After reading Jerome a Paris' optimistic diary (the previous-to-last one) it got me thinking about social and economic processes which may ensure that, when all's said and done, we end up with sustainable economies, hopefully in time to avert the worst of global warming.
This may turn into a diary series, if there is interest. Since it's rattled around my head for a while, I'll address the oil issue in the first diary of the potential series.
1. Fear Linearity
According to some, oil is the most crucial resource of the modern world, what we eat, what allows us to produce food to it and the ultimate source of the chemicals we use daily.
I call it the world's most useless resource.
All right, that's not exactly true. But it is indicative of the almost complete absence of a concept from the discussion: That of substitution. In economics, substitution means that a good or a service used for a certain purpose is replaced with another good or service. Substitutes can be perfect, that is, they can seamlessly replace on another, or they can be imperfect, which means that troubles in substitution make them less attractive.
Here's an example. Suppose a dedicated businessman monopolises the world's baguette production. His eyes twinkle at the money that will be flowing into his account.
He's wrong. There will be about as much money flowing into his coffers as in the case of a competitive market in baguettes. Why? Because if the price of baguettes rises above the price for bread in general, most people will simply buy loaves or other sorts of bread.
Conversely, take the example of electric cars. They suffice for ordinary trips, and the more expensive varieties have a range of 100 miles, which makes them suitable for most daily traffic. But even ignoring things such as habit, it's clear they're less flexible and therefore less useful than cars with an internal combustion engine: They have a shorter range, and take several hours to recharge. In the absence of high-voltage charging locations, which would shorten the recharge time, the utility of an electric vehicle declines even more. That means their total cost would have to decline substantially, the total costs of gasoline- and diesel-powered vehicles would have to increase substantially, or preferences would have to change ("Green is good!") for electric vehicles to become competitive.
To conclude, when faced with the question of a scarce resource, the first question which should be asked is whether it can be replaced, to what extent, how well, at what price, and in what time period.
2. Oil's Myriad Uses and Substitutes
Globally, oil was used for the following purposes in 2008:
Sector and share
Other energy transformation sectors: 6.3%
Civil and agricultural: 11.8%
Road transportation: 40.4%
Other transportation: 12.7%
Nonenergy uses: 14.3%
Source: Leonardo Maugeri, Beyond the Age of Oil, p. 36
In 2008, global oil consumption was about 85 million barrels per day. Several observations are warranted: Firstly, electricity generation is not really connected with oil. There are only two types of countries which use oil for a large proportion of electricity: Islands and oil producers. Islands (Hawaii is a good example) use it because oil is easy to transport and, unlike gas, for example, doesn't need specialised infrastructure to store; oil producers use oil because they have plenty of it, but, since oil fetches a high price, they are trying to substitute away from it in electricity generations (the nuclear programme in Iran, Saudi Arabia's solar ambitions...).
Secondly, oil use in manufacturing is a crude affair: Either it's used to generate heat for steam to power machinery (most often) or to generate electricity which powers machinery or to power machinery directly. There's nothing magical about that use: Mechanical contraptions can be replaced with electric engines, biomass (to a certain extent), coal, gas (can be biogas)... oil's used because it's handy and relatively cheap.
Nonenergy uses can be used as a proxy for materials. Everything from plastic through pesticides to medication is manufactured from oil. However, there is nothing magical about oil. It's used for this purpose because it's relatively cheap, plentiful, and convenient. Still, there's no Exclusive Oil Molecule that would prevent other biological sources to replace oil in the production of petrochemicals, as the following study shows:
Résumé / AbstractMethane, coal and biomass are being considered as alternatives to crude oil for the production of basic petrochemicals, such as light olefins. This paper is a study on the production costs of 24 process routes utilizing these primary energy sources. A wide range of projected energy prices in 2030-2050 found in the open literature is used. The basis for comparison is the production cost per t of high value chemicals (HVCs or light olefin-value equivalent). /.../ Energy prices in 2008: most of the coal-based routes and biomass-based routes (particularly sugar cane) still have much lower production costs than the oil- and gas-based routes (even if international freight costs are included). /.../ we suggest that policies for the petrochemicals industry focus on stimulating the use of biomass as well as carbon capture and storage features for coal-based routes.
In short, if you have something organic, you have a source of petrochemicals (Soylent Green chairs). If you want to know how much you can produce, take a source of biomass (say, Vermont), calculate how much you can sustainably harvest, calculate how much of which kinds of petrochemicals you can produce with it, and you'll have long-term production estimated relatively well. Of course, some uses might be priced out through scarcity. You'll probably get your aspirin, although the triple plastic wrap might have to go (which would lead to the collapse of the scissor industry in China, leading to mass riots), unless plastics are going to be recycled (Can I buy the oceanic garbage patch? I'll sell mining rights.).
There is a larger question: Transportation.
Ahh... transportation. Most oil is used in this sector, in one form or another. Getting from point A to B is largely oil-dependent, and oil use is probably most difficult to substitute here. It's not impossible, though. This sector is by far the most important for the West. In IEA-11 countries (the data can be used as a proxy for any of them in the absence of country-specific data) oil use is as follows ( http://www.iea.org/... )
In short, oil scarcity increases transport costs and increases distances. But by how much and how is the increase distributed? How can an oil shortage be mitigated?
a) Transport Costs and Oil Price
We are all familiar with the concept of food miles, I presume? The longer an item has travelled, the more oil it has used, and the worse its carbon footprint. Simple, right?
You see, considering the distance travelled is not the only important metric. You have to consider the oil required to transport a pound of goods a mile and then multiply that metric by the number of miles travelled to get total oil used to transport a pound of goods.
Example: Assume you have a car with a mileage of 10l/100km. You need a 1/10l (1dl) of oil to travel one kilometre.
Now assume you travel 10km away to buy a packet of crisps which weighs a pound. To transport the packet 10km in your car you use a litre of petrol. The entire round trip means you've burned two litres of petrol to transport a pound of crisps because you were feeling peckish.
Conversely, as this study, admittedly an old one, so fuel economies have probably changed, shows, various modes of transportation need differing amounts of petrol to move a tonne of grain a mile. Trucking is the most inefficient solution (apart from using your car), followed by (diesel-powered) trains, followed by shipping in various forms. Larger ships present formidable economies of scale.
This generates several predictions.
First of all, an oil shortage is felt by consumers first and foremost as an increase in their own transportation costs. Assuming people drive alone, they use their vehicles to transport approximately 100-300 pounds, not counting baggage. No matter the fuel economy, this is quite inefficient.
Conversely, transporting goods should be affected only by a severe shortage, and trucking should suffer most of all. Rail transport can be electrified, although expanding the rail network, as opposed to only electrifying the existing one, likely takes quite a lot of time. Finally, shipping does not use a lot of oil in total, and given its formidable economies its cost should be little affected by an increase in oil prices, at least compared to other forms of transport.
This implies several consequences: Many customers should be in a position to adapt to higher oil prices by buying electric cars, which are due to come into the market during the next two years. A car with a range of a hundred miles should serve most people's daily needs even absent fast charging infrastructure and replaceable batteries. Light electric trucks with a range of 100 miles for local delivery are already on the market and have been bought, for example, by the British Royal Mail. Essentially, short range transport can be accommodated via electric vehicles quite easily.
Of course, electric vehicles, especially if they use lithium-ion batteries, are quite expensive because of the battery price. However, for urban customers less efficient but less expensive batteries (nickel cadmium, lead-acid) can be used, since they drive shorter distances. Additionally, electric car production is currently a boutique industry. Mass production tends to lead to more refined production process which decreases costs, so the price is likely to drop with an increase in production. Finally, electric engines have few moving parts, so they last longer than internal combustion engines, at least if GM's EV-1 is any indication. A car that lasts longer and requires fewer repairs is a better investment, other things being equal. And electricity is less expensive than gasoline (it costs you about $1 to "fill up" an electric car for 100km).
On the other hand, rail can be electrified (in much of the developed world it already is), although expanding it takes time. Shipping would need to adapt late to a shortage, and can revert to coal or shift to large, nuclear-powered freighters.
Because of this I'd argue that trucking is the largest medium-term problem. Batteries aren't advanced enough to allow long-distance trucking, developing a replaceable battery infrastructure, while it's being proposed (rummage around for the English or French version or google "Renault Fluence ZE") it takes time. The same goes for the other two alternatives, shifting to hydrogen or natural gas for trucking, at least as a temporary measure (natural gas would probably be the easiest solution).
b) Large Towns, Small Towns
This creates an interesting situation. Kunstler, for example, claims small towns are the future. I would disagree. When adaptation starts (late) we can be reasonably sure areas with a high population density will be served first, because (i) developed areas usually have a larger purchasing power, (ii) oil use per person is lower in high density areas so people will retain more purchasing power, (iii) alternatives (electric rail/short-range electric trucking) are easier to implement, and (iv) serve more voters.
Those regions will be connected to the food-producing hinterland by rail, insofar as they aren't already (and they to a large extent already are). Small towns will probably be quite a bit down on the list, unless they're vital for food production, raw materials, or another reason. Sure, small towns with domestic biofuel production and/or electricity generation will survive, but I'd argue it will entail substantial hardship. Conversely, population and manufacturing will again concentrate around railroads, waterways, and coastlines.
The suburbs? Their demise might have been greatly exaggerated. I think that when considering the death of suburbia we are dealing with an empirical question, not a general, overarching trend. Since suburbs differ, I would estimate their chance of survival based on (i) distance from places of employment, (ii) distance from stores and clinics, (iii) their population density, which implies the feasibility of public transportation, (iv) the affluence of the suburb, which allows the residents to switch to electric vehicles, and (v) the willingness of the residents to do so.
4. Private Adaptation, Public Adaptation
The reason I'm not that pessimistic about adaptation to oil scarcity, not even in the United States, is that, while the state will have to get involved at some point, there is much individuals and businesses can do.
But why don't they adapt now? I'd guess the answer is uncertainty. In the 1970s everyone from the pundits to academia predicted a peak in oil production which didn't happen. Now, if the state takes adaptation measures that isn't such a problem. Taxpayer money is wasted daily, so what's a few tens of billions more? That's the amount of change Pentagon officials lose in couches every year.
On the other hand, take the example of a few young, idealistic engineers who are considering investing in a plant that produces petrochemicals from biomass. It will only be profitable if the price of oil stays above $100 or so, and the price of other alternatives must not be too low, either.
Of course, the company could survive short-term price oscillations as long as, over time, the price of oil and other alternatives stayed on average sufficiently above the threshold. But there must be a sufficient likelihood of that happening that the parties are willing to commit to a long-term investment. In short, uncertainty inhibits adaptation.
Conversely, once the benchmark price becomes certain enough, uncertainty begins working in adaptation's favour. It's easiest to explain this by using Williamson's basic schematic from transaction costs economics.
Assume that there is no asset specifity, that you've entered a contract where there is no additional loss if you terminate it. In that case if the other parties to the contract violate it, you haven't got a problem: Assuming they exist, you can find other contractual parties. That's a competitive market.
Now assume you have assets specific to the transaction. These assets will be lost if the contract is terminated. Assume you own a company which sells GPS systems to GM. Let's assume that the GPS systems which GM uses are specific and cannot be installed into other cars - say, because they use the upcoming ESA's alternative to GPS or the Russian Chronos satellite system and they aren't licensed. Shifting to another customer would mean modifying the production process, which is not costless. This cost is a bond, a hostage which allows the other to change the terms of the contract: As long as the harm inflicted is lesser than the value of the hostage then the affected party will likely adhere to the contract.
Of course, generally both parties with assets specific to the transaction seek to implement safeguards, hostages or other forms. But when such arrangements are impossible, the affected party will only be willing to buy at a lower price or sell at a higher price to reflect uncertainty, and such a contractual arrangement will be unstable.
Now consider investing in an oil-specific technology in times of scarcity. Perhaps you buy a car with an internal combustion engine. The same goes for a large investor. The cost of buying an electric car (assuming there is no public transport available) is in this case the bond that pushes you into a series of contracts buying petrol from suppliers over the lifetime of the investment. That means an implicit contract with oil producers.
Assume that the producers act as a monopolist (not an unreasonable assumption should production concentrate in OPEC and countries with similar interests). They have in essence a customer base locked in with their investments, and can cheat them to the point when shifting away from oil becomes profitable. Granted, customers can implement safeguards - the possibility of war is one - but they will likely be weak (although denying grain shipments, for example, can do wonders).
Any oil-based investment in such conditions will therefore represent considerable uncertainty. Assuming investors are at least boundedly rational (consciously rational, but only limitedly so) they will not be willing to pay the full price for such technology, as uncertainty can reduce its value. So the cost will be at least in part passed on to providers, in our case car companies, either through a lower price for gasoline-powered cars or through a loss of business to electric car manufacturers. The same goes for any technology that requires oil. Petrochemical production from coal, gas, and biomass will start looking a lot more attractive. Fuel oil will vanish from production, replaced by coal and electric engines. Solar panels and wind will replace oil-based power generation in remote places.