an example of the kind of demand we can expect from these developing nations, you need look no further than automobile ownership. In China in 2006, there were 24 automobiles for every 1,000 citizens. By contrast, the U.S. has 765 vehicles for every 1,000 people. It is estimated that Chinese car ownership will increase 67% (up to 40 cars / 1,000) by the year 2010. Again, a massive increase in demand. And for these developing countries, it is just the beginning.

Political Unrest

Hey, did you know that the U.S. is at war with an oil-rich nation?

Get used to it, because this fact probably won't be changing in our lifetime. At the earth summit in Rio de Janiero in 1992, George H. Bush declared that the American way of life was not negotiable. Fast forward 16 years to a time in which the U.S. is at war with a country for no other discernible reason than it's place in the world's oil supply chain, and you begin to understand just how non-negotiable that way of life is.

Because more than anything else, the American Dream is dependent upon the supply of cheap oil. Oil is the steroids of the suburbs. Everything about the suburban lifestyle; the sprawl where you have to drive to get anywhere; drive-through fast food arriving in disposable containers; the way our food is grown all over the world and delivered to the big box grocery stores that can only be reached by SUV; the complete and utter lack of any dependable form of public transportation... All of these things come crumbling down without oil. Which is precisely why countries are willing to send their children halfway across the world to die for it.

After the present war with Iraq is "over", there is little doubt that the U.S. will shift its strategic attentions to Iran. The result will undoubtedly be a massive increase in the price of oil. We can expect this pattern to repeat itself until long after we leave this place.

(In his exit speech on January 17, 1961, Dwight D. Eisenhower warned the American people to guard against the implementation of a military-industrial complex. Without going into too much detail, a military industrial complex can be defined as: “an informal and changing coalition of groups with vested psychological, moral, and material interests in the continuous development and maintenance of high levels of weaponry, in preservation of colonial markets and in military-strategic conceptions of internal affairs.” It essentially means that a country's economy is dependent upon the perpetuation of war. This is yet another unannounced reason for the U.S. to begin engaging Iran.)

What does this all mean?

A perpetual increase in the price of oil will invariably change the way we live. And I am of the opinion that this isn't necessarily a bad thing.

I don't need to get into details about the various ways we will be forced to downsize our lifestyle (an excercise that is about 50 years overdue), but rest assured, this downsizing will be inescapable. Smaller houses. Smaller cars. Smaller vacations...

But it isn't all doom and gloom. The $200 barrel world will force us to make many of the changes we should have made decades ago. We will begin to carpool; not because we feel like we should, but because we literally won't be able to afford not to. We will waste less. Again, not because it's the right thing to do (we've known it to be the right thing to do since the beginning of time), but because it will be the only way.

Our communities will evolve. We will see better public transportation in cities because there will be no other choice (we may even see a dedicated streetcar line running up and down the Nolensville Pike in Nashville one day). We will have grocery stores within walking distance because that is how people will choose to get around. People will ride bicycles with baskets on the front of them. It will be glorious.

Most importantly, we as a society will adapt. We will develop new and existing technologies that will allow us to exist in a world where we are no longer dependent upon oil. We will have houses with geothermal heating and an R-value of 30. We will use sustainable energy sources (wind, solar, water...) to power our homes and cities. And we will have solar-electric automobiles to get from point A to point B (how these vehicles have not been mass-produced and marketed by the auto industry is utterly indefensible).

Oh yeah. And there will be infinitely less pollution, because there won't be as much fuel to burn. We can't forget that particular benefit.

So have no fear. Because despite the fact that the world is changing, in many ways, it will be changing for the better.


Anonymous said...

Just a couple of quick comments.

Most importantly, there are many parallels that can be drawn between your arguments of the price oil continuing to increase and the price of real estate continuing to decrease. Both are finite resources with growing demand. Every 10 years or so we get reminded that it's not a law that real estate will continue to grow in value and chances are we'll be reminded of the same thing with oil.

The thing is that while they're finite resources, there are alternatives to their use and that's the real key.

For example, rather than buying your own plot of land and building horizontally, people can get together and buy condos and build vertically. With oil, we've had historically low prices for almost the last 25 years, so there wasn't a need to develop the alternatives - that is changing, so we'll start to see how things shift.

The parallels do go further than just limited supply, there are disasters like Katrina that decrease portions of housing supply, increasing the burden of demand elsewhere (i.e. Texas); there are growing populations placing an increasing strain (subprime mortgages giving credit to those not previously worthy is similar to a newly stable China reversing trends of about 200 years); political unrest (well, I don't really think that's anything new with oil - we've had wars in the Middle East involving external parties like the US, Russia, or Great Britain for about 60 years).

My second comment relates to your point that there will be less pollution as we move away from oil is a little too optimistic for me. What we'll have is less pollution of the type we're currently aware of, but we'll get a lot more of a type of pollution that we're not currently aware of. Let's not forget that the car was seen as a cleaner way of travel than the horse when it first came out - after all, it got all those emissions from horses off the street. For a more recent example, having air conditioners use HFCs instead of CFCs was seen as a way to limit pollution. After all, HFCs don't deplete the ozone at all, while CFCs were quite the pollutant. Turns out, unfortunately, that HFCs are among the worst greenhouse gases out there. Who knew? As an example ... we are about to see the biggest push towards wind and nuclear powers that has ever been seen. For some humility on current scientific knowledge, it took us a few hundred years to find out about oil and its GHG effects, so we're going to find out a lot more about wind (who knows what effect that will have on the natural flow of air through the atmosphere as it becomes a wide-scale solution and not targeted) and nuclear (who knows what effect all the radioactive waste is going to have)

Anonymous said...

Interesting article on page 4 from CIBC's chief economist, talking about oil at $7 a gallon and the effects it will have. It's worth a read. All CIBC's economic research is free, in case any of you kids want to do a little boning up. You said bone.


Anonymous said...

Sorry, that link should have been:



Anonymous said...

Sorry, but we're all fucked...royally. Pardon my lingo, but there's no other way I can express what's happening. You've been way too optimistic. A lot of people will perish. When those trucks stop rolling to the grocery stores... Our food supply network is perilously fragile. But even if we come to grips with the "energy" problem, the way homo "sapiens" has overwhelmed the planet and its thin biosphere leaves us at the mercy of dear old Mother Nature. You talk of "less pollution"? By then it'll be too late. Our so-called leaders have dithered with our future for far too long. And they continue to do so. Band-aid solutions to a gaping wound just won't cut it my friend. Nope. It all stems from the arrogance of our species and how we've lost the connection to reality (ie; natural systems). Technology won't save us this time. We're but a hair's breadth on the yardstick of time. And we still think we're the cat's ass.

OK: That seemingly misanthropic rant doesn't mean I'm a miserable people-hating curmudgeon. Just a realist. I am extremely grateful for all the wonders of our modern age and so very thankful I was born 50+ years ago... I also "do what I can" to make positive change in my blessed little corner of the world. I rail against the political status quo, supporting electoral reform and contributing to and campaigning for the Green Party. Ya gotta fight all the way to the end. And live in the moment.

Yeah, and if you don't have kids yet, you might want to think twice about it...I wouldn't wish the mess we're leaving behind upon 'em.