A Crude Guess About The Future

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.


Tom

"Thanks to government regulation"

Seriously?

I think government regulation is the last thing we should "thank" when it comes to energy. The government has done nothing but slow and impede progress in this area. The reason cars are more "green" today is because there is consumer demand for green cars.

Douglas

"But to this point man has managed to keep up with the demand curve..."

Until he doesn't.

Christopher Strom

"...just as it’s a certainty that the world’s oil supply is limited, it’s also a certainty that human creativity is limitless."

And that limitless creativity will allow us to find and extract every barrel of oil (from our finite supply) that costs less than a barrel-of-oil's worth of energy to extract. And we will. And as we approach the end of the extractable supply, our civilization will undergo just as impressive and fundamental a change as it did when we learned to harness that energy.

Ezzie

What Tom said re: Gov't regulation.

Why compare to the price per gallon, when there are so many other factors that go into that cost? The cost of pulling crude from the ground has gone down tremendously, and if as you note above the supply has been dramatically increased through ingenuity, then that offsets a large chunk of the increased demand as well.

RogerP

Oil is not the only commodity with "peak" scenarios than haven't panned out. In the 1960s, we were told that there was only 5 yearsworth of mercury because the US was spreading it all over Viet Nam in fuses as mercury fulminate. As my dental amalgam manufacturing colleague will attest, there's still plenty of mercury around.

Today, speculators are saying the same thing about silver, as though industry won't respond to skyrocketing prices.

Perhaps I should haul out my copy of "Limits to Growth". I could use a laugh

Daniel

'Thanks to Government Regulation' was supposed to be negative, if I'm not mistaken.

Clancy

I interpret it as a non-normative statement of fact. As in: Government regulation (along with the other factors mentioned) has helped push gas mileage up. Whether or not you think it is moral for them to do so is not what the post is about.

Myron

Your argument of human creativity as a counter to a finite resource is short sighted. It's like drinking a Big Gulp, you can grab bigger and bigger straws to satiate your thirst but at some point there just wont be any more liquid left. While you can look in your Big Gulp and see how much you have left, you can't do that with oil. The industry revolves around discovering more and more, but what happens when that stops? All the human creativity in the world won't stop the economic devastation that will certainly occur.

zach

What is the inflation adjusted $ per mile change from 1919 to 2010?

GT

"...and that world oil demand is set to skyrocket thanks in large part to the motorization of India and China"

and this has nothing to do with our SUVs, trucks, rejection of mass transit systems. Right.

Just because we had the cars before them doesn't make us any more (or less) deserving than the Chinese or Indians. Will we give up our cars for the planet? Then why should some one else in another country give it up? Let's not take cheap shots and blame them for all the problems in the world!

Cackalacka

Color me shocked that you are skeptical re: Peak Oil.

Y'all are quite predictable when it comes to some forms of 'green' skepticism.

Casey K

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. ;)

Hank

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.

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Lucas

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.

Christopher Strom

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.

James

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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Eric M. Jones

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

Lucas

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.

Bob Woolley

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.

Wim Graux

I don't get it. Shouldn't the switch from gold-backed money to fiat money be more prominent on both sides ?