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$20 Per Gallon’ by Christopher Steiner
Matthew DeBord, Los Angeles Times
20 Per Gallon
How the Inevitable Rise in the Price of Gasoline Will Change Our Lives for the Better
Christopher Steiner
Grand Central: 276 pp., $24.99
During the summer of 2008, Americans found out just how much was too much to pay for gas. On July 11, a barrel of oil hit $147.27, which translated into $4.11 for a gallon of regular gas at the pump — the highest price ever reached in the U.S. And that was just the average. In some places, the price got close to $5 a gallon. It was the Summer of Pain.
Many people who’d never heard of “peak oil,” or who’d been trading in one SUV for another, or who’d scoffed at the idea that Americans would ever drive less, suddenly learned that when the price of a finite commodity spikes, even cherished habits change. And it’s not just about driving: Our entire American way of life, in fact much of the global economy, has been built over decades on cheap oil: Seafood and plastic toys from China can flow freely around the world. The price of bread and milk stays low. Airlines can engage in price wars.
…This is the altered state of petroleum consciousness that Christopher Steiner, a trained engineer and writer for Forbes, envisions. And it’s happening quickly, he points out. “As the middle class continues to explode in China, India, and scores of other spots circling the earth, hundreds of millions of additional cars will hit the roads,” he writes. Many of those cars will be like the $2,200 Tata Nano, a “people’s car” created for Indian consumers who’ve been riding bicycles and motor scooters for generations. “People want what Americans have had for decades: easy cars and an easy life. These people will get what they want, but in the process they will catalyze a global economic reformation on a scale never seen. . . . ” Even the tattered remnants of the Detroit Big Three want a piece of this market: As General Motors left bankruptcy at home, it was selling more cars than ever in China.
Steiner has adopted a nicely readable structure for the book. Starting at $4 a gallon, each chapter tracks what will happen when gas hits a particular price, escalating by $2 until he gets to $20. He visits an airplane graveyard in order to explain how $8-a-gallon gas will crush the airline industry. At $14, he checks out an abandoned Wal-Mart “ghost box” and imagines a grim end to the car-dominated exurb. “Stores will return to the downtowns of yore as small towns’ populations . . . return to the small-town infrastructures that their grandparents and great-grandparents built.”
(26 July 2009)
Oil is Peaking But Not Because of Speculation
Steven R. Kopits, The Cutting Edge
In seeking to explain the run up in oil prices from 2004 to 2008, commentators often turn to ‘speculation’ as the primary cause. While speculation—or at least a kind of piling-on—may have explained the very late stages of the oil price rally, the willingness to attribute oil prices primarily to financial investors, as the CBS news show 60 Minutes did a few months back, risks drawing the wrong lesson from the period.
Let’s rewind the clock and recall the events of the time. After many years of solid growth, oil production plateaued in October 2004. Regardless of the price level, the oil supply simply stopped responding, and from then on, the world had to make do with broadly flat supplies. Ordinarily, the expansion of the world’s economy would be accompanied by increased energy consumption and an inelastic oil supply might have been expected to hinder economic development. It didn’t. In the four years to mid-2008, the world economy expanded by 18 percent. The global economy boomed, even without new oil.
However, this came at a price. In the absence of oil supply growth, demand accommodation was required. This was achieved by prices rises averaging 25 percent per annum from 2003 to the end of 2007. In other words, the price of oil went up, and this constrained consumption by causing the marginal consumer to drop out of the market. This proved a workable solution for a time, but the global economy could not sustain 25 percentannual price increases indefinitely, and by second half 2007, the situation was becoming critical. Consumption was being maintained by continuing draws on inventories averaging 1.4 million b/d, and virtually every producer, with the possible exception of the Saudis, was running flat out. By early 2008, even the Saudis were throwing the kitchen sink at the market—all to no avail. On paper, it looked like a peak oil nightmare.
…Prices did ultimately fall, but not because the supply situation eased, nor because speculators fled the market, and not because inventories were released. Prices fell because the global economy collapsed.
This period then shows us two of the possible adjustment mechanisms in the era of peak oil: oil-less growth characterized by increasing prices and continuous, incremental adjustment; and recession accompanied by a dramatic steep drop in consumption and a collapse of oil prices. The lesson to be drawn is that conservation can work within limits, but at some point, there is a straw that breaks the camel’s back and the whole system collapses. Ultimately, the inability of the oil supply to keep pace with global demand proved to be a key contributing factor to the current recession. However, that the proximate cause of the recession is China, not peak oil. China ultimately provided both the financial liquidity and the commodities demand which brought down the global economy. Were China not so large and not at its current stage of development, peak oil might have come and gone without anyone noticing for some time. As it was, China hit its stride just as the oil supply was stumbling. The issue was not, therefore, peak oil in and of itself, but rather the supply/demand imbalance caused by the inability of the global oil supply to adjust to China’s incremental demand.
(27 July 2009)
Are We Headed for Another Oil Shock?
Scott S. Nyquist, Businessweek
As the global economy recovers from the current downturn, there is a significant risk that resurgent energy demand will coincide with tight supply, vaulting oil prices higher again. Indeed, prices are already on the rise. Research by the McKinsey Global Institute (MGI), combining macroeconomic modeling with an understanding of industry dynamics, finds that unless business leaders and policymakers act decisively on both oil supply and demand, there is a risk that a second oil shock could follow economic recovery—indeed, one that could be lengthier than the second price spike that hit the world economy in the 1970s.
In the 1970s there was a silver lining to the twin shocks. For a long time after, energy demand remained subdued and the world saw a revolution in energy efficiency and substitution. Never again, policymakers vowed, would they allow soaring energy prices to take their economies hostage.
Today, tight credit as well as uncertainty about oil price levels is compromising investment in new supply. Even after the credit crunch eases, producers could remain cautious in the face of strenuous efforts by markets such as the U.S. to lessen their dependence on imported oil, adding uncertainty to the demand outlook. In any case, even in a more benign investment environment, producers will find adding supply capacity more difficult than they did in the 1970s because of the challenge of producing oil from rapidly maturing oil fields and the difficulty of finding new low-cost oil fields.
(29 July 2009)
