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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

Electricity: 6.7%
Heat: 0.3%
Other energy transformation sectors: 6.3%
Manufacturing: 7.5%
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.

3. 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/... )

Freight: 25%
Travel: 53%
Service: 4%
Households: 9%
Manufacturing: 8%
Sum: 99%

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?

Wrong.

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.

 

Originally posted to Dauphin on Mon Nov 22, 2010 at 03:22 AM PST.

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Comment Preferences

  •  Eco jar. n/t (12+ / 0-)

    Iuris praecepta sunt haec: Honeste vivere, alterum non laedere, suum cuique tribuere. - Ulpian, Digestae 1, 3

    by Dauphin on Mon Nov 22, 2010 at 03:23:15 AM PST

  •  How can you separate (1+ / 0-)
    Recommended by:
    G2geek

    gas from the oil issue? These two, and coal as well, are all fossil fuels, and all are expected to peak before 2030 (general consensus of what I read). I'm not sure if in the percentages you cite, gas is included...I'm assuming it isn't?

    We have to consider all the ramifications of a total overhaul of our society. Will we be able to continue to maintain roads concrete/asphalt roads? Will we have fuel to power the larger vehicles currently in use for maintaining roads, transporting supplies for manufacturing (even electric vehicles need batteries and parts delivered), or will it all be on rail, and if so, how will we build the extensive rail system needed to maintain manufacturing and to supply food?

    Many many questions, in my mind, and it points to big changes which, given our current economic situation and entanglement in foreign conflicts with no end in sight, I don't see our society ready to make. We are not a society that can handle change very well...except maybe the minor weather emergency and power outage, when our pioneer survival skills kick in...we're good at things like that. But coordinating largescale societal change involving industry, engineering, and I would think, government involvement to help administer the many interests...if we are at the same time faced with urgency for any number of other reasons I won't bother to enumerate...I say we have a tough road ahead.

    •  Oh, I'd agree. (3+ / 0-)
      Recommended by:
      G2geek, neroden, Oh Mary Oh

      But there debate on when certain resources will peak. The USGS is more optimistic on coal and gas, for example, and according to ASPO everything will peak next year (since 1990). Of course, we can't be sure, but if various fossil fuels are set to peak at different times (and the consensus seems to be gas will peak later than oil and coal later than gas that is extremely relevant for adaptation.

      Furthermore, there's a difference between a peak of scarcity or a peak because of production difficulties. For example, Alaska's North Slope is estimated to hold as much coal as the entire lower 48 put together; the Norwegians discovered a coal deposit on the sea floor as large as all of the world's known reserves combined. The catch? Those finds won't delay a peak because you can't produce them quickly enough. They can only smoothen and extend the decline.

      But that's the important bit! Look at the global oil use chart. All civil and agricultural uses (from public transportation to military to wheat to vegetables) use about 8 mbpd. There'll be enough oil for them for a long time, and biofuels, CTL and GTL could probably cover a large part of that assuming we make no effort towards electric machinery for civil uses and agriculture. That's a non-issue.

      As for road maintenance, see above. Furthermore, if you switch to concrete, it's more expensive but more durable, reducing total need for maintenance.

      Finally, all the discussions of societal reactions seem a tad pessimistic to me. During the past century, societies coped with terrors worse than anything we've lived through. They coped because (i) they had at least a rough plan, and (ii) governments (dictatorial and democratic) managed to convince them policies will eventually ease the pain. What do you think Roosevelt did with his "we have nothing to fear but fear itself?" Nothing, except that he completely changed the discourse. Nothing real changed, but it allowed the New Deal to go through.

      Iuris praecepta sunt haec: Honeste vivere, alterum non laedere, suum cuique tribuere. - Ulpian, Digestae 1, 3

      by Dauphin on Mon Nov 22, 2010 at 04:04:37 AM PST

      [ Parent ]

      •  the core issue here is the timeline between... (5+ / 0-)

        ... decline of a given resource, and rise of a replacement.

        Rooftop solar can be installed at the rate of gigawatts per year in the US.  Utility-scale solar, wind farms, and nuclear reactors take anywhere from 5 years (with no NIMBYs in the way) to 15 years (with NIMBYs attempting to block the projects).   Solar alone can cover about 20% of electricity demand; but wind, nuclear, and other sources such as geothermal, will be needed to make up the rest.  

        Oil becomes a problem the moment that demand begins to exceed supply: at that point begin the bidding wars that will drive up prices nonlinearly and create economic and social dislocations.  

        At that point there is a shift of investment toward utility scale solar, wind, and nuclear.  But ...uh oh... building all of those things is oil-intensive (construction equipment, concrete, steel, transportation), so now another nonlinearity interferes with the transition.

        And peak oil is small stuff compared to the climate catastrophe.

        I have no doubt we'll eventually slouch toward ecotopia.  Whether we get there with a scientifically and technologically capable civilization remains to be seen.  

        •  I'm begining to think (3+ / 0-)
          Recommended by:
          G2geek, neroden, Dauphin

          The US may be the exceptional case where national policy stands in the way and local policy is the only hope.

          With the right incentives, at least a few states including CA might have to play a leading role for the next 3-5 years as policy incubators and leantech pump-primers becuase Congress looks pretty dealocked.

          I should be interesting to see is Jerry and Arnold team-up now that Meg and Carly got erased from the landscape.

          What about my Daughter's future?

          by koNko on Mon Nov 22, 2010 at 07:22:21 AM PST

          [ Parent ]

          •  YES! Jerry & Arnold! (2+ / 0-)
            Recommended by:
            neroden, Dauphin

            Jerry the high-tech progressive, and Arnold the rational Republican, teaming up to support green industry.  That's bipartisanship we can all support.  

            BTW, a decent chunk of my income in 2010 was earned with clients in the green industries.  That made all the difference between being up against the wall and being able to live at a reasonable working-class standard.   So whatever's good for the green industries, will be directly good for me as well.  

            Now all we need is a Solar City like y'all have over there.  I cite that to friends all the time as an example of what we have to catch up with.  

            •  I fully expect California to lead on this (0+ / 0-)

              It always has led on the environment in the US and I got my green roots there as a student in the early 1980's.

              Particularly in the case of solar and mass-transit, CA has much to gain from greening with a huge existing base of under utalized brains and industrial capacity, and one of the world's larget technology incubator communities, not to mention the return to society.

              Do you do any biz with Applied Materials? Solar Energy company.

              Between the Bay Area, Boston and Research Triangle, the US has all the intellectusl and R+D clusters it needs to lead in Clean Energy, if you could only get Congres off it's ass. Makes me crazy.

              Go, Cal!

              What about my Daughter's future?

              by koNko on Tue Nov 23, 2010 at 03:46:38 PM PST

              [ Parent ]

        •  Yes, but here's the thing. (0+ / 0-)

          The "it's oil intensive" argument doesn't, err... hold oil because as I've shown all industrial uses of oil, particularly in the developed world are relatively small when compared to personal uses and will be affected later.

          Secondly, even considering transportation, construction, etc. on an emergency scale, it's unlikely that'll consume more than a small share of oil in the freight sector, so I think physical availability won't be a problem. Thirdly, and most importantly, here we again have economies of scale: If the price of oil goes up 500%, but, given its share in the end price even that drives the price up by only for example 5%, that's not the end of the world

          Finally, if push really came to shove, I have no doubt the state would use its reserve and the military its capped wells for such purposes.

          Iuris praecepta sunt haec: Honeste vivere, alterum non laedere, suum cuique tribuere. - Ulpian, Digestae 1, 3

          by Dauphin on Tue Nov 23, 2010 at 12:52:35 AM PST

          [ Parent ]

      •  Thanks for the clarification (0+ / 0-)

        but from where I stand, I don't see that we have much of a (i), and less of a (ii). We need a Roosevelt, and a lot more than that, to get government to effectively lead...but I'm glad you're seeing it, it makes me feel better.

        And although I might agree that societies have coped with worse terrors before, I'm not we have ever had to deal with problems so complex and requiring so much cooperation between so many people...while we are still thinking and acting like war is a reasonable means to get things done.

  •  It's all about price, isn't it. Sure subsitutions (3+ / 0-)
    Recommended by:
    G2geek, neroden, Dauphin

    are available or will be, but at what price? I keep thinking of Dune and the Spice, which folded time and space. Oil has shrunk the world. Until inexpensive replacements are on line, the world will once again be a much larger place.

    "Smart people believe weird things because they are skilled at defending beliefs they arrived at for non-smart reasons."

    by the fan man on Mon Nov 22, 2010 at 04:18:58 AM PST

    •  At first glance, (0+ / 0-)

      many substitutions aren't that expensive once you break the lock-in. More importantly, I predict the world won't be larger but distances will be distorted: While it'll take longer and it will be more annoying, it'll be entirely possible for a Parisian to hop on a train and travel to a business meeting in Moscow. On the other hand, for a New Yorker San Francisco might be closer than a burg in Tennessee.

      The same goes for trade: Goods which are voluminous and/or inexpensive and/or easy to produce on a smaller scale probably won't be traded much, but others will. You can ship grain by train, ship, or truck. Pharmaceuticals are easy to transport and keep well, so they could be traded not just by train and electric car, but by horse-drawn carriage and clipper. Iron doesn't much care when it arrives, so it'll be traded no matter the mode of transport.

      Iuris praecepta sunt haec: Honeste vivere, alterum non laedere, suum cuique tribuere. - Ulpian, Digestae 1, 3

      by Dauphin on Mon Nov 22, 2010 at 04:53:31 AM PST

      [ Parent ]

    •  So, a German might ho on holiday to Florence (2+ / 0-)
      Recommended by:
      neroden, bmcphail

      or the South of France while plane trips to the Caribbean will probably be the preserve of the wealthy.

      Iuris praecepta sunt haec: Honeste vivere, alterum non laedere, suum cuique tribuere. - Ulpian, Digestae 1, 3

      by Dauphin on Mon Nov 22, 2010 at 04:54:26 AM PST

      [ Parent ]

  •  A greater problem is Peak Water (1+ / 0-)
    Recommended by:
    Dauphin

    We passed it a long time ago (in terms of fresh water).

    What about my Daughter's future?

    by koNko on Mon Nov 22, 2010 at 07:33:06 AM PST

  •  Nice diary - glad it was rescued, otherwise (4+ / 0-)

    wouldn't have seen it.

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