High Oil Prices Start To Work. But Is It Enough?

The transition from using hydrocarbons to using electrons to power our transportation systems is such a huge change that it truly is like turning around a speeding aircraft carrier on a dime.   The Hirsch Report estimated the transition would take twenty years to accomplish if concerted efforts were begun before oil began to become scarce, longer if we wait.

To date no major countries, other than Israel and Denmark, have begun concerted efforts.  Rather, most OECD countries are relying on market prices to induce car makers and consumers to switch gradually to hybrids and hybrid electrics.  European countries give the process a little push with high oil taxes and good public transportation.  But many developing countries, including all oil exporters, actually insulate their populations from market prices through subsidies.

Market prices are causing changes to start happening but at a very slow rate.  Hybrids, the first generation of fuel efficiency, are available and are gaining mild market acceptance.  The second generation, the plug-in-hybrid-electric vehicle (HEV) is scheduled to come in 2010.  Perhaps best of all, according to a report in today’s Wall Street Journal automobile executives are now convinced that the transition to HEV’s must happen.  That is certainly good news.

On the other hand, even this modest market-driven effort will have little success if the price of oil does not stay high.  As the Journal reported, Mike Jackson CEO of AutoNation, the largest U.S. car retailer, said about selling HEV’s, “I’m a good car salesman. If I have high gas prices and an open-minded consumer, it’s very doable. There is a connection between their needs and what we have to offer them. If we have cheap gasoline, it’s mission impossible.”  In fact progress toward the transition will probably slow unless the price of oil keeps rising, since it is really the sense that oil prices will keep increasing more than the price level itself that motivates car buyers to sacrifice size and power for efficiency.

Even if oil prices continue higher causing a successful introduction of HEV’s in 2010, it will not be enough to substantially reduce U.S. (let along global) gasoline demand before oil production collapses in about five years.  As Chris Skrebowski said, “Of the 120 largest fields, 50 are in decline, 44 not in decline, 12 unclear and seven are undeveloped. The average age of the giants is 42 years, [they provide] 50 percent of total production and contain two-thirds of reserves.”  Skrebowski told a meeting of ASPO (Association for the Study of Peak Oil) in October, 2007 that there are so few new oil fields scheduled to come on stream after 2012 that global production will fall off a cliff by 2014.

This is part of my ASPO report at the time as regards Skrebowski’s presentation:

A similar forecast was made by respected oil analyst Charlie Maxwell who stated in an interview in February, “Between now and 2010, this supply shortfall will be made up through a drawdown in inventories, helped out by a slowdown in demand in 2008 and 2009 due to a recession or near-recession in the U.S  But in 2010 the shortfall will become greater than can be made up by what’s still in inventory, and thus will begin a long period of global oil scarcity that will get worse starting in 2012 or 2013, which is when Maxwell foresees a “peak” in conventional oil production.”

Since the world is relying on market forces to propel the transition from hydrocarbons to electrons, the logical conclusion must be either that the Hirsh Report was wrong because a concerted effort is not needed and it will take market forces much less than the 20 years to implement the transition - or else that the market price of oil will move much, much higher within the next five years to force the transition more rapidly, given the estimated shortfall of oil supplies.

It seems clear to me that this speeding aircraft carrier will not turn around quickly even with much higher oil prices.  Moreover, if prices weaken this year or next, making Mike Jackson’s job more difficult, the price increases after 2010 will have to be even that much greater.

Posted in Categories: Commodities, Contributor, External Research.

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Comment by Kat

2008-06-12 08:24:30

Try checking out the Drive $marter Challenge (www.drivesmarterchallenge.org). You can enter your specific vehicle data and figure out how much money you can save my taking six fuel-efficiency steps. They also provide other fuel-efficiency tips to help you save on gas costs.

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