BIKE: Thoughts on Near Peak Oil

[alan_drake]

I belong to a slightly differnt school of thought than most.  I recognize that there IS elasticity of supply; i.e. higher prices will result in more production.  Both convential and "other" (tar sands, coal to oil & natural gas to gasoline are the three most likely) production is higher with €100/barrel oil than €20/barrel oil.  Not dramatically higher, but higher,

Please note that I used the euro and not the dollar sign.  The reason is that the US is in a uniquely bad situation.  High oil use per capita, very low elasticity of demand and a pre-existing balance of payments problem (in 2003 about $2 of exports for $3 in imports.  Now the imports (oil and all other) cost more due to the lower $).

I have heard that, at $60/barrel, all US material exports will be needed to pay for oil and movies, software & insurance will have to cover the rest.

The potential supply (on-line, ready to produce) used to be about 5 million b/day.  It is now between 1 & 2 million b/day BUT most of that surplus is in production, creating large increases in inventory.

Thus the free market is preparing for a supply interuption (Hurricane Ivan, war in Nigeria, strikes in Venezula).  Once almost all storage is full, the price will drop (short-term).

Since both demand and supply vary over time, *AND* there is no longer large reserve production that can just be turned on, above ground reserves are the only option.

So I see the current inventory build as a rational response to a collison between growing demand & not so growing supply.

IMHO, before Peak Oil, there will be a period that we are now clearly entering.  Growing demand collides with production growing at a slower rate.  That is I expect world oil production to increase from 2005, but at a slower rate than inherent demand growth.  Say 1% each year for X years.  Then .5%, then stable, then decline.  All at every higher euro prices.

Even this will NOT be a "soft landing".  IMHO, the US is the weak sister for the reasons listed above.  Chinese demand can grow at 3% or even 5%/year in a world with 1% more oil.  They have the exports to pay for it !  The EU, Japan, S. Korea et al can also get what they need for the same reasons, although only minimal growth.

Any economic good can saturate it's market and create a glut. The US dollar and US assets are quite likely (IMHO) to reach that point.  A "tipping" point may be within sight.  The US dollar will need to be driven down to a point where "cheap US labor" starts making import substitutions and exports.  Enough to pay for oil & other imports.

The very low elasticity of demand seen so far (Hummer sales down just 25%, overall demand up) modes ill for the future.  Demand destruction (depression levels unemployment and a €.45 dollar) may be the only option EVEN with 1% world oil production growth.

All that is needed is 1% to 3% oil demand decrease each year in the US, IMHO.  The hard way or the easy way.

I personally favor the following policy options:

1) Electrify US railroads.  Do so by giving property tax exemptions to any RR that electrifies.

2) Electrify city buses with trolley buses on busy routes.  95% FTA matching for electric buses, 65% for natural gas, 50% for diesel.

3) Raise CAFE standards "till they hurt".

4) Raise gas taxes as much as politically possible (see EU & Japan).

5) Take existing light & heavy rail plans and go back to 80% FTA funding (get the $ by almost eliminating federal fudning for new highways).  Minimal fed funding for diesel locos (say 50%).

Salt Lake City will put a plan to build their 30 year plan in 10 years on the ballot next year by tripling taxes.  With 80% funding it will "just happen" with existing taxes.

Miami, Dallas, Houston, LA, San Jose, NYC (2nd Avenue subway, connectors, etc.), Seattle, Portland etc. all have plans "ready to go"  or in the process of building slowly.  Build them quickly with high % FTA funding.

Other cities can join by deciding to build electric rail AND endorsing TOD concepts (zoning, tax breaks) around stations.

80% funding also allows for better designs that are not quite so "cost effective" BUT are more attractive to pax (grade seperation, reserved ROW, 3 or 4 tracks to allow express service, etc.)  Copenhagen anyone ?

In 1970, 4% of DC commuters used buses.  Today 38% use Metro & buses.  All because of a massive investment that could be repeated elsewhere.

6) Create a Strategic Rail Reserve (extra heavy & Light rail cars to pack people into in an oil emergency for those cities with electric rail).

7) Give Boeing a subsidy (just like the EU gives AirBus) to apply 787 technology ASAP to a 737 replacement.  It will give us something to export and reduce domestic oil use as well.

8) Amtrak today is a not much more fuel efficent than Southwest.  Go for city-pairs 200 miles apart or closer, build electric semi-HSR (top speed 90 to 110 mph) that is used by both pax & freight.  Current Boston-DC to Richmond-Charlotte-(Atlanta spur)-Savannah-Jacksonville-Orlando-(Tampa spur)-Ft. Lauderdale-Miami would be attractive for both regional pax and long distance freight.

9) Drill ANWAR, off Florida & CA etc.

10) Develop a continent wide high voltage DC "loop" to help ship wind, hydro, nuke and other power around from supply to demand.  Also build more pumped storage to store off-peak power for peak use.

Wind in the Dakotas could be "cheap" today but no market (cheap coal & hydro locally, which wind cannot compete against yet).

Have TVA & Bonneville build a couple of standard nukes that others can use copy if they want to.  Break the ice.

This could eliminate natural gas imprts by reducing NG powered electricity and may even allow NG for limited transportation use.

11) I personally "Buy American" to help preserve our industrial base.  It is far easier to expand a small struggling base than start from nothing.  US made underwear seems gone, but socks (Hanes) are still here.  So forth.

Any thoughts ?

Alan Drake