Friday, July 04, 2008

Dude, where's my solar car?

David Cohen, not the secret one, posits three possible scenarios for how the US weathers the next seven years of increasing oil shortages: bad, worse, and game's over.
Conceptually, each of the 7-year scenarios below is very simple. It is a matter of making compensatory demand decreases. For example, if non-OECD demand rises 1 million barrels per day in a year's time, and the crude + condensate oil supply increases 285,000 barrels per day, then OECD demand must fall by 715,000 barrels per day during that year to keep the oil market in approximately the same balance it is in today.

It is the ability or failure to achieve the necessary offsets that makes for relative reward or punishment in the OECD economies. It will take 7 to 10 years (or more) to make significant structural changes that decrease OECD (and America's) oil demand. Such changes include significant market penetration for gas-electric hybrids or plug-in hybrids, some "2nd generation" biofuels from cellulosic feedstocks, more ultra-deepwater oil production, building extensive light-rail transit systems, expanding the railroad system (in the U.S.), and restructuring the geography of work & living patterns to encourage fuel conservation.

American oil demand makes up 40.6% of total OECD demand (EIA data, two-month average for 2008). I will assume that U.S. oil consumption stays constant as a percentage of OECD demand in future years. The price elasticity of demand measures the sensitivity of consumption to price. Low elasticity implies that demand does not decrease much as the price rises.

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Scenario 1 � Buy Some Time
Yellow Alert

This scenario assumes a high price elasticity of OECD oil demand. Americans, Europeans, the Japanese, the Koreans and others are highly motivated to cut their demand sharply in the medium-term. The OECD countries achieve a 10% consumption cut over 7 years while keeping the economic performance stable at current GDP levels. The decreased consumption offsets non-OECD demand growth and sluggish oil supply growth, thus buying us some of the time necessary to implement significant structural changes. OECD consumers adapt well to high oil prices, which remain more or less at their current level. After 7 years, American oil demand comes in just below 18 million barrels per day. This is the "best case" scenario.
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Scenario 2 � Close But No Cigar
Orange Alert

This scenario assumes a medium-to-low price elasticity of OECD oil demand. The developed economies achieve only a 5% consumption cut after 7 years. Competition for oil (exports) goes up because non-OECD demand growth is not offset, resulting in an ever-rising floor price for crude oil. Americans are slow to make adjustments, or find it too difficult to do in an anemic economy with sharply declining home prices. The real price of oil (in 2008 dollars) rises above $150, a price level which is sustained for years at a time. The housing market never recovers.The economy is slowly strangled by an ever-tightening stagflation noose. The economy is intact, but just barely. School districts, city & county services, businesses, et. al. are hit hard but do not shut down.
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Scenario 3 � It's All Over Now, Baby Blue
Red Alert

This scenario assumes a very low price elasticity of OECD oil demand. The OECD nations achieve only a minuscule consumption cut in the next few years. Non-OECD demand growth and inadequate global supply are only slightly offset. Actually, a much larger consumption cut is "achieved" after 2011 because the economy is in a tailspin. Sustained prices of $200/barrel lead to the economic collapse. Demand takes a nosedive as duress causes the loss of many jobs when businesses (or public services) are forced to shut down. Home mortgage defaults are common. Driving becomes a luxury for many. Conditions are akin to the Great Depression for many Americans. Our quality of life deteriorates rapidly. This is the worst case.


As I've mentioned in other posts, catastrophic economic collapse from peak oil is the real problem that should be keeping everyone awake at night, not Global Warming. The latter problem, if it is being caused by fossil fuel based carbon emissions, will largely be solved by the former. Under any of the energy scenarios above, our collective carbon footprint will fall.

As I've also stated, the iron grip that environmental guilt has had over our political system, limiting investments in resource exploitation, is quickly slipping away. It is already happening. Add to the list of endangered species the practice called "environmental impact study". It will be a trying time for marginal species, and only the prettiest will survive.

But whatever scenario unfolds, we will eventually get to the other side of oil dependence. That's the positive thing to take away from this current period of economic anxiety. New technologies will be developed and perfected that will allow us to tap renewable sources of energy. World population will peak sometime after mid-century, putting a cap on worldwide energy demand. We will probably never return to energy as cheap as it was to Americans in the 1990s, but we will adjust to higher prices in ways that make its impact less severe. We are living through a historic economic and technological shift of epic proportions. The ride will be bumpy, but I think that America, despite the doomsayers, will come through stronger than ever. And we'll have flying cars!

Update: Four oil companies begin oil exploration off the Florida coast. Apparently a portion of the coastal waters near the panhandle were exempt from the Federal moratorium and the state ban, but until now the economics for exploiting these fields were not favorable.

3 Comments:

Blogger David said...

Far be it from me to undercut David Cohen, but unfortunately he fails my simple test in these matters: he's keen for me to make sacrifices, but he's not willing to abandon his own political agenda. Call me when he starts promoting nukes and stops promoting light rail.

July 05, 2008 11:14 AM  
Blogger Harry Eagar said...

For the record, a friend of mine took delivery this week of his solar car, a Flybo (somebody's gotta get to their marketing department).

His house is all PV and exports to the grid. If the Public Utilities Commission rules in his favor, he will be able to sell power in the daytime and buy it back at night to recharge his Flybo for 10 cents/kwh less, so he would actually be making money on fuel for his vehicle.

Since it cost him $10,500, he has to sell only 100,500 kwh to break even.

July 05, 2008 3:38 PM  
Blogger lonbud said...

Now that's American ingenuity!

July 06, 2008 10:32 AM  

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