The Ergosphere
Monday, June 15, 2009

The 2012 oil crunch vs. Cash for Clunkers

Via the UAE comes a warning from Saudi Arabia:  crude oil prices are likely to spike above last year's record high.  "If others do not begin to invest similarly in new capacity expansion projects, we could see within two to three years another price spike similar to, or worse than, what we witnessed in 2008."

This is no surprise to anyone who's been following the peak oil news, and it seems very unlikely that anything can be done on the supply side.  If oil production is to keep pace with the historically rising consumption curve, we'll need 20-30 million barrels per day of new production by 2030 just to keep pace with depletion elsewhere.  That's several new Saudi Arabias.

Where would this capacity come from?  Not Mexico; its fields are sliding fast (Cantarell at 30%/year) and Pemex has neither the capability to develop difficult new resources nor the legal ability to partner with private oil companies.  Not Venezuela; Chavez steals anything that comes into his country.  Not Canada; the tar sands are terribly expensive to develop and are unlikely to hit 3 million bbl/day.  Not Russia, which is past peak and following the same route as the USA's lower 48.  Not Brazil; even if the 8 billion barrels in Tupi can be pumped at an initial 10%/year, that is only about 2 million bbl/day.  And certainly not ANWR or the Bakken shale, which are good for perhaps 2 mmbbl/day total.

Non-solutions = we're screwed

There is NO solution to this problem on the supply side.  The supply needed to continue BAU does not exist; oil prices high enough to expand supply will instead collapse the economy before that supply can be brought to market.  The only way this challenge will be met is on the demand side, by shifting to other energy sources where it is feasible and aggressive economizing where it is not.

What's depressing is the utter inadequacy of our government response.  Let's take this "Cash for Clunkers" bill (HR2751).  It would give a $3500 rebate for the purchase of a vehicle achieving as little as two miles per gallon more than the one traded in.  A five MPG increase nets $4500.

This will help clear dealer lots, but it won't do squat for our real problems:

It's almost as if this bill was intended to screw the country.

A back-of-the-envelope calculation

Let's try an example here.  Suppose that Joe Sixpack has a 10-year-old pickup that's EPA rated at 17 MPG combined, which he drives 20 miles one-way to work 250 days a year plus 50 miles each weekend.  His fuel consumption is 741 gallons per year.  He has a choice of trading it for a Model X achieving 19 MPG plus $3500, a Model Y achieving 22 MPG plus $4500, or a Prius netting 50 MPG plus $4500.

At historical gasoline prices of perhaps $1.50/gallon, his fuel expenses were around $1100/year or under $100/month; this is quite bearable.  But at today's local price of about $2.80/gallon, this jumps to $2075/year or $173/month; the extra $80/month has to come from somewhere, which is either his non-existent savings or the consumer economy.  This is a substantial hit; if Joe makes $40,000/year, the increase is roughly 2% of his income.  Things aren't much better with the trade-ins.  The Model X's thirst costs $1857 ($155/month) to slake today, and the Model Y costs $1604/year ($134/month).  Only the Prius gets costs down into the realm of reason, at a mere $59/month.  Joe could pay off some debt and take his lady out for a night on the town now and then.

It will get worse. Much, much worse.

But we're not done yet.  If crude prices head toward $200/bbl in 2012, gasoline will be above $5/gallon.  At $5/gallon, feeding the 17 MPG monster costs $3706/year ($309/mo), which is over 9% of Joe's gross income.  The Model X takes $3316/$276 (over 8%) and the Model Y $2864/$239 (over 7%).  Only the cost of the Prius remains in sane territory, at $1260/year or $105/month—roughly 3% of Joe's income, or about what the old pickup cost at $1.50/gallon.  The Prius, or something like it, is the only vehicle that Joe can afford to keep driving at that point.

You may have noticed that I ignored the rebates in the cost calculations.  They barely matter.  If Joe banks $3500 on the Model X and gas goes to $5, his fuel costs will eat those savings in about 16 months; if he buys the Model Y, the $4500 in the bank will pay his increased fuel bills for about two and a half years.  Joe will be out of savings while he's still upside-down on his new car loan.  Again, only a Prius-class car can save his budget.

Of course, this is in addition to the credit crunch.  The USA needs to be paying its debts off, not adding to them.  Are we going to be able to finance a whole new fleet of guzzlers, and then the crude to run them?  Or will we face a surge of business failures, credit-card defaults and mortgage foreclosures which make the last two years look like a corner lemonade stand on a rainy weekend?  My money (what's left of it) is on the latter, and building another fleet 3 years from now when this year's becomes unaffordable to run is out of the question.

The yawning gap between the crisis and the response

If our government was attuned to the looming problem, we would be seeing some real action on these problems.  Nothing like HR2751 would receive a committee hearing, let alone House passage.  We would be closing truck production lines and converting them to non-automotive products, while pushing to get Fiat's and other manufacturers' high-economy products into the remaining plants as rapidly as possible.  US auto suppliers would be paid to re-tool for the new models, and Toyota's US Prius production line would be opened ahead of schedule.  We'd be settting a high and steadily increasing floor on fuel prices, to keep that money inside the country instead of flowing out to oil producers.

Congress won't even think about anything like that.

Can we stop the Guzzler Subsidy Bill of 2009?  Perhaps not.  But if I was going to try, I'd call my congresscritters and Senators and tell them something like this:

At this point it's up to you.  Can you stop this runaway train before it runs off the collapsed bridge?  I'm not sanguine, but I can hope.

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30 Years they have been pushing a "Cash for Crap to buy Crap" Program... always to sell more cars and hiding behind good intentions...

While your comments on supply parallel the clunker issue 'Non-solutions = we're screwed There is NO solution to this problem...'

The international market HAS 50mpg and fully electric cars NOW (some are U.S. made)... that cost around the same price as 'cash for clunkers' and 'hybrid hype' rebates... (HPV, GS, BYD)

Poet - For over 5 year we have shared soooo many viable options to the massive peak energy and transportation issues. Many viable and most profitable.

Why this is even being considered makes our epic problems biblical....

Change is an inevitable succession of events, but we are making things that were hard to change, nearly impossible.
60% of the cars that are currently donated to charity will be eligible for voucher under the cash for clunkers program. Since the tax deduction for donating a car is only $500 or what the car sells for, charities won't be able to compete. A better idea is to just go back to allowing the donor to claim the book value for their car donation. This way all vehicles are eligible, the government doesn't have to spend $4million on vouchers and administer a program with rules which are not enforceable! Since many of the cars that are donated are recycled there is an environmental benefit as well!
Karen Campese
while this was suppose to be for consumers, it is not. scams abound, buyers beware. check this :
Dude, get a grip. And go read this.

To summarize for you, in case you can't get through the subscriber wall, something like a 60 to 100 years of natural gas (depending on consumption levels) has been recently discovered in American shale deposits, available for economic extraction. Western Pennsylvania is a hotbed of exploration wells as we speak. And every year the estimate of recoverable amounts grows.

I don't doubt that commodities such as fossil fuels are in some sense limited. But the likelihood that the supply would fall off a cliff, so fast that the normal price signals and human ingenuity wouldn't suffice to find a replacement, is something I find very unlikely.

This sort of sudden disaster was predicted in my youth, in the 1970s, for right now. By 2009 we were supposed to be back in the Stone Ages, scrapping over fish and firewood. That's so far from reality it should have caused anyone indulging in similar Armageddon scenarios to think twice, or thrice.
Carl, the prospects for shale gas and tight gas are far from settled.  There is considerable dispute whether the wells will have lifetime production of 3.3 billion cubic feet as the drilling companies claim, or 1 billion cubic feet as the oil analyst Arthur Berman thinks based on analysis of their early production data.

It's true that $8/mmBTU gas is expensive for heating, but cheap for motor fuel.  It's also true that high natgas prices will hit the rest of the economy even if we can drive relatively cheaply, and we no longer have the luxury of thinking of these things in isolation.  Last, if the natgas plays should turn out to have much less economically recoverable resource than previously thought, having industry, space heating AND transportation dependent on natgas would leave us in much worse shape than we are now.  We made this mistake once with oil, and you would have to be a fool to make it again so soon.
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