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High Oil Prices Start to Work. 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.
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10 responses so far ↓
1 Jack be Nibble // Jun 10, 2008 at 11:28 pm
A speeding aircraft carrier needs what? fifty miles to make a smooth u-turn in clear water. Why that’s only half the distance from San Diego to L.A. It seems to me that’s not a problem at all. The real problem is that the water is full of floating objects.
This means: investors beware! Red skies… early warning…many things are going to sink.
2 Lou Grinzo // Jun 11, 2008 at 4:24 am
I have to admit that while I’m a card-carrying member of the near-term peak crowd, I think the Hirsch report’s “20 years to change the vehicle fleet” thing is a misreading of the situation.
For one thing, that time frame is without the immense pressure to change that we’re just starting to feel, so the 20 years figure likely isn’t accurate for the situation we’re facing.
But much more important is the fact that we don’t have to change the fleet instantly. As all good peakers (at least the non-doomers) know, “peak oil doesn’t mean no oil”; we can reduce consumption over a period of 12 or 15 years and ride the supply curve down, post peak, and avoid a catastrophe or truly high prices.
3 Jim Kingsdale // Jun 11, 2008 at 7:03 am
Jack: good points. Also my carrier metaphore was pretty lame. I need a better one.
Lou: I think we will certainly ride the supply curve down, but I doubt it will happen without catastrophically high oil prices.
4 Lou Grinzo // Jun 11, 2008 at 8:02 am
Jim: To me, that’s the $64 gazillion question: Will demand drop fast enough to remain below the lower of what oil producers can and are willing to ship?
As prices increase we will likely see even more incentive to horde among the exporters, something we’ve both written about. That’s a wild card just as important as the issue of what producers really have in terms of reserves and spare capacity.
5 Jeff Howard // Jun 11, 2008 at 8:40 am
Probably off-topic, but has anyone ever contemplated what might become of all the equipment in the world that is presently used to explore and mine for oil IF we convert most of the world’s auto fleet to electric and there is no longer an incentive to produce oil long term? Can all this equipment be reconstituted for other uses? Will steel and other products be recycled? Who benefits? Who loses?
Just trying to take that “next step” in the thought process.
6 jkingsdale // Jun 11, 2008 at 12:08 pm
Lou: as you know, the job of the oil price is to keep demand at or below what the exporters will/can sell. I just think the price will have to be very very high to accomplish that task.
Jeff: there will actually be a greater need for drilling equipment as oil production declines because the remaining oil will be harder to recover and will be found in smaller deposits.
7 ks // Jun 11, 2008 at 12:31 pm
Jim,
Following up on this post (and your last one), I am trying to get a better sense of the post-2012 period. I note that Freddy Hutter at Trendlines revised his depletion scenario in May to reflect lack of megaproject announcements to show a peak of 91 mbd in 2013. He then graphs out a decline, followed by a small recovery, followed by continuous decline. The scenario creates a 22 yr plateau from 2010-2031. This is an all-liquids scenario, where you may be discussing RCO. In either case, I would like to get your thoughts — as well as those of others who post here — on whether this scenario is credible and if so, what the take-away is. The scenario and explanation can be found at:
http://www.trendlines.ca/freddyhutterscenario2300.htm
8 jkingsdale // Jun 11, 2008 at 3:14 pm
Re Hutton forecast: I think his NGL/GTL estimates are way too high and the kerogen estimate is totally speculative. Nobody can know if or when kerogen will be feasible to produce. If oil production peaks in 2012 or so I foresee a fairly rapid decline as new field production goes down about 2 mb/d and decline rates for existing fields begin to increase. Compounding the problem will be increased hoarding since the high price of oil provides even less incentive for exporters to produce at capacity.
9 paultaut // Jun 11, 2008 at 3:43 pm
China has announced it will need 5% extra daily, or roughly 400k brls.
This is because of the earthquake. This increase wipes out the latest Opec increase. The effects of the earthquake will not go away anytime soon.
Gazprom issued an announcement that it believes oil is headed to $250. I believe them more than T. Boone. They announced earlier this year that beginning in 2009, they will no longer accept dollars.
My guesstimate currently, in next 6 months without an Israel/Iran conflict, is oil at $160.
10 chip // Jun 16, 2008 at 4:57 pm
Jim,
I really enjoy your insights.Very provocative.You and others under estimate the American will and investment power.The investment in alt energy is extremely brisk globally and will continue regardless of where crude oil goes.We use 20 million barrels a day of liquid crude in USA.There are 42 gallons in a barrel and refined thats about 20 gallons per barrel.To solve this alternative supply issue requires aggressive policy change at the local,state and national level as well as aggressive govn and private investment.Every one is talking 15-20 years to make a transition.As an example of lack of will and public policy,look at govn.mandate of 35 mpg by 2020 for vehicles.Absolutely lame and an insult to American ingenuity.My fear is that our dwindling BIG 2 auto manufactures buy into that lame requirement. Instead,they need to get off their blinded and fat butts and get really aggressive before Honda outpaces Ford as #3.Transportation via 2 axel,4 tires accounts for over 1/2 daily consumption in US daily.There are only 3 touch points in that model: 1.Refined liquid 2.Vehicle 3.Operator.The US can produce a high production fleet that can get 150 MPG and that GALLON does not have to be Crude? We need to recruit Michael Dell to Detroit!!
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