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Oil pinch threatens to bring changes

WASHINGTON — Strips of black asphalt stretching across green fields. White contrails following jets through the early evening sky.

To Americans, such scenes are beautiful. And common.

We have an economy built around open road and endless sky. We count on trucks to transport our goods, cars to get us to work and airplanes to whisk us to vacation spots.

But a growing chorus of experts says the age of cheap gasoline, diesel and jet fuel will be coming to an end — and soon. Economists say this could lead to higher prices for consumers, lower wages for workers or diminished profits for shareholders.

While the Earth still holds lots of oil, most of the easy-to-reach light crude oil used to fuel engines has been sucked up, many experts believe. As China, India and other developing nations reach for their share, global oil production may well be peaking and moving toward an inevitable decline.

If that's true, America's transportation-dependent economy appears headed for a crippling crisis in coming decades. The federal Department of Energy projects that even 20 years from now, the nation's transportation sector will still be filling nearly 97 percent of its energy needs with oil.

The best approach to the oil crunch is to "do everything all at once," says Matt Simmons, chairman and chief executive of Simmons & Company International, a Houston- based investment banking firm that specializes in energy companies.

He believes Americans must find whatever oil is left, use it as efficiently as possible and make sure it is being used where it's most needed — for transportation, not heating or industrial purposes where substitutes, such as coal or renewable fuels, could serve as well.

The next Congress is expected to craft a national energy policy that will encourage domestic production, even if it continues to shy away from mandating conservation measures.

"Doing everything" would help buy time while engineers focus on the long-term solution, which is to "invent a new energy source that does not exist today," Simmons said.

Engineers already are working on ways to improve wind turbines and solar panels that help provide electricity and heating. Auto companies are making progress on developing and selling hybrid cars that get great mileage.

'Stuck with jet fuel'

But engineers are far from developing any good way to lift a Boeing 757 off the ground or hurl a loaded Mack truck down the freeway without burning lots of oil.

Because fuel is the second-biggest cost for both industries after labor, they are under intense financial pressure to adapt to what may be a new age of more expensive oil.

"We're stuck with jet fuel," which the industry burns at a rate of 18 billion gallons a year, said John Heimlich, chief economist at the Air Transport Association, a trade group for airlines. Even looking ahead 30 years, he sees no realistic alternatives for flying without oil.

At the same time, he agrees with those who say the era of cheap oil is over.

Heimlich said that for U.S. airlines to break even, oil prices must remain below $31 a barrel.

During the decade between 1992 and 2001, the median price of a barrel of oil was $20, allowing airlines to pile up profits. Today, a barrel costs about $47, nearly 50 percent more than a year ago.

"I think we'll see some price moderation in '06 and '07, then we'll resume an upward path," Heimlich said.

To help reduce fuel costs, air carriers are slowing cruising speeds, buffing out fuselage scratches to reduce drag, offloading unneeded galleys, carts and drinking water, as well as increasing use of single-engine taxiing and developing better flight plans.

They would like to aggressively replace old equipment. Replacing an old DC-10-40 with a new 757-300 can reduce fuel consumption by about half.

But the irony is that today's soaring fuel costs are making it more difficult for carriers to upgrade equipment. Both UAL Corp.'s United Airlines, the country's second-largest airline, and US Airways Group Inc., the seventh-largest, are in bankruptcy. Virtually all carriers are reporting losses.

Truckers make changes

The trucking industry is also trying to adapt to expensive oil. In the past year, diesel fuel prices have risen about 65 percent. To help in the short term, many truckers have imposed fuel surcharges on customers.

But to cut fuel consumption, trucking experts say companies will have to make many changes, including design modifications that reduce drag, training drivers how to stretch fuel and simply slowing down.

Truckers must learn to conserve oil-based fuel because "I don't see any alternate form [of energy] coming anytime soon," said Tavio Headley, staff economist with the American Trucking Associations, a trade group.

Sam Shelton, an associate professor at Georgia Tech's Woodruff School of Mechanical Engineering, is trying to find ways to stretch oil supplies. He heads the university's new Strategic Energy Initiative, a program intended to carry out research, development and demonstration projects involving new technologies to replace oil or at least extend its use.

He believes increasingly scarce oil supplies should be channeled into the industries that truly need them. "Oil should be saved for the transportation sector" because the "energy density" of oil is needed to move heavy loads, he said.

It also should be reserved for making plastics, fertilizers, adhesives and other goods. "There are certain things that need the chemical structure found only in hydrocarbons," he said.

Shelton agrees with the energy experts who compare the use of home heating oil to throwing Picassos into the fireplace to heat the family room. Surely there are more sensible ways to warm spaces, such as using electricity generated by coal, nuclear power or wind, he suggests.

Shelton said the government should have an energy policy that uses tax credits, deductions and other incentives to boost oil conservation and steer Americans away from using oil for any nonessential purpose.

Some experts disagree with Shelton, saying the free market will prevent oil shortages, as it did in the last century when price spikes led to increased drilling.

They believe today's high prices don't foretell the end of an era. Instead, they are a temporary reflection of specific, short-term events, such as continued fighting in Iraq, an attempt to recall the president of Venezuela, the threat of terrorist attacks in Saudi Arabia, and the dispute between the Russian government and its largest oil exporter, Yukos Oil Co.

They argue that as new, profitable reserves are found in coming years, the world will be awash in oil again, just as it was in the 1990s.

Rapid depletions

Shelton says history also teaches another lesson: that oil runs out. Oil companies have been proving for decades that production from known fields can decline rapidly, a phenomenon described as "Hubbert's curve."

In 1956, geophysicist M. King Hubbert observed that oil fields do not produce evenly until the last drop is gone. After about half the oil has been pumped from the ground, getting out the second half becomes more difficult and costly. When production falls off enough, the oil company abandons the field.

As a result, a typical field's production is represented by a curve that slowly rises to a peak and then falls sharply.

Hubbert's model predicted that oil production in the continental United States would peak around 1971. It did and has been declining since.

Many geologists believe the whole planet is now approaching the peak of Hubbert's curve and that new reserves will never be able to keep pace with growing global demand.

In the United States, "we are producing a third less oil than in 1970, even though the price is four times as high" after adjusting for inflation, he said. If the free market were the only mechanism that mattered, Americans would be pumping more and more oil, but they can't because the supply has peaked, he said.

"The peaking of oil is as certain as death," he said. "All you can do is debate when."

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