It’s time to prepare for the end of the oil era

The Thinker by Rodin

I have written before about America’s dependence on oil. In July 2004, I wrote about the end of cheap oil. At the time, the $40 price for a barrel of oil seemed outrageous. Two years later, we look back at those prices with nostalgia. A year later, I wrote that America was a country in decline, in part due to the many emerging economies driving up demand for oil. A month later, I wrote about how surreal and scary it was to drive through the rapidly growing exurbs, knowing that their existence was predicated on the automobile and consequently the ready availability of gasoline.

Like most Americans, I too cannot help but be fixated on the price of gas. I reached an unfortunate milestone this week when I filled up my fuel efficient Honda Civic Hybrid. It is just a compact car, but it still cost $36.50 to fill its tank. I do not recall ever spending more than $30 to fill it up. My wife drives a larger car (a 1997 Honda Odyssey). I filled it up for her on Monday and it cost $41, another record high. I am sure others with larger cars and gas tanks are paying much more. I heard on the news this week of a woman who paid over $100 to fill the tank of her Ford Explorer SUV. That has to hurt.

Naturally, with these kinds of prices it is hard to keep hybrid cars in the showrooms. SUV sales are way down. Many Americans are making big changes in their driving choices. Even our Republican congress is thinking the previously unthinkable: raising automobile fuel efficiency standards, even for SUVs and light trucks.

These are steps in the right direction. Yet I also think most Americans understand intuitively now that an era has passed. We can no longer take for granted that we can get from point A to point B at an affordable price and at a time of our choosing. Prudent Americans should be preparing for what comes next.

Of course, it is hard to know what will come next or how soon it will arrive. I do think we can take as a given that our transportation costs are going to keep going up, largely due to increases in the price of oil. I think we can also count on our oil supply system becoming more vulnerable to supply fluctuations. We are like a hypochondriac. We watch our oil supply system with the greatest concern. The smallest problems are greatly magnified and cause oil dependent economies to keep bidding up the price of oil. While there are still likely undiscovered oil fields out there, they are fewer. Extracting oil from them will be increasingly more expensive.

Those of us who lived through the 1970s remember the two oil shocks. We remember gas lines. We remember only being allowed to buy gas only on odd or even days. I remember waiting for more than an hour to have the opportunity to fill up my car’s tank. We are likely to see those days again.

It is possible that Saudi Arabia will fully open its spigots, thereby increasing supply and lowering prices. However, they are already pumping at close to their capacity. Moreover, it is not necessarily in their interests to increase the supply. Even if they do so, there is more demand. China, India and Indonesia are but some of the emerging new economies whose continued growth is predicated on oil.

What does the average American do? Is it enough to buy a hybrid? As with all things it depends on what actually happens and how much risk that you are comfortable assuming. It may also depend on your financial situation. Oil price increases are easier to endure if you make $100,000 a year instead of $40,000 a year. However, if there are large disruptions in the supply of oil all of us automobile owners will have to wait in gas lines.

I am more of the paranoid type. I do not necessarily prepare for the worst case, but I am prepared for the next to worse case. I think gas prices will keep going up. I think we will see occasional gas lines. I think our lifestyles will get a lot more expensive and risky, and I want to minimize both of these likelihoods. So yes, while SUVs were still flying out of dealers’ lots I bought a hybrid. Today, as I listen to my wife’s car idling at traffic lights, I also wonder if it is time to trade in her car for a hybrid. These are sound strategies, providing there is an adequate oil supply.

Long ago I realized my family also needed to be in a position where we could live without a car if necessary. I am fortunate because I can bike to work when the weather allows. Work is three miles each way and biking is an easy and fun way to get the exercise my body needs anyhow. If biking is out of the question, walking is not. I also have a bus I can jump on a quarter mile down the road if necessary. My wife is in a more difficult spot. Her job is 15 miles away. It is theoretically possible for her to get there by public transportation, but unless the bus routes changed, it would likely be at least a 90-minute trip each way to work and she would still have to do considerable walking. We also have two grocery stores about a mile away from us. Life would not be pleasant but assuming that public transportation was available, we could get by.

If your income depends on having an automobile, I suggest that it is time to rethink your lifestyle. I am not saying it would be easy, but I do think that this is the time to do it. It is better to be on the leading rather than the trailing edge of this change. For example, if you have a house in the exurbs, it is time to think about selling it and moving in closer. I would recommend settling somewhere no more than a mile from public transportation. Ideally, the public transportation should take you expeditiously to convenient major centers of employment.

Clearly, this is not an easy thing to do. One of the reasons people moved to the exurbs in the first place was that it was expensive living near the city. However, if it is expensive now, it is only going to get more expensive. What might your life look like in ten years if gas costs $20 a gallon and you still had to commute by car? Now suppose you could not even get to your job because you could not buy gas for your car. Could you telecommute indefinitely? Could you buy your groceries from a nearby farmer’s market?

I fear that there will be many hard and unpopular choices like these in the years ahead. The good news is that in many communities the housing market is soft. Here in Northern Virginia there is an abundance of unsold condominiums. Even houses are languishing in the market and prices are coming down. This may be the time to make that difficult lifestyle transition, even though in the short term it may cost you considerably more to move in closer to the city.

I feel fortunate. While there are no guarantees in life, I have a reasonable buffer should a sustained oil shock occur. The good news is that the sooner we come to grips with our new reality, the better prepared and less vulnerable our society will be when it arrives. If more of us realize, for example, that we need to live closer to places where there are plentiful job opportunities, it will encourage denser housing developments closer to urban areas. With the return of far-flung suburbanites, these communities will probably be transformed in a positive way. While we may not like having more neighbors closer to us, we will still carry our values with us. We will insist on safe neighborhoods and quality schools.

As part of this transformation, we will also be consuming less oil, simplifying our lives, improving the environment and helping the planet. In addition, if you begin this transition now it will cost you a lot less and be a lot less painful than it will be for the procrastinators.

As the late Ann Landers so often put it, it is time for Americans to “wake up and smell the coffee”.

The End of Cheap Oil

The Thinker by Rodin

I subscribe to National Geographic. Generally I just flip through the magazine and let my eyes linger on their lush pictures. But occasionally I actually read an article. Their recent article The End of Cheap Oil got my attention. The author makes a convincing case that oil is going to get increasingly more expensive over time simply because of supply and demand. The world’s proven oil reserves are well known. It is unlikely we will discover any huge new oil reserves. If we do then with the world’s thirst for petroleum increasing every year any new reserves won’t last for long.

China, India and Indonesia are emerging as major industrial powers. They are greatly adding to demand for the world’s oil supply. Their demands will only increase. The increase in demand of course also leads to more incentive to find new sources of oil. While we are unlikely to find too many new sources of oil, we’ll find more expensive ways of extracting oil. The net effect will be the same: the era of cheap oil will end.

We may have already seen the beginning of the end when oil prices rose this spring to above $40 a barrel. They have since gone under $40 a barrel and then moved over $40 a barrel again. Certainly a major oil producer like Saudi Arabia can flood the market with oil and reduce the short-term cost of oil. But such tricks won’t last forever. Increasingly oil-exporting countries will have little reason to increase supply since it only cuts into their own revenues.

The United States is a very prosperous country. If oil becomes more expensive we are in a good position to simply pay the higher prices. This will be to the detriment of emerging economies like China. (China may decide it must have oil and invade countries like Indonesia to ensure a steady supply.) The effect worldwide could be very severe inflation. That in turn can cause recessions, depressions or more likely the bugaboo from the 1970s: stagflation. Stagflation is slowing growth in the economy accompanied by a general rise in prices.

Arguably we may already be experiencing stagflation. Currently our GDP is down from its somewhat feverish levels a couple quarters ago while prices have risen steadily. (Actually wages haven’t kept up with increased prices this year, which means that the average wage earner in America is effectively losing money.) Those of us who lived through the 1970s oil shock remember what stagflation was like: 18% interest rates, up to 14 percent annual inflation, an anemically growing economy and wages always lagging a few percentage points behind inflation. All this and gas lines too. It was not a fun time.

Most of us don’t really understand how our economy is tied up around oil. I think we understand that it takes oil to create the gasoline used to power our cars. But we don’t think much beyond that. We don’t understand the huge inflationary effect of a rise in oil prices. And yet gasoline powers the trucks that deliver our food. It delivers the fertilizers so farmers can grow crops in the volumes needed. It runs our tractors. It powers our airplanes. We don’t have coal-burning trains anymore: locomotives require lots of oil too to move freight. Plastics, packaging, many drugs, even a lot of our clothes are made from petroleum products. Petroleum is pervasive and it is everywhere. Our economies are totally geared around its plentiful access, ready availability and reasonable price.

This is why the end of cheap oil is so very scary: we have nothing with which to replace oil. Just think of the impact on the airline business alone. If a barrel of oil reached $150, would we have a commercial airline industry? Would we fly from coast to coast if it cost us $1500 each way? What would be the ripple effect to our economy? How many people would be unemployed if our commercial airline industry shrunk to 20 percent of its current size?

Clearly we have other sources of energy available, including coal (which produces most of our electricity) nuclear and hydroelectric. But as my friend Frank Pierce has pointed out, oil has some compelling advantages because it is so very portable. An airplane cannot be tethered to the ground to an electric cord. There are no alternatives for extracting so much energy in such a convenient and portable liquid form. Similarly, although hybrid cars offer some relief from an oil shock, eventually cars may become too expensive to drive.

Hopefully the end of the oil age will be a gradual process. But it appears to be coming nonetheless and we are not prepared. In fact except for a few in the know most people have no idea that a persistent long-term oil shock is in the horizon of our lifetime. Currently there is hardly any research into petroleum equivalents. (This looks interesting, but it is unlikely we could find enough biomass to satisfy our insatiable thirst for petroleum.) And our appetite for oil seems boundless. It doesn’t seem like any person alive prefers to live in a third world country. They’d much rather live in industrial economies. Millions cross borders annually just to eke out a slightly better lifestyle in a more developed country. Yet the only model we have for a modern economy is oil based.

Those of us living in modern economies would have no idea of how to survive in an agrarian economy. Indeed we really can’t. There are too many of us to feed now. We absolutely depend on oil to run our tractors and till our fields and fatten our cattle so that we can support 300 million plus people just here in the United States. Without it we can predict mass starvation, brutality, anarchy, perhaps war.

If we had enlightened leadership we would be have a well-funded Manhattan-like project. Its goals would be not just to reduce our dependence on foreign oil, but also to find ways to have an oil-less economy. And yet as always we seem to be clueless. The Republicans think that finding oil in the Arctic National Wildlife Refuge is part of the solution. If so it is a tiny part and buys us perhaps a few years of relief from the coming oil shock. Even if we had a huge oil field under the Arctic National Wildlife Refuge we’d still be importing most of our oil. We simply cannot sustain our economy with our own oil.

Hopefully the oil shock will be a tempered shock. Hopefully prices will rise slowly enough to avoid huge rounds of inflation. But there are no guarantees and it would be foolish to prepare for this rosiest of scenarios.

This National Geographic article makes me wonder what sort of retirement I will have, or if I could afford to retire at all. Will the coming oil shock reduce the value of my pension by 50 percent or more? Will I at age 70 be homeless somewhere because I cannot afford to keep a roof over my head?

I wish we had real leadership in Washington. Even the Democrats seem to have only a dim idea of this very likely future. It seems everyone in government is ill informed or living in denial. I wish I could shake them up. Research money spent now to develop ways to sustain a petroleum-less economy might well mean the survival of our nation in the 21st century. Petroleum equivalent tools and products that become available when this oil shock happens could make for some very rich inventors.

Maybe that’s what I need to do: become the Thomas Edison of the petroleum-less age. Like everyone else I don’t want this oil shock to happen in my lifetime. I like the way my life is ordered right now. I want to maintain this lifestyle until the day I die. But increasingly I see this freight train headed right toward us. I wish while there is still time that we were smart enough to prepare for this inevitable era.