Though it has an upside for the biosphere that shouldn’t be ignored, $100/barrel oil definitely isn’t much fun for our pocketbooks or the world economy. And could worse times be ahead?
When we see spikes like this, there are inevitably voices predicting stratospheric prices for crude just beyond the horizon. The basic reasoning is that oil supplies are finite (clearly, in the very big picture they are), and that world oil demand is set to skyrocket thanks in large part to the motorization of India and China (it is—see my last post.) “Peak oil” advocates maintain that at some point we are simply bound to run out of the stuff.
I’ve never been a big fan of the peak oil story. First, price signals will encourage conservation as oil gets more dear, reducing demand pressure. We’ve already come a long way on that front; in 1970, the average car on the road got about 14 mpg, and the average van, light truck or SUV about 10. Today, the averages for new cars and trucks sold are considerably more than double those figures, and things continue to move in the right direction thanks to government regulation (rising CAFE mpg standards), new technology (including but not limited to hybrids), and the fact that consumers respond to oil price increases pretty much like economists predict they should, changing purchasing, travel and location decisions in order to conserve when oil prices rise.
Much more dramatic than anything on the demand side, though, has been our stunning record at increasing supply, which has been a true testament to the power of human ingenuity.
Consider this variant on the Simon-Ehrlich wager, in which an ecologist (Ehrlich) bet an economist (Simon) that the inflation-adjusted prices of five commodities would rise in the 1980s. (All five fell, and Ehrlich lost.) This table (below) shows historical gas prices stretching back to 1919. At 25 cents per gallon in that year, I’ll grant that you’d probably give your right arm for a time machine big enough to fit you and your Toyota Tundra. (Be sure to get your influenza inoculation before you go, however.)
Source: Energy Information Administration (Mar 2005).
But in constant 2010 dollars, that 1919 price of gas was $3.14. True, at the moment we’re paying a bit more—about $3.96. However, keep in mind that in 1919 there were 7.58 million motor vehicles on America’s roads. Today, Americans own about 254 million vehicles. That means that gas prices have risen 26 percent since 1919, while US vehicle ownership has risen 3,250 percent. And those vehicles are being driven more intensively than their 1919 counterparts. We now drive 6,800 percent more miles per year than in 1919, while gas prices have stayed pretty much stable.
Much as I’d love to, it’s beyond my power to conduct a séance and call up the spirits of oil executives and petroleum engineers from 1919. (Besides, if I could raise the dead I’d be concentrating my efforts on Jerry Garcia.) But I bet if I could conjure up oilmen from the past, they’d tell me that thanks to the wondrous, futuristic science of 1919, most of the oil that the laws of engineering and physics would permit man to cost-effectively extract had been discovered, and that supplying 800 million vehicles worldwide would be a mathematical and physical impossibility, by orders of magnitude.
As they say in the investment biz, past performance is no guarantee of future returns. But to this point man has managed to keep up with the demand curve, and just as it’s a certainty that the world’s oil supply is limited, it’s also a certainty that human creativity is limitless.
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Color me shocked that you are skeptical re: Peak Oil.
Y’all are quite predictable when it comes to some forms of ‘green’ skepticism.
Hot debate. What do you think?
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I don’t remember who said it, but the quote is sound:
“The problem isn’t that we’ll run out of oil, it’s that we won’t.”
Interesting numbers about the overall cost of fuel through the years, though. It’s easy to get caught up in the doom and gloom.
As for the deregulationists in the room, his point was about rising fuel efficiency. Every rise in government standards has prompted car companies to adjust their lines, kicking and screaming. Regulation can be good, folks. Now eat your veggies.
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The oilmen of 1919 would probably be shocked by how effectively their industry had captured government. After which, they would immediately argue the need for aggressive fracking, the opening of land and ocean reserves for extraction and the need for industry subsidies.
Every source of food and energy man has consumed with reckless abandon and shortsighted greed has run dry. There is no reason to think that this time will be different. Cheap oil does not just impact cars, it impacts almost all of modern civilization. Oil is not going to have a gentle decline where each year we use a little less, it is going to be a panic, and there is nothing to suggest that consumer behavior acts rationally in the event of a panic. As your own chart shows, gas is hardly more expensive than it historically has, and yet people are irrationally reacting. Too many have made decisions based on the super cheap oil and are in for a very painful discovery.
Hot debate. What do you think?
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Peak oil theory doesn’t say that oil will “run out”. It says oil production will PEAK and after sometime begin slowly decrease while demand (at actual price) will rise. Economical basics says price will rise.
We went trhu Peak Wood and world has not ended. Tecnology will play a big role sure, but expect some thigs to get REALLY expensive until then. Just remember ’70 oil crisis.
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Peak Wood? Seriously? The (unstated) fundamental assumption behind Peak Oil is that the supply of oil is finite. The trees I planted last season suggest that there’s not really a parallel “Peak Wood” scenario.
Hot debate. What do you think?
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A more apt comparison might be to the “peak wood” problem of Classical Greece. The mountains were stripped of their trees to build the “wooden walls” of ships that defended Athens, and to smelt the silver that made her commercial empire possible. Some, at least, of the Greeks saw what was happening. See e.g. Plato’s Critias:
“…not so very long ago there were still to be seen roofs of timber cut from trees growing there, which were of a size sufficient to cover the largest houses; and there were many other high trees, cultivated by man and bearing abundance of food for cattle. Moreover, the land reaped the benefit of the annual rainfall, not as now losing the water which flows off the bare earth into the sea, but, having an abundant supply in all places, and receiving it into herself and treasuring it up in the close clay soil, it let off into the hollows the streams which it absorbed from the heights, providing everywhere abundant fountains and rivers, of which there may still be observed sacred memorials in places where fountains once existed…”
So Greece exhausted the land and was conquered. And 2500 years later, neither the land not the country have really recovered.
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One of the reasons the Mayans died out was the deforestation of thier lands, they burned it all, within 100 years of the collapse of the population the forest had regrown.
The model-T weighed less than half as much as present-day cars, had 20 HP and 25 MPG. But if you really want to see how far backwards we’ve gone–check out this 1916 Chevy Volt!:
http://www.periheliondesign.com/downloads/Gas_Electric_Automobile.jpg
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The top speed was approximately 45mph, you had start it with a hand crank, and the windows were made of pane glass causing severe cuts in case of a wreck. There were no seatbelts or airbags. Wrecks at 40mph were often fatal. It could not climb steep hills because of the fuel intake design (unless in reverse). It could not operate in extreme cold or heat and early models had no suspension systems or headlights.
I’ll take my car today.
Hot debate. What do you think?
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Thinking about the graph, i had a hunch: If oil (and gas) price goes up, the price of a lot of products and services goes up as well. Correlation is not 1, but maybe you need to correct for that.
On recent visit to the Thomas Edison museum in Ft. Myers, Florida, I noticed and took a picture of this sign:
https://picasaweb.google.com/rakewell1/FtMyersMarch192011?feat=directlink#5590075178621131570
The relevant part is the quotation from a 1913 issue of Scientific American about the impending exhaustion of the world’s oil supply.
So yeah, I think it’s likely that the 1919 oil execs might have said about what you imagine them saying.
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While gas prices may not have gone up much in real terms over the long haul, I think it is important to keep in mind the real cost of oil. Just as a house costs way more than just the mortgage payment oil costs way more than what we pay at the pump. Add in the cost of being tangled up the mid-East. Throw on the cost of a couple wars and the lives lost. Figure in the fact that we’re funding at least indirectly the people who attack us. Would we even know where Iraq was on the map if not for oil?
I don’t get it. Shouldn’t the switch from gold-backed money to fiat money be more prominent on both sides ?