Energy Literacy Advocates Newsroom

It looks as though the inelasticity of gasoline prices is finally giving way to increased conservation by the American public, as evidenced by the article below:


Americans ditching the car

By Kenneth Musante and Aaron Smith, CNNMoney.com staff writers

NEW YORK (CNNMoney.com) -- Americans drove 9.6 billion fewer miles in May compared with a year earlier, according to a report Monday from the Federal Highway Administration.
"We have seen the longest decline in vehicular miles traveled since we started collecting this data," said U.S. Transportation Secretary Mary E. Peters in a conference call with reporters.
Peters said that in the first four months of this year, Americans traveled 40.5 billion miles less compared with the same period in 2007. She said the decline in usage means less tax revenue for highway system.
Many of these commuters are flocking to trains, buses and bikes, or telecommuting from home.
Rising gas prices are to blame for the driving decline, and the use of public transportation is soaring, said Virginia Miller, spokeswoman for the American Public Transit Association, a private trade group.
"It does seem that we are on track to beat last year's record [public transportation] ridership," she said, noting that the 2007 tally of 10.3 billion public transit trips was a 50-year high.
"That can really only be explained by the large increase in gas prices," said Miller.
Gasoline prices soared in May, rising for 24 consecutive days in the month, and breaking the psychologically significant $4-a-gallon barrier in many states, according to data from motorist group AAA.
The FHA said that driving in May experienced the third-largest monthly drop since the agency, a division of the U.S. Department of Transportation that manages the nation's highways and bridges, began collecting data 66 years ago. It was the largest drop for any May, a month that usually sees driving increase due to the Memorial Day holiday, the agency said. Three of those largest monthly declines have occurred since December, as unusually high fuel prices take a toll on drivers.
Trains, buses, bikes, telecommuting
Many of these drivers switched to public transportation. Usage jumped in the first three months of the year by 88 million trips from a year ago, for a total of 2.6 billion, according to the most recent figures available from the APTA.
Some of the most dramatic increases occurred in the light rail systems in Baltimore, Minneapolis and St. Louis, the commuter rails of Seattle and Harrisburg, Penn., the buses of San Antonio and Denver, and the subways and elevated rails of and Boston.
The Boston Globe reported Monday that the Massachusetts Bay Transportation Authority broke a ridership record of 375 million passengers in fiscal year 2008, which is 21 million more than the prior year.
Other commuters, like Eric Creese, a senior database administrator in Eagan, Minn., switched to muscle power for commuting. Creese, a former triathloner, said that high gas prices inspired him to "get back" into biking.
"I asked myself, 'Why drive 150 miles a week when I can save my car, my money and do something good for my body and environment,?'" said Creese, who said he has biked 1,000 miles to work since May and saved about $250 in gas.
Now Creese runs a Web site - GasFreeCommute.com - for bike commuters, with calculators to estimate calories burned and gasoline saved. His co-workers have logged their miles on his site, totaling 5,400 so far.
And if commuters really want to save money, they'll stay at home, said Chuck Wilsker, president and co-founder of The Telework Coalition. Wilsker estimates the nationwide tally of telecommuters to increase by 4 or 5 million workers this year, from an estimated 28 million at the start of 2008.
"If you want to quickly reduce your commuting costs by 20%, leave your car at home one day a week; if you want to reduce your costs by 40%, leave your car at home two days," said Wilsker, who telecommutes from his suburban Maryland home to Washington, D.C.
Not only does Wilsker save on gas, but he said he saves on automotive wear and tear, lunch and dry cleaning.
"You know what I'm wearing?" said Wilsker. "I'm wearing shorts, sandals and a tank top. I'm sitting here working from home. My dry cleaning bill is none."
Feds get squeezed on taxes
As high fuel costs led many to rely on other forms of transportation, such as mass transit, and to cut back their miles on the road this year, the reduced driving also sliced tax revenue that would normally go toward highway maintenance, the FHA said.
The federal tax on gas generates 18.4 cents per gallon of regular gas sold and 24.4 cents per gallon for diesel fuel, which gets pumped in to the federal Highway Trust Fund. Some states also add a tax of their own to fund various projects.
The FHA budget totaled $42.18 billion in fiscal year 2008. The Bush Administration has requested $40.14 billion for fiscal year 2009.
As Americans drive less, new ways are needed to fund the national road system, the highway agency said. Even though fewer drivers are using the highways, funding is still critical, party because of a backlog in highway projects.
Peters said she would unveil a new plan on Tuesday to "fundamentally reform our nation's transportation." She said much of the plan will focus on calculating a better cost-benefit analysis for maintaining the national highway system, as well as "weaning ourselves from the gas tax over time."
First Published: July 28, 2008: 9:45 AM EDT



Find this article at: http://money.cnn.com/2008/07/28/news/economy/driving/index.htm?cnn=yes

Labels: economy, oil price, oil supply/demand

On June 27, Neil King Jr. of the Wall Street Journal posted an article opening a window into Saudi oil supply discussions. We've published the text of that article here for you.

"Global Oil-Supply WorriesFuel Debate in Saudi ArabiaFormer Officials at OddsOver 'Peak' Theory;Crude Hits High" By NEIL KING JR. June 27, 2008; Page A1

Sadad al-Husseini and Nansen Saleri raced up the ranks at Saudi Aramco, the world's most powerful oil company, working together for years to squeezemore crude from Saudi Arabia's massive fields. Today, the two men havestaked out opposite sides of a momentous industry debate.[Sadad al-Husseini]

Mr. Husseini, Aramco's second-in-command until 2004, says the world faces a brute reality of depleting resources and ever rising prices. Mr. Saleri, until recently the company's oil-reservoir manager, insists that with enough ingenuity and investment, plenty more oil can be found. With oil prices having doubled over the past year, political leaders, Wall Street investors, commuters, airlines and car makers are all scrambling todivine where prices will head next. The disparity of opinion between two ofthe most knowledgeable men in the industry shows how much fog hangs over the most basic question of all -- whether oil can be unearthed any faster than it currently is.

At the moment, Mr. Husseini's pessimistic view is clearly ascendant. Even before this year's surge in oil prices, there were gloomy industry predictions that world oil output would soon hit a ceiling. U.S. benchmark crude hit a record high on Thursday, propelled by Libyan threats of possible supply cuts, closing at $139.64 a barrel, up more than threefold since 2004.

But Mr. Saleri isn't alone in dismissing the gloom as misplaced. Optimists, from Exxon Mobil Corp. to the U.S. Energy Department, argue that high prices propel companies to innovate and invest more. As supplies rebound, prices will fall from today's levels. Saudi Arabia itself, producer of 12% of the world's oil, has vacillated for years over whether to try to extract oil faster than it already is. Last weekend, urged on by Saudi King Abdullah, it appeared to move into Mr. Saleri's camp. Fearful that supply jitters were damaging the world economy,the kingdom said it was ready to invest tens of billions of dollars to boostits capacity to unprecedented levels -- to 15 million barrels a day over the next decade, from just over 11 million now. Opinions within the region on the health of the Persian Gulf's remaining petroleum riches vary more widely than many realize. Messrs. Husseini and Saleri disagree over whether the new Saudi production target iseither feasible or wise -- echoing a debate that has swirled behind thescenes at Aramco for years. That the two men worked side by side at the company that controls one-quarter of the world's proven oil reserves makes their divergent outlooks all the more striking.

Mr. Husseini, now an independent consultant, has jetted around the worldspreading his views, including recently over dinner with George Soros and a clutch of other top financiers. Mr. Saleri has lectured, written opinionpieces and buttonholed top oil officials from Latin America to Kuwait. Mr. Husseini, 61 years old, lives across the street from the Saudi oil minister, Ali Naimi, in a leafy neighborhood of Dhahran, the Aramco company town on Saudi Arabia's east coast. The suave but sharply opinionated petroleum geologist says most of the big oil repositories have been found, and no amount of gadgetry will restore bubbly youth to aging fields fromI ndonesia to the Gulf of Mexico. War, politics and soaring costs, he adds, are slowing development in many of the most promising regions."The fact is, we have to work harder and harder to get the oil we need," he says. Those who contend otherwise, he insists, "claim to have some magic potion, like voodoo, that doesn't exist."

Mr. Saleri, who is a year younger, shrugs off his former boss's pessimism. A self-described "technology nut" who resigned as Aramco's top reservoir manager last fall to set up his own consulting shop in Houston, Mr. Saleri has become a vociferous opponent of the "peak oil"view, which holds that global oil production is about to enter a permanent slump due to shrinking resources and limited investment."We have consumed only one trillion of the 14 or 15 trillion barrels of oilthat are out there," says Mr. Saleri, citing a personal estimate for all types of oil that is far higher than most. "For the next 40, 50 or 60 years, I see no problem at all."

Both men started their careers at Aramco as outsiders. Mr. Husseini's family moved to Saudi Arabia from Syria in 1961, when he was 14. The royal family had invited his father to help establish the Saudi National Guard under the command of Prince Abdullah, who is now the Saudi king. Prince Abdullah became a guardian of sorts to the six Husseini children after their father died in a car wreck in 1968. After graduating from Brown University, Mr. Husseini took a job with Aramco,which was then in American hands. By 1980, when the Saudi government took over the company, the young geologist was rising fast."Sadad was one of the best engineers I worked with anywhere in the world,"says Edward Price, Aramco's president at the time.

THE CAPACITY QUESTION. The Debate: Industry experts are divided over whether global oil production has peaked. The Background: Pessimists say big new discoveries are unlikely; optimists say innovation and investment will yield more. The Saudi Factor: Last weekend, Saudi Arabia said it would move to boos tproduction capacity. Mr. Saleri's route to Aramco was more circuitous. Born to a prominent Armenian family in Istanbul, he studied in the U.S., then joined Standard Oil of California, now Chevron Corp. His job was to take all the known data on an oil field -- well-flow rates, geological core samples, seismic charts-- and predict how the reservoir would behave under different production scenarios. "I basically sat in a dark room and crunched data," he says. In 1978, Chevron sent him to Saudi Arabia for a seven-year stint as a consultant to Aramco, where he met Mr. Husseini. The oil world was about to experience a price spike that began with the Iranian revolution. For three years, starting in 1979, Aramco pushed its oil production to nearly 10 million barrels a day -- still its all-time record.What happened next bears directly on Mr. Husseini's current view. The effort to draw out so much more oil, he says, nearly crippled the kingdom's mightiest fields. The pressure in many of them plummeted. Water seeped into oil zones."They were going hellbent for leather to take care of world demand,"he says. "And then we spent the next seven or eight years cleaning up the mess."

After Aramco began cutting back on output in 1981, Mr. Husseini worked to mend its huge reservoirs -- and to understand them better. In 1992, he persuaded Mr. Saleri to join Aramco full-time to help create computer-simulation models of all Saudi oil fields. The two men worked side by side on some of Aramco's most ambitious projects, including the development of a vast oil field called Shaybah, deep in the country's remote and forbidding Empty Quarter. It was at Shaybah that Mr. Saleri had what he calls his "big eureka moment."Aramco had developed the field using hundreds of wells that went down, then snaked horizontally. But when Shaybah came on stream in 1998, its production fell short of the planned 500,000 barrels a day. Mr. Saleri led an aggressive campaign to drill a new batch of extraordinarily long wells, many with multiple branches shooting off in all directions. Shaybah's production shot up. "That was a true engineering breakthrough," says Rick Chimblo, Aramco's chief geophysicist at the time.That success helps explain why Mr. Saleri is now such an optimist."Shaybah brought me fame," says Mr. Saleri. "And it made me realize how the old rules no longer applied."

Mr. Husseini applauded Mr. Saleri's accomplishment. But soon, the two executives were disagreeing on key forecasts. In 2001, Aramco was looking to open the kingdom's vast Empty Quarter to foreign natural-gas exploration. Mr. Husseini estimated that the area contained at most about 30 trillioncubic feet of gas -- not large by Saudi standards. Mr. Saleri predicted the area would yield 10 times that much. So far, drilling in the area has found no commercial quantities of gas. At around that time, rising oil demand revived discussion within Aramco overwhen and how to boost the kingdom's production capacity, then just over 10 million barrels a day. Then, as now, Messrs. Husseini and Saleri had sharply different views on the issue. Recalling his experience in Shaybah, Mr. Saleri argued that the kingdom could hit 15 million barrels a day and hold that level for decades. Mr.Husseini, remembering the missteps of the late 1970s, pushed for what he calls "a realistic, gradual approach." Fifteen million barrels a day would be sustainable only briefly, he said, and then only with huge effort and expense."My view is that you produce a field for the longest period of time at the least capital cost," says Mr. Husseini. "Nansen comes from the international-company school of thought, which is to get the maximum amountof oil you can in the shortest time."

In recent months, Saudi leaders appeared to have adopted Mr.Husseini's view. Local reports quoted King Abdullah saying that some new discoveries should stay in the ground. "With grace from God, our children need it," he said. Mr. Naimi, the oil minister, announced that Aramco saw no need to go beyond 12.5 million barrels a day next year. But on Sunday, under heavy international pressure, the kingdom revived its earlier promise to push for the far higher target of 15 million barrels a day. Mr. Husseini, once viewed as a shoo-in to be Aramco's top executive, left Aramco in March 2004 after clashing with other senior managers overproduction targets and other matters, others at the company say. Mr. Husseini declines to explain why he left, saying only: "I'd done all I could to support all our collective objectives without having to do anything I would feel embarrassed about." Months later, he issued his first gloomy take on the world's oil. Forces ranging from resource nationalism to depletion rates in the biggest fields, he wrote in Oil and Gas Journal, meant that oil prices will continue to escalate through the end of the decade. By fall he was warning that consumers shouldn't expect any big Saudi production increases over the next decade. His statements earned him several sharp rebukes from the Saudi Oil Ministry, though Mr. Husseini insists that his relations with the country's top oil officials remain warm. Mr. Husseini says he often bumps into Mr. Naimi, the Saudi oil minister, in their Dhahran neighborhood or at parties. "We are great friends. I see him all the time," he says. Mr. Naimi declined to comment.

By last fall, anxiety was growing within the industry and on Wall Street over whether long-term supplies could keep pace with the rising world demand. Mr. Husseini stoked those fears at a London conference in October. The major oil-producing nations were inflating their oil reserves by as much as 300 billion barrels, about one-quarter of the world's proven reserves, he said, while the giant fields of the Persian Gulf region are 41% depleted. Mr. Saleri, who left Aramco in September, doesn't share those worries. He has hired a half dozen former Aramco and Chevron officials and opened a business in Houston. His company, Quantum Reservoir Impact, says it has the reservoir-modeling and management know-how to revive declining oil fields. Mr. Saleri is now shopping his services to big national oil companies in Latin America and the Middle East, though he has yet to sign any contracts.

In a Wall Street Journal opinion piece in March, he dismissed the peak-oil theory. "The world has plenty of oil," he wrote. Three weeks later, Mr. Husseini flew to New York at the invitation of a clutch of high-powered financiers, including Mr. Soros, Leucadia NationalCorp. Chairman Ian M. Cumming and Aubrey McClendon, the chief executive of natural-gas company Chesapeake Energy Corp. The group of about 20 met for dinner in the 21 Club's wine cellar. Mr. Husseini declines to comment on the session. One guest says he spoke mainly about the geopolitical thunderclouds hovering over the oil market, especially the U.S. and Israeli standoff with Iran. In a longer presentation the following morning, he argued that the world will have to work hard just to keep its oil production where it is. Conservation, not new oil discoveries, will be "the primary source of overall energy availability" going forward, he said. He delivered the same message to oil magnate T. Boone Pickens over lunch in Chicago. "It was just two oil guys talking," says Mr.Pickens, adding that Mr. Husseini's views dovetail with his own.

Messrs. Husseini and Saleri remain collegial, though they haven't spoken for months. Both see the other's views as largely a matter of personal disposition."Sadad by nature sees the dark clouds overhead," says Mr. Saleri. "He's a pessimist."His former boss laughs at the description. "The problem with Nansen,"he says, "is that he loves his theories, even when they run up against reality."

Labels: oil companies, oil supply, oil supply/demand, peak oil

After another day of record-setting oil on Wall Street, Alexei Miller, chief executive officer of OAO Gazprom, the world's biggest natural- gas company, predicted crude oil will climb to $250 a barrel in the "foreseeable future.'' If the "foreseeable future" includes $250 a barrel for crude oil, food prices double, plunging the U.S., Japan and Europe into deep recession. Companies go bankrupt. Airlines are nationalized. Sport-utility vehicle sales dry up as gasoline tops $7 a gallon.

Yet as these remarks touched off a storm of investing and options contract negotiations for fuel, criticism over Miller's prediction also grew. Tom Kloza, chief oil analyst for the Oil Price Information Service in Wall, New Jersey, is skeptical about Miller's prediction because it may benefit Gazprom. "It's silly to take people with incredibly vested interests as having an unfettered, unbiased opinion,'' Kloza says. Mark Zandi, chief economist at Moody's Economy.com in West Chester, Pennsylvania, says the firm's economic models break down if the price of oil goes over $200 a barrel. "The U.S. goes into deep recession, as does most of Europe and Japan, and that takes much of the developing economies with it,'' he says. "I don't see how we get to $250 because the economy is broken long before that, and demand falls and that causes prices to fall.''

To read more of this article, click here.

Labels: economy, oil prices, oil supply/demand

Fears of an energy crisis, according to columnist Gerald Seib, mean 2008 Presidential candidates must grapple with answers neither easy or cost-free. Yet Seib notes that America is not without historical examples in overcoming energy issues, and contends that the oil shock of the mid-1970s, and the Arab oil embargo of 1973 offer valuable lessons to today's policymakers.

Then, as now, a weakening U.S. dollar placed upward pressure on oil prices, eventually leading to a quadrupling in cost. While attempts at government price controls on oil proved, historically, to be a particularly bad idea, Sieb cites two government steps which were effective: first, an increase in energy supplies, and secondly, policies aimed at reducing consumer demand. The 1970's saw the creation of Corporate Average Fuel Efficiency (CAFE) standards, which required auto makers to produce fleets that got better gas mileage. The standards required that new-car gas mileage, on average, double over the following decade. When combined with a national speed limit set at 55 miles-per-hour, CAFE standards helped lower demand for oil by 2 million barrels per day.

While energy transition is not simple or quick, improvements in America's energy portfolio combined with increased efficiency have proven historically useful in lessening a crisis. To read more about the policy precedents of the 1970's and potential contemporary applications, click here.

Labels: election 2008, energy policy, oil supply/demand, u.s. energy policy

Is sheer market economics dictating the recent surge in hybrid and compact flourescent light bulb purchases? The U.S. is at a "tipping point," with people beginning to factor energy use into everyday decisions, says Lee Schipper in The Wall Street Journal. Schipper, who has studied energy consumption for decades, declares the driver isn't ecology, bur rather "Sadly, it's economics. No pain, no gain."

Columnist Jeffrey Ball attributes Europe's energy consumption patterns - where the average resident consumes less than half as much oil each year as the average American - to high energy taxes, rather than environmental awareness. These economic penalties make conservation rational and not just virtuous.

For the full text of this article, click here.

Labels: economy, energy sources, environment, oil price, oil supply/demand

Wednesday, May 28 - There are two sides to every coin. While consumers struggle to assimilate $4 per gallon for gasoline, the oil industry itself faces a maelstrom of hurdles in supply-side economics. Not only have costs more than doubled for developing a new oil or gas field, the backbone of the oil industry is within 10 years of retirement. Competition over equipment and personnel have effectively delayed new projects while driving up operating costs.

Daniel Yergin highlights the woes facing the oil industry - points typically neglected in media coverage - while uncovering supply-side factors forcing oil to its breaking point. For the full text of this article, click here.

Labels: economy, oil companies, oil supply, oil supply/demand

Tuesday, May 20 - On Wall Street the price of oil hit $130 per barrel amidst market fears of inflation and supply concerns.

Amidst these concerns, Goldman Sachs issued a forecast that crude will reach $135 a barrel in the third quarter of 2008 and rise to $145 in the fourth quarter. While Saudi Arabia announced that they would increase production by 300,000 barrels a day (b/d) to 9.45 million b/d during June in order meet demand from US customers and President Bush, under pressure from a vote in Congress, halted additions to the US Strategic Petroleum Reserve, these measures are widely dismissed as too little to affect prices.

For the full article, click here.

Labels: economy, oil price, oil supply/demand

ELA readers will note there are two distinct arguments going on right now about oil supplies. One is about the geological oil supplies remaining, the other is about effective affordable oil supplies remaining.

This article discusses geologic oil supplies and the future, but note it does not address the affordability of these supplies (remember we stopped burning wood for heating needs long before all of the world's forests were chopped down - why?, because coal came along as a cheap solution - we need a similar transition to sustainable energy sources now).

This article discusses the effects of increased oil prices on the economy - perhaps a more relevant consideration than when geological supplies will peak.

Labels: economy, oil supply/demand

The following letter excerpt appeared in the February 4th, 2008 edition of the Oil and Gas Journal in response to a recent study by Cambridge Energy Resources (CERA) that estimated an average 4.5% annual decline rate in oil production (view the press release accompanying this study here):

"The January 17th 2008 press release by Cambridge Energy Research Associates…reported the world’s oil supplies were to rise to 112 million b/d by 2017. This rise is in spite of CERA’s other conclusion that the world’s oil fields are declining in capacity at the average rate of 4.5%/year. These conclusions are clearly suspect.
"Although it is unlikely that global oil production is likely to drop significantly in the next few years, major sustainable increases are equally unlikely. Given the current global production of 86 million b/d and CERA’s 4.5% decline, global capacity would have to increase by 7.5 million b/d each year for the next 10 years to reach 112 million b/d. This is a total of 75 million b/d of new capacity in 10 years. Even excluding the effect of declining rates, achieving 112 million b/d within a decade represents a massive leap of 26 million b/d in global capacity.
"To put this in perspective, 75 million b/d of new capacity is the equivalent of eight new Saudi Arabias or 14 new Irans in just 10 years. Considering the reality that Saudi Arabia, with 25% of the world’s best proven reserves, is already investing $50 billion to increase its production capacity by 2 million b/d, where does CERA expect the additional 24 million b/d of production capacity to come from, let alone the replacement for the 51 million b/d of declines?"

Dr. Moujahed Al-Husseini, GeoArabia; Manama, Bahrain
Dr. Sadad Al-Husseini, Saudi Aramco (retired); Dharan

Labels: oil supply/demand, peak oil

This opinion editorial by the Denver Post does a nice job of addressing what so few are willing to: the fact that demand side solutions to our economic oil equation are rarely addressed.

Read the article here...

Labels: energy policy, oil supply/demand

The article below, from the Economist, highlights why our economy is more resilient to oil price increases presently while still pointing out the serious danger of energy complacency.


SHOCK TREATMENT
Nov 15th 2007

Why the economy has absorbed high oil prices fairly easily, and why it may no longer
OIL prices have a special place in economic folklore. The two nastiest global recessions of recent decades were preceded by huge and sudden rises in the price of oil, first in 1973 and then in 1979. These twin spikes, both engineered by the Organisation of the Petroleum Exporting Countries limiting its oil shipments, are still the textbook example of an economic "shock"--a sudden change in business conditions. Abrupt increases in the oil price have prompted anxiety about stunted growth ever since.
Higher oil prices hurt the economy because they act like a tax increase. Firms that use oil face higher costs which, if they cannot be passed on in higher prices, might mean that some production becomes unprofitable. Consumers paying more for their petrol and heating oil have less to spend on other things. If they look for higher wages to compensate for a drop in purchasing power, that will only lead to job losses.

Oil-producing countries benefit from higher crude prices so the impact on global demand depends how their extra income is spent. But even if oil windfalls are spent largely on goods produced by oil importers, the abrupt shift in the distribution of global income will still be destabilising.
Given the gloomy history, the lingering unease about higher oil prices is understandable. A demonstration of this came on November 13th when, after a rough few days, stockmarkets rose on news that the oil price had fallen below $93. After all the talk of breaking the three-figure barrier, a drop towards a mere $90 spurred a relief rally.
Yet for all that, something has changed. Today's oil prices would have been unthinkable until very recently. Six years ago, when a barrel of crude could be bought for as little as $20, oil prices at today's levels would have raised fears of deep recession. Notwithstanding the spectre of past oil shocks, crude prices have risen to ever-dizzier heights without derailing a five-year period of strong global growth.
But why has the oil bogeyman become less scary? Two new papers*[1] by three well-known economists set out to explain. They come to similar
conclusions: oil shocks do not hurt as much because oil is used less intensively than before, because the economy is more flexible and because central banks are better at controlling inflation.
What makes oil special is that it is a uniquely dense and portable form of energy. It is not easy to switch to alternatives very quickly, so disruptions to supply are damaging. Yet improvements in energy efficiency mean dependence on oil is not what it once was. Rich countries use less than half as much oil as they did in 1970 for each inflation-adjusted dollar of GDP. So although prices in real terms have returned to levels last seen in the 1970s, their impact is not as powerful when set against the diminished economic importance of oil (see charts).
The blow from dearer oil is less powerful than it was and compared with their rigid state in the 1970s, today's more flexible economies are better able to take a punch. Higher oil prices have some unavoidable direct consequences on companies' production costs and on prices paid by consumers for oil-derived products. Wider damage to jobs and output depends on how well these increased costs are absorbed. If workers insist on higher cash wages to maintain their spending power, firms'
costs will take an additional hit, resulting in lay-offs, higher unemployment and depressed demand. To the extent that workers take it on the chin, accepting higher oil prices as a temporary tax increase that lowers their real take-home pay, the collateral damage will be smaller. The rigidity of the 1970s economies, where union power and indexed contracts meant wages were unyielding, only magnified the adverse effects of oil shocks. Today's flexible jobs markets allow oil shocks to be absorbed less harmfully.
If consumers are more forgiving of oil shocks, it is partly because they have become more accustomed to volatile prices and partly because they have greater trust in policymakers to keep inflation under control. Dearer oil has pushed up consumer prices, but expectations of future price increases have remained remarkably stable. That in turn reflects a belief that central banks will act where necessary to keep a lid on inflation. There is a self-fulfilling aspect to that faith.
Employees are less pushy in seeking inflationary wage deals and firms think twice about raising their own prices. As a result, central banks do not need to respond as aggressively as in the past to the inflation caused by higher oil prices. A less jerky monetary policy makes for greater stability.
PUMP-ACTION PROBLEMS
Both papers help tell us why oil shocks hurt much less than they used to. But that is not to say that oil prices no longer matter at all.
Neither analysis takes the run-up in oil prices over the last year into account. The rise in crude prices since the summer has been rapid even by the standards of the 1970s shocks and comes at a particularly bad time for America, the world's largest oil user. Consumers are now having to absorb a flurry of punches. Falling house prices, tighter credit conditions, rising unemployment, as well as higher prices at the petrol pump, all cloud the outlook for consumer spending.
Moreover, part of the cost of absorbing past oil-price hikes has been higher consumer debt and a huge trade deficit, both of which make America's economy more vulnerable. And though the Federal Reserve's credibility has allowed it to cut interest rates in anticipation of a downturn, the persistence of oil-led inflation may yet shift expectations of future price pressures, forcing the central bank to keep monetary policy on a tighter chain. America's economy no longer has the glass chin that it had in the 1970s. But a combination of powerful blows could still have a shattering impact.

*"The Macroeconomic Effects of Oil Price Shocks: Why are the 2000s So Different From the 1970s?", by Olivier Blanchard and Jordi Gali.
Massachusetts Institute of Technology Working Paper 07-21 (August 2007).
"Who's Afraid of a Big Bad Oil Shock", by William Nordhaus. Preliminary draft (September 2007) prepared for Brookings Panel on Economic Activity.

Labels: economy, energy policy, oil supply/demand

For those confused about the scientific facts behind climate change this article offers a good primer. It also touches on possible solutions...

________________________________________________________
The CO2 from fossil fuels lingers in the atmosphere, so global warming can't be undone. But catastrophe can still be averted.
By Bill McKibben
National Geographic Magazine, October 2007
http://magma.nationalgeographic.com/ngm/2007-10/carbon-crisis/carbon-crisis.html


Here's how it works. Before the industrial revolution, the Earth's atmosphere contained about 280 parts per million of carbon dioxide. That was a good amount–"good" defined as "what we were used to." Since the molecular structure of carbon dioxide traps heat near the planet's surface that would otherwise radiate back out to space, civilization grew up in a world whose thermostat was set by that number. It equated to a global average temperature of about 57 degrees Fahrenheit (about 14 degrees Celsius), which in turn equated to all the places we built our cities, all the crops we learned to grow and eat, all the water supplies we learned to depend on, even the passage of the seasons that, at higher latitudes, set our psychological calendars.

Once we started burning coal and gas and oil to power our lives, that 280 number started to rise. When we began measuring in the late 1950s, it had already reached the 315 level. Now it's at 380, and increasing by roughly two parts per million annually. That doesn't sound like very much, but it turns out that the extra heat that CO2 traps, a couple of watts per square meter of the Earth's surface, is enough to warm the planet considerably. We've raised the temperature more than a degree Fahrenheit (0.56 degrees Celsius) already. It's impossible to precisely predict the consequences of any further increase in CO2 in the atmosphere. But the warming we've seen so far has started almost everything frozen on Earth to melting; it has changed seasons and rainfall patterns; it's set the sea to rising.

No matter what we do now, that warming will increase some–there's a lag time before the heat fully plays out in the atmosphere. That is, we can't stop global warming. Our task is less inspiring: to contain the damage, to keep things from getting out of control. And even that is not easy. For one thing, until recently there's been no clear data suggesting the point where catastrophe looms. Now we're getting a better picture–the past couple of years have seen a series of reports indicating that 450 parts per million CO2 is a threshold we'd be wise to respect. Beyond that point, scientists believe future centuries will likely face the melting of the Greenland and West Antarctic ice sheets and a subsequent rise in sea level of giant proportion. Four hundred fifty parts per million is still a best guess (and it doesn't include the witches' brew of other, lesser, greenhouse gases like methane and nitrous oxide). But it will serve as a target of sorts for the world to aim at. A target that's moving, fast. If concentrations keep increasing by two parts per million per year, we're only three and a half decades away.




So the math isn't complicated–but that doesn't mean it isn't intimidating. So far only the Europeans and Japanese have even begun to trim their carbon emissions, and they may not meet their own modest targets. Meanwhile, U.S. carbon emissions, a quarter of the world's total, continue to rise steadily–earlier this year we told the United Nations we'd be producing 20 percent more carbon in 2020 than we had in 2000. China and India are suddenly starting to produce huge quantities of CO2 as well. On a per capita basis (which is really the only sensible way to think about the morality of the situation), they aren't anywhere close to American figures, but their populations are so huge, and their economic growth so rapid, that they make the prospect of a worldwide decline in emissions seem much more daunting. The Chinese are currently building a coal-fired power plant every week or so. That's a lot of carbon.

Everyone involved knows what the basic outlines of a deal that could avert catastrophe would look like: rapid, sustained, and dramatic cuts in emissions by the technologically advanced countries, coupled with large-scale technology transfer to China, India, and the rest of the developing world so that they can power up their emerging economies without burning up their coal. Everyone knows the big questions, too: Are such rapid cuts even possible? Do we have the political will to make them and to extend them overseas?

The first question–is it even possible?–is usually addressed by fixating on some single new technology (hydrogen! ethanol!) and imagining it will solve our troubles. But the scale of the problem means we'll need many strategies. Three years ago a Princeton team made one of the best assessments of the possibilities. Stephen Pacala and Robert Socolow published a paper in Science detailing 15 stabilization wedges"–changes big enough to really matter, and for which the technology was already available or clearly on the horizon. Most people have heard of some of them: more fuel-efficient cars, better-built homes, wind turbines, biofuels like ethanol. Others are newer and less sure: plans for building coal-fired power plants that can separate carbon from the exhaust so it can be "sequestered" underground. (See Illustration "How to Cut Emissions.")

These approaches have one thing in common: They're more difficult than simply burning fossil fuel. They force us to realize that we've already had our magic fuel and that what comes next will be more expensive and more difficult. The price tag for the global transition will be in the trillions of dollars. Of course, along the way it will create myriad new jobs, and when it's complete, it may be a much more elegant system. (Once you've built the windmill, the wind is free; you don't need to guard it against terrorists or build a massive army to control the countries from which it blows.) And since we're wasting so much energy now, some of the first tasks would be relatively easy. If we replaced every incandescent bulb that burned out in the next decade anyplace in the world with a compact fluorescent, we'd make an impressive start on one of the 15 wedges. But in that same decade we'd need to build 400,000 large wind turbines–clearly possible, but only with real commitment. We'd need to follow the lead of Germany and Japan and seriously subsidize rooftop solar panels; we'd need to get most of the world's farmers plowing their fields less, to build back the carbon their soils have lost. We'd need to do everything all at once.

As precedents for such collective effort, people sometimes point to the Manhattan Project to build a nuclear weapon or the Apollo Program to put a man on the moon. But those analogies don't really work. They demanded the intense concentration of money and intelligence on a single small niche in our technosphere. Now we need almost the opposite: a commitment to take what we already know how to do and somehow spread it into every corner of our economies, and indeed our most basic activities. It's as if NASA's goal had been to put all of us on the moon.

Not all the answers are technological, of course–maybe not even most of them. Many of the paths to stabilization run straight through our daily lives, and in every case they will demand difficult changes. Air travel is one of the fastest growing sources of carbon emissions around the world, for instance, but even many of us who are noble about changing lightbulbs and happy to drive hybrid cars chafe at the thought of not jetting around the country or the world. By now we're used to ordering take-out food from every corner of the world every night of our lives–according to one study, the average bite of food has traveled nearly 1,500 miles (2,414 kilometers) before it reaches an American's lips, which means it's been marinated in (crude) oil. We drive alone, because it's more convenient than adjusting our schedules for public transit. We build ever bigger homes even as our family sizes shrink, and we watch ever bigger TVs, and–well, enough said. We need to figure out how to change those habits.

Probably the only way that will happen is if fossil fuel costs us considerably more. All the schemes to cut carbon emissions–the so-called cap-and-trade systems, for instance, that would let businesses bid for permission to emit–are ways to make coal and gas and oil progressively more expensive, and thus to change the direction in which economic gravity pulls when it applies to energy. If what we paid for a gallon of gas reflected even a portion of its huge environmental cost, we'd be driving small cars to the train station, just like the Europeans. And we'd be riding bikes when the sun shone.

The most straightforward way to raise the price would be a tax on carbon. But that's not easy. Since everyone needs to use fuel, it would be regressive–you'd have to figure out how to keep from hurting poor people unduly. And we'd need to be grown-up enough to have a real conversation about taxes–say, about switching away from taxes on things we like (employment) to taxes on things we hate (global warming). That may be too much to ask for–but if it is, then what chance is there we'll be able to take on the even more difficult task of persuading the Chinese, the Indians, and all who are lined up behind them to forgo a coal-powered future in favor of something more manageable? We know it's possible–earlier this year a UN panel estimated that the total cost for the energy transition, once all the pluses and minuses were netted out, would be just over 0.1 percent of the world's economy each year for the next quarter century. A small price to pay.

In the end, global warming presents the greatest test we humans have yet faced. Are we ready to change, in dramatic and prolonged ways, in order to offer a workable future to subsequent generations and diverse forms of life? If we are, new technologies and new habits offer some promise. But only if we move quickly and decisively–and with a maturity we've rarely shown as a society or a species. It's our coming-of-age moment, and there are no certainties or guarantees. Only a window of possibility, closing fast but still ajar enough to let in some hope.

Labels: environment, oil supply/demand