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Jay Currie

One Damn Thing After Another

10/22/2004

Peak Oil - Ken Layne fills up

First, "Peak Oil" means two or three different things, depending on your source: There's actual peak production, when the total oil produced is forever lower than the Peak Oil date. Then there's the Consumption Curve -- or fluctuating demand curve, I guess -- running along or atop true supply. Then there's the point at which the cost / energy of producing oil exceeds the value of the oil itself. Today, the cost of returning to mostly played-out fields or dealing with oil shale or oil sand is more than the market will pay.
ken layne
With oil prices hovering around $55.00 a barrel hand wringing has begun. It needn't, though it is almost certainly a good thing that oil prices are rising, and not just for Alberta. The West's economies have been cheap oil addicts for a very long time. Which has frought us the delights of SUVs for city use and suburbs. Miles and miles of economically looney houses miles from anywhere one might make a living.

There are two questions implied by Layne's long and interesting post. Are we running out of oil? Will consuption patterns shift. The answer to the first is no. Or, rather, not for a while. The cost of extraction in the Alberta oil sands is around $18.00 a barrel. Way more than the pump and go in Saudi; but there is a hell of lot of the stuff and a margin of an easy $25.00 a barrel will keep the drag lines running. There is lots of oil at $55.00 and even more at $100.00 a barrel.

But cheap oil is going or gone.

Which means the owners of Navigators look like fools - as if they didn't already. So do folks who have bought houses fifty miles from where they work. Hello...do you really like driving for an hour and a half every day? No? Well, you like it less when gas is $4.00 a litre. (Call it $14.00 a gallon for the metrically challenged.)

End of Western civilization? Well, no. My friend Thomas reports that gas is two Euros a litre in France and the traffic is terrible.

In fact, Layne mentions the beginning of the market's answer to expensive oil,
So what would it mean? We're already seeing one happy result: mass-market hybrid vehicles. (I'm holding out for the 2005 Toyota Highlander hybrid, which is a helluva mid-sized 4WD buddy that combines the legendary Land Rover known & loved throughout the world with the smooth & fancy Camry.) Other happy results are the new fleet of hybrid FedEx trucks, smart Urban-Suburban Light Rail and the commercial development of BioDiesel for our big trucks.
This is what economists, and the Japanese who nearly broke Detroit by making small cars which people wanted to buy, call a substitution effect. Yup, consumers are not dumb. They respond to price signals by buying cars that go farther on a litre of gas.

Substitution can occur in other and more interesting ways. You can stop driving. You can work at home. You can movecloser to your work. You can tell your kids to walk to school/soccer/ballet. You can take the bus.

Market signals work best when they are clear. A consumer is not going to care about fuel efficiency if he or she thinks that oil prices will drop like a rock next year and the year after. But if they are clear about pricey oil they are going to dump the SUV and go for the economobile, hybrid or otherwise. They will also think twice about the house in the back of beyond.

More expensive oil will also sput the development of a huge variety of fuel saving technolgies. Really light cars. Safe nuclear power. House by house geothermal heat and cooling. Many of these technologies are available now but are to expensive relative to burning dead dinos. That price point will shift.

The bonus in all this is that the gradual conversion to more fuel efficient life cars and life styles will also reduce the reliance on imported oil. Which, in turn, will reduce the significance of the Middle East and its bizarre politics. this cannot help but be a good thing.