Thoughts on a Thought Experiment

As I indicated in the original post - Coping with Gas at $100 a Gallon - here are some of the comments on my thought experiment on $100 gasoline. Comments were varied, ranging from things like “thought-provoking”, “great question”, “a good exercise”, and “interesting” - to “absurd”, “silly”, and finally my personal favorite (from the thread at The Oil Drum) “you have gone off the deep end.”

A number of people clearly didn’t understand the purpose of a thought experiment. For instance, it should have been clear that the $100 cost was not important. It could have been $20 or $1,000. The point is to look around you and see how much fat you could cut if you really had to - by imagining gasoline at an outrageously high price. I wanted to stick the cost out so far that you really have to make difficult choices - but I also wanted to provide a concrete number to think about. I find that people tend to give unreasonable answers if you just ask “What will you do if gasoline gets really expensive?” I get more realistic answers if I put a $ figure on the abstract idea of “really expensive.”

And even though I wrote “in reality the economy would have collapsed under those prices”, a number of people commented along the lines of “That’s unrealistic. The economy would have collapsed.” I can only imagine that these people have a very tough time when someone describes the gravity on Jupiter by using an illustration of how much you would weigh there (2.53 times as much if you are interested). I can hear them now: “That’s dumb. It’s a gas ball and the radiation would kill you anyway.” Yes indeed.

From those who did get the purpose - and even from some who didn’t - I got a lot of interesting comments. Following are excerpts of some:

Personally I could cope with $100/gallon gas (that’s A$27.50/L for Australian readers). I’ve telecommuted for a decade and visited the office so infrequently I’ve moved 800km away from the city office. I have solar hotwater and my daily energy usage is less than 10kWh/day. My late model Euro turbo-diesel does around 5L/100km, so it would cost $1500 to fill but that would drive me more than 1,000km. Most of the neccesities of life (supermarket, school, doctors, hospital etc) are less than 1km away so I can easily walk or bike it.

Problem is, would there be anything on the supermarket shelves? Would the hospital have any medicines or doctors?

Of course that last bit is the part over which we have limited control. We live in a very interdependent world. Rising prices will ripple out, with the impact unknown.

I understand what you are trying to do, but it is making my head spin. First, I live in the northeast and heat with oil. Domestic hot water from oil, too. We use about 600 gallons per year. Obviously we won’t at $100/ gal. Could we use 50 gallons per year, just heating the domestic hot water? That would only cost us a measley $5,000. Of course we wouldn’t have any water at all in the winter, because the pipes would be frozen. And no, burning wood won’t be an option.

This is where I think a lot of people are going to have issues. So what’s the solution for someone living in a cold climate for minimizing their fuel bills as prices climb?

Try not to look at the world through the eyes of the twentysomething. Imagine your your health being bad enough that walking a quarter-mile is a struggle. That using a cart to move your groceries doubles or triples your walking time. Consider being at risk to young criminals who steal your money, maybe even your food, and do you physical harm.

While I have the brain and body of a twenty-something ;-), my birth certificate says I recently became a forty-something. And I agree with your sentiments completely. High prices will be especially difficult as people age.

A comment like “living in an apartment expecting to survive with no real-world skills north of roughly 40° would be impossible” is probably valid. In my case, I learned how to garden, butcher, can and freeze fruits and vegetables, repair almost anything, carpenter, weld, masonry and farm. It’s my kids that would need some very quick education on basic self-sufficiency.

I am going through that education with my kids now. I don’t expect them to have to raise food to survive, but I want them to understand how it’s done.

I would be able to walk the two miles to work (as I do know, when the weather and time constraints permit), since I assume most people wouldn’t be driving anything beyond a scooter, so the road would be safe. No car. I picked my apartment because there is a metro station, and grocery stores within walking distance. Although a metro ride would likely cost $30+ a ride (electricity would cost??).

I’d imagine most of the outer suburbs near here would become small farms, I would bike there to buy a backpack worth of vegetables during growing season.

Even now, because of sky-rocketing food prices, I think gardens are going to start making a big resurgence. That’s going to be driven not by thoughts of survival, but about saving some money on groceries. That’s why we always had a huge garden when I was growing up. Personally, I am going to focus on items that produce a lot in a short period of time. My favorites to have in a garden are probably tomatoes, squash, and okra (although okra can take a lot of room).

Don’t forget about other things you use gasoline for. Right now I can pay a kid $25 to mow my lawn. At $100 for gas, $25 won’t even cover the gas for mowing. So, I would probably have to get a manual push mower. I am not even sure how well those things work, though, so maybe I would get a cow.

So far I am not getting any traction in my own family for my idea of parking a goat in the backyard.

Robert, if you are concerned about not replacing a new hot water heater, you can get a thermosyphon type or a batch type of water heater. These basically just preheat the water before it goes into your existing tank, so that tank does less work. While probably not as efficient as a pressurized glycerol type of system, they are much cheaper to buy and install. Maybe $2-3k installed before federal/state incentives; less if you do it yourself.

I have thought about that. I need to run the numbers. If I really think prices are going to continue at this pace for the next few years, it would pay out relatively quickly.

The truth is that much of what is being discussed here is the maintenence of a lifestyle, not survival. For example, people did live in TX before air conditioning, and while many may move because they can’t afford it, others will continue to do so.

As for the elderly - elderly people living in isolation from their families probably will suffer a great deal - but there are solutions to that problem - cohabitation with extended family or friends who operate that way.

I grew up in Oklahoma without air conditioning. As a kid, it’s bearable, and I have long suspected this is why I am not very sensitive to the heat even now. But I remember going to my grandparents’ houses, and seeing their misery in the summer. Again, as you say, the problems are worse for the elderly.

I live in a temperate climate in Belgium and commute to work by electric rail. I imagine that my job would continue at the oil company where I am working. No doubt we’d have some new projects implementing tighter security at gas stations or maybe shutting pumps due to lack of volume.

On weekends, I would continue travelling to local shops, theatres, restaurants and museums via electric light rail. I would ride my mountain bike much more often as the traffic on local streets would be reduced. The quietness of empty streets will be a nice side effect of oil shortages.

I believe Europe is in a much better position for handling price shocks. And I agree with your comment on the quietness of the streets. Even now in the Netherlands - on a holiday or Sunday morning - I can often go out and there is absolute silence on the roads. It would be nice if this was always the case.

We have already built a wind generator and use propane for cooking and hot water. We could go off the grid, since TV and internet would be the first two things to go anyway. We don’t need to heat our water since a black hose in the sun works very well; and we could cook over a fire if propane was unavailable.

I have been thinking lately about the practicality and expense of a wind generator. I don’t have a feel for whether it is a realistic option for me. But not the Internet! I can give up TV (I can’t even remember the last time I turned it on), but I think I would give up hot water before I would part with the Internet. Interesting side-note. When I was in India recently, even the slums all had satellite dishes on top. I was also told that most have a small refrigerator. My takeaway lesson from that is that people are going to fight to keep the TVs on.

If telecommuting were not encouraged at work, I would move within bicycling distance of the office.

I planted three apple trees last year, and some vegetables yesterday. The grocery store is within bicycling distance, and yes, I have tried it out shopping and biking those groceries home in my backpack. I would need to go to the grocery store every other day, but the exercise would be healthy.

I think the trend would be the reversal of the suburban expansion. It would take a long time to happen - and I don’t agree with Jim Kunstler’s vision of the suburbs being abandoned. But we are already seeing a rapid slowdown in the present rate of expansion at today’s fuel prices.

I would walk to work (about 4.5 miles). I already do this from time to time and it really isn’t too bad. Groceries and most stores are with in the same distance.

Like you, I think there is a ton of fat that can be cut from the system — hell, even if the work force started riding motorcycles/scooters (as many are), there would be immense savings.

I don’t think we appreciate how creative we can be with price as a driver. That’s one reason I was never in the Doomer camp: While I think we have a potentially difficult stretch, we will adjust our behaviors. The best thing that can happen is that prices continue to rise at a steady pace - in front of peak oil - so we can start making adjustments before they are forced upon us.

There were lots of other good comments, but this is starting to get pretty long (and I want to go see the Open Air Museum today). You can see the entire list of comments following the original essay, and you can find more than 300 additional comments in the same thread at The Oil Drum. Here’s hoping the thought experiment remains just that.

National Wind Projects

I recently received a press release from National Wind, a developer of wind farms. I usually ignore press releases, but I thought this was topical enough to investigate. Further, I haven’t written anything on wind in a long time. So, I replied and asked if they could give me some details of some of the projects they are involved in, and I would be glad to post them. Below is a list of their recent projects, following by a list of those in the pipeline.

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Featured Development Projects

We have publicized a number of our development projects, many of which have existing power purchase agreements.

Each family of projects consists of several phases of 50 megawatts or larger.

Jeffers Wind Energy Center

- Located in Cottonwood County, Minnesota
- Construction of first 50 megawatt phase is complete
- Xcel Energy is the offtaker

Emmet County Energy LLC, formed in 2005

- 200 megawatt family of projects located in Emmet and Dickinson Counties, Iowa
- Collectively known as the NorthStar Wind Farms
- Letter of Intent in place to sell power to a utility and to sell a portion of the project
- Will be operational by 2009

M-Power LLC, formed in 2006

- 430 megawatt family of projects located in Griggs and Steele Counties, North Dakota
- North Dakota’s largest community-owned wind energy development
- First two phases (150 MW) will be operational in 2009

High Country Energy LLC, formed in 2007

- 300 megawatt family of projects located in Dodge and Olmsted Counties, Minnesota
- When operational, it will be the largest C-BED (Community-Based Energy Development) in Minnesota
- First 150 megawatt phase committed to Wisconsin Public Service Corporation

Dakota Wind Energy LLC, formed in 2007

- 750 megawatt family of projects located in Day, Roberts, and Marshall Counties, South Dakota
- The first large-scale community wind project in South Dakota

Root River Energy LLC, formed in 2008

- 250 megawatt family of projects located in Fillmore County, Minnesota

Lake Country Wind Energy LLC, formed in 2008

- 350 megawatt family of projects located in Meeker and Kandiyohi Counties, Minnesota

Projects in Feasibility and Early Stages of Development

In addition to our projects in advanced stages of development, we have
projects in early stages of development:

- 200 MW project family in Southeastern Minnesota
- 300 MW project family in Southwest Minnesota
- 300 MW project family in Northeastern Iowa
- 300 MW project family in Northwestern Iowa
- 400 MW project family in Southeastern North Dakota
- 200 MW project family in South-Central Montana
- 300 MW project family in Central Montana
- 360 MW project family in Central Montana
- 200 MW project family in North-Central Colorado
- 250 MW project family in Northeastern Colorado
- 300 MW project family in Wyoming
- 150 MW project family in Western Michigan

Renewable Energy Jobs at Google

A recruiter from Google recently contacted me and asked if I would put a note on here that they are looking for candidates for their Renewable Energy Group. You may recall that I previously wrote a post covering several companies - Green Job Opportunities. This one is specifically for Google. Below is their call for qualified people to take up the challenge of supplying clean energy to the world.

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Environmental sustainability in the face of global climate change is a high priority for Google because, as our business grows, so does our demand for energy. We’ve worked hard to increase our efficiency and become carbon-neutral, but when it comes to buying clean and affordable electricity we still have limited options. We’ve recently announced that we’re taking a first step toward tackling this important challenge.

Business as usual: will not deliver low-cost, clean energy fast enough to avoid potentially catastrophic climate change. We need a clean energy solution that will deliver breakthrough technologies priced lower than carbon-intensive alternatives such as coal. Google is launching an internal R&D group to develop electricity from renewable energy sources at a cost less than coal. This initiative will explore advanced solar thermal power, high-altitude wind, enhanced geothermal systems, and eventually other breakthrough technologies as well.

Head of Renewable Energy: http://www.google.com/support/jobs/bin/answer.py?answer=81799&query=energy&topic=&type=energy

Renewable Energy Engineer: http://www.google.com/support/jobs/bin/answer.py?answer=81800&query=energy&topic=&type=energy

If you know other outstanding engineers who may be interested in joining the team, I encourage you to pass along this information as we are hiring for multiple positions.

The Solar-Powered Prius

Solar-Powered Prius (Source: http://www.solarelectricalvehicles.com/)

At the end of my recent essay on Nissan’s electric car announcement, I wrote “For my next calculation, I need to see how much power I could generate by putting a solar panel on the roof of my electric car and letting it recharge all day.”

In response, a reader wrote and told me that a feasibility study has been done for this on a Toyota Prius. The paper was the source of the above picture of the prototype:

Prius White Paper

From the paper:

Abstract

The major automobile manufacturers are producing hybrid automobiles, which are part electric and part gasoline powered. Could these automobiles take another step and obtain some of their fuel from the sun?

Solar Electrical Vehicles has developed a prototype PV Prius to help answer that question. The PV Prius is fitted with a custom molded fiberglass photovoltaic module as shown in Figure 1. Solar Electrical Vehicles has applied for a patent on the PV Prius solar system.

The photovoltaic module is rated at 215 watts at AM 1.5. The module is connected to a DC-DC converter and peak power tracker. The output of the converter is directly connected to the primary motive NiMh battery.

The daily power production available for charging the Prius primary motive battery is estimated to be between 850 and 1,300 watt-hours. The car uses 150-175 watt-hours per mile. Thus, the expected range per day that the PV Prius would have on solar power alone would be between 5 and 8 miles. Based upon a nominal daily trip length of 28 miles the gasoline consumption of the PV Prius would be reduced by 17% to 29%.

The following section was of particular interest to me:

Can a PV Prius obtain all of its fuel from Solar?

The answer to this question is a definite yes providing that the stock Prius, in addition to having the solar modifications described in the previous section, increase the size of the secondary battery and the DC-DC converter used to deliver solar energy to the NiMH battery. Using a maximum depth of discharge of 50% to provide some reserve power and extend the cycle life of the enhanced Lead Acid battery, the capacity would have to be increased from its present 3 kWh rating to 8 kWh.

In addition, the 48 to 240 V DC-DC converter capacity would need to be increased to at least 2000 watts. With this battery capacity, increased energy from a residential photovoltaic array could be used to recharge the battery at night when the car is parked in the garage. This complete system is the Total PV Prius.

How can this be? How can you recharge your Total PV Prius at night parked in the garage? The answer to that is net metering with your local electric utility. That is if you live in a region of the country which net metering is offered for residences with a grid connected photovoltaic array, then the owner of the Total PV Prius would be able to supply energy to the utility grid during the day light hours and have it returned to him in the evening. While the energy returned to the homeowner may be produced using fossil fuels, the energy supplied to the utility during the daylight hours would have reduced the use of fossil fuels by an equivalent amount.

Some of you solar guys take a crack at that, and let’s discuss what some of the hurdles might be. The economic analysis isn’t all that promising, as the expected gasoline savings over the lifetime of the vehicle is estimated at somewhere between 300 and 600 gallons. That’s not going to warrant much capital on a purely economic evaluation. No cost estimates are given for the required modifications, but I am guessing the cost is more than can be justified by the gasoline savings.

It’s a start, anyway. Keep in mind that this is a Prius, and a lighter car can have a much greater range. The economics may look a lot better if the range is higher, and so is your daily commute.

A Solar-Powered Airplane

One of the things I have stated repeatedly is that even as I see the world moving to solar power by necessity, we will always need liquid fuels for long-haul transport and airline travel. Turns out I may have been wrong about the airline travel bit:

Solar Impulse will fly only on solar power

The Solar Impulse project has been broken down in stages to allow for adequate testing and technological advancement. The initial planning stages began in 2003. 2007 and 2008 should see the production of a prototype(s) for testing and the first overnight flights. Then larger prototypes will be introduced in 2009-2010 for longer test flights. The final stage should occur in 2010, when the flight around the world is expected to finally be possible.

Yahoo! News provides video coverage:

Solar Plane Ready for Flight

Amazing. This shifted my paradigm on air travel, which to date has always been that it would require liquid fuels. Of course as is normally the case with new technology, there are caveats. Right now it is still at the simulator stage, and while the stated intent is to eventually be able to fly 300 passengers, per the video this will require “new technologies.” A very interesting story, regardless.

Coping with Gas at $100 a Gallon

I am fond of thought experiments. I like to ask “What If?” This can help me frame a problem. For instance, if I wonder how much land it would take to generate enough electricity to supply the U.S., that’s a thought experiment. But it is one that may tell me whether the idea is daft from conception, or whether there is a nugget of hope embedded within.

Lately I have been thinking of another thought experiment. What would I, personally, do if gasoline was $100 a gallon? Now that may seem silly. Nobody thinks we are going to have to deal with gasoline at $100 a gallon. But that misses the point of the thought experiment. When I ask people at what point gas prices are going to have a major impact on their lifestyle, that seems to be a moving target. When gas was $2, they said $4. Now that gas is $4, many have realized they won’t make big changes at $10. A friend who drives a Suburban recently told me that he doesn’t care about gas prices; that he is going to keep driving at the same rate regardless.

So the point is to jump so far out there - $100/gal - that there is no question that 99% of us would have to make some serious changes. The thought experiment is mainly designed to flesh out how people might cope as gasoline becomes more expensive. This is already reality for some, as your $100/gal dilemma is someone else’s dilemma at $4/gal.

What I would like is to hear how you would cope with $100 a gallon gasoline. I will post some of the answers later in the week. Let’s presume that gasoline prices increase to $100 at a steady rate over the next 5 years. Because many of our energy sources are interchangeable, let’s assume that other fossil fuel sources (coal, gas, etc.) follow suit. Alternative (non-fossil fuel) energy sources, such as solar and nuclear, would also follow this trend, but not at the same rate since they are less dependent on fossil fuel inputs. So the idea is really, with respect to fossil fuels, “How low can you realistically go?” I don’t want to make any assumptions on what would be happening in the economy as a whole, because in reality the economy would have collapsed under those prices. So my assumption is that life goes on, albeit with very steep fossil fuel prices.

Here is how I think it would affect me. Looking at my own situation, I just bought a house 23.5 miles from my office. However, I did this with my eyes wide open. The fact is, I don’t spend much time in the office. Since I started with my new company on March 1st, I have spent just 4 days in the office. So, a long daily commute is not something I have to deal with. In fact, I have never actually made the commute, as the 4 days I spent in the office preceded the purchase of my house. (Presently I am on site at our factory in the Netherlands, and I ride a bike to work).

But, even when I do have to travel to the office, at $100 a gallon, that 47 mile round trip will add up. Even the most fuel efficient cars in the U.S. are going to cost me around $100 for the trip. If I have to make that trip twice a month - and so far I am averaging less than that - it’s going to cost me $2400 a year - and that’s presuming I have a car that can get 47 miles a gallon.

Clearly, something like an SUV is out of the question. This could cost me $400 every time I had to go to the office. So SUVs, even now in their death throes, will be transportation only for the truly rich. What I really want - unless the cost is prohibitive - is the most fuel efficient car I can find. Today, I think that’s a Toyota Prius, but I am really hoping that an electric car rides to the rescue. (I would definitely choose the public transportation option if available, but right now it isn’t available from my home location to my office).

Even then, $100 to drive in to the office is pretty steep. I want to find a way around that. I am going to lobby my employer for permission to telecommute. At those prices, he is going to get a lot of those requests. When I think about what I do during a typical day, almost everything could be done via telephone, teleconference, webconference, or webcam. And when I do have to go to work, I am going to search for a car pool. At those fuel prices, a lot of people are going to be willing to share rides. I would imagine that new, creative ways of organizing car pools will pop up.

I would completely stop using an auto for short trips, and likely buy a small motorcycle for quick trips within 5 miles. If time is not a factor, I will ride a bike for those short trips. We would have to do a much better job of planning out our groceries, as it won’t be economical to run to the store to pick up a few items. Entertainment options like Netflix will start to look a lot more attractive.

In my home, I would also need to make changes. My wife and I currently fight over the thermostat. When I am alone, I will set it as high as 85. [Edit for clarification: That's the air conditioning, not the heat setting in the winter]. With the family at home, I will drop it to 78. The wife and kids like it at 75. With gas at $100 a gallon and electricity sharply higher, we are going to have to get used to being less comfortable. 82 degrees inside is a lot better than 105 degrees outside. But even so, I am probably facing $1,500 a month electric bills.

I am going to install (lots of) solar panels, because at these prices the payback period should be very short. Ditto for a solar hot water heater, which keeps beckoning to me, but remains just out of reach. (I have a brand new hot water heater in my new house, and I can’t justify replacing it already). Ground source heat pumps are going to look much more attractive. I will need to identify and track all sorts of transient electricity drains in the house by installing something like the Kill-O-Watt electricity usage monitors.

My business travel would not be sustainable at those rates. For the next 12 months, I am probably looking at 12 trips just to the Netherlands. If those trips are 20 times as expensive, I am going to have to get webcams for everyone on the team, and our “face to face” meetings will happen that way. To me, being on site right now is important, because I get to know people, and they get to know me. I can understand who does what. But after that, I can conduct business remotely. Ultra-expensive fossil fuel prices will force me to see just how effective I can be at doing that.

Other things would obviously be impacted, such as where we decide to vacation, or where I am going to invest any money I have left over. But I think that covers the major items. Have I overlooked anything major?

I am greatly interested in your thoughts.

My Worst Fears

In case you haven’t seen it, the peak oil panic really hit the mainstream this weekend:

Energy fears looming, new survivalists prepare

Convinced the planet’s oil supply is dwindling and the world’s economies are heading for a crash, some people around the country are moving onto homesteads, learning to live off their land, conserving fuel and, in some cases, stocking up on guns they expect to use to defend themselves and their supplies from desperate crowds of people who didn’t prepare.

“There’s going to be things that happen when people can’t get things that they need for themselves and their families,” said Lynn-Marie, who believes cities could see a rise in violence as early as 2012. “People will be unprepared,” she said. “And we can imagine marauding hordes.”

Wrapped up in that story are my worst fears - that the Doomers are right and we are headed toward a disaster. But note that this is my worst fear, and not my expectation. There is a big difference. My expectation is that we have several years of true gut checking - where we will find out just how low we can reduce our fossil fuel usage. (In fact, that’s part of the reason for my thought experiment on $100 gasoline). It will be a difficult time (especially economically), but unlike the Doomer view, I don’t see a massive die-off. I think we have a whole lot of fat we can cut before it comes to that.

But that doesn’t mean I am unaware of - or unprepared for - the worst case scenarios.

Nationalize the Oil Industry?

In a post I wrote just over a year ago - Peak Oil: End of the World? - I posed the following:

If you think the public is outraged now, wait until gas is $10 a gallon, people are suffering as a result, the economy is tanking, and ExxonMobil posts the first ever $100 billion annual profit.

The vast majority of the country will blame Big Oil for their woes, and they will resent that Big Oil is profiting from it. How will the public react? How will the government react? No doubt there will be legislation designed to combat the problem, but of what form? Will the government institute rationing? Will they attempt to nationalize the oil companies?

This wasn’t the first time I have mentioned the prospect, and it won’t be the last. You may have seen Representative Maxine Waters yesterday threaten to nationalize the oil industry during a house hearing on fuel prices:

Video: Maxine Waters threatens to nationalize America’s oil industry

The thing is, I can only see these calls for nationalization gaining in popularity. Our government - if it behaves in the predictable fashion that I have come to expect - is incapable of stopping the climb in prices. Long-term, prices are going higher - and oil companies will benefit. Even as oil majors struggle to replace their reserves, oil prices are rising at an even faster pace. Thus, the value of the oil that they do produce more than offsets those declines. So what I expect to see is oil companies become more and more profitable as oil prices continue to climb. The only things our government can do to stem the pain are things they can’t collectively agree to do. What they can collectively seem to do is offer pandering solutions that appease the public’s anger by “sticking it to the oil companies.”

So I foresee more calls to nationalize. If the goal is to bring prices down, it would be a disaster. If the government took over, what would they do with the profits? They would end up getting diverted down other channels. That is not sustainable, as this industry is very capital intensive. Venezuela is seeing their production decline accelerate as they fail to invest enough money back into the business.

Ironically, I wrote an essay just a few days ago on this topic for Resource Investor:

Creeping Nationalization and the Oil Industry

After pointing out that 1). Most of ExxonMobil’s profits are derived from overseas operations; and 2). Government has had a handsome windfall as well from rising prices; I lay out what I see as the risk if we creep toward nationalization:

What does the government risk by implementing creeping nationalization and open hostility toward such a key industry? One need look no further than Venezuela, where ExxonMobil and ConocoPhillips both left the country as Hugo Chavez increased taxes to the point that the risk was no longer worth the reward. Of course countries like Iran and China were more than willing to move into the void, which further diminishes the access the U.S. companies have to global oil reserves.

But with the constant threat of higher taxes hanging over their heads, it is not inconceivable that some U.S.-based oil companies would simply relocate to countries with more consistent energy policies. After all, that’s what Halliburton did, which ironically sparked political outrage from the same crowd calling for windfall profits taxes on oil companies.

Nationalizing the industry is not going to bring prices down. Using history as a guide (Venezuela, Mexico), it would likely accelerate the decline in production, driving prices even higher. But that doesn’t mean that the government won’t eventually tire of the annual rite of tongue-lashing the oil companies, and move on to more drastic action.

Ford Awakens from a Slumber; Post Office Rejects Ethanol

It seems that the reality of our situation is sinking in at Ford:

Ford’s trouble: $4 gas is here to stay

NEW YORK (CNNMoney.com) — Ford Motor Co. executives say they believe that $4 gas is here to stay, resulting in a fundamental consumer shift away from gas-guzzling SUVs and pickups and causing continued losses at its core North American auto unit.

The company said it expects gas prices to remain in the range of $3.75 to $4.25 a gallon through the end of 2009. And that expectation prompted the nation’s No. 3 automaker to announce deep production cuts for what has been its best selling and most profitable vehicles for several decades and could lead to more plant closings and job cuts down the road.

The company plans to ramp up production of smaller cars and crossovers: Ford Focus, Fusion, Edge and Escape, the Mercury Milan and Mariner, as well as the Lincoln MKZ and Lincoln MKX. These models generally cost less and have lower profit margins than the light truck models for which Ford is cutting production, such as the F-Series pickup, still the nation’s best selling vehicle.

I think that’s good news for everyone, except Ford shareholders and some Ford employees.

And a feel-good story about the ethanol industry:

Ethanol Vehicles for Post Office Burn More Gas, Get Fewer Miles

May 21 (Bloomberg) — The U.S. Postal Service purchased more than 30,000 ethanol-capable trucks and minivans from 1999 to 2005, making it the biggest American buyer of alternative-fuel vehicles. Gasoline consumption jumped by more than 1.5 million gallons as a result.

The trucks, derived from Ford Motor Co.’s Explorer sport-utility vehicle, had bigger engines than Jeeps from the former Chrysler Corp. they replaced. A Postal Service study found the new vehicles got as much as 29 percent fewer miles to the gallon. Mail carriers used the corn-based fuel in just 1,000 of them because there weren’t enough places to buy it.

“You’re getting fewer miles per gallon, and it’s costing us more,” Walt O’Tormey, the Postal Service’s Washington-based vice president of engineering, said in an interview. The agency may buy electric vehicles instead, he said.

Perhaps I should have said, “feel-good story for me.” After all, when corn-fueled cars are traded in for electric cars, that feels pretty good to me. In fairness though, I should point out that it does say that the ethanol-fueled vehicles they bought had bigger engines. Not sure why they went that route.

An Amazing Disconnect

Why Are Oil Prices Rising? The Picture Tells the Tale (Credit to Optimist)

The recent, rapid climb in oil prices has started to get everyone’s attention. In fact, when people use Google to search for information, and then link in here, I can see that information. Lately I have noticed a dramatic rise in the number of people searching for an explanation for why oil and gas prices are rising. It seems Congress is also searching for answers, as they once again hauled oil executives to Washington for a public whipping. This time, it was the Senate Judiciary Committee putting on the show:

Don’t blame us for prices

Reading through the testimony, it is amazing to me that these senators are so fundamentally ignorant of supply and demand. Some of the statements:

“You have to sense what you’re doing to us - we’re on the precipice here, about to fall into recession,” said Sen. Richard Durbin, D-Ill. “Does it trouble any one of you - the costs you’re imposing on families, on small businesses, on truckers?”

To me, that is a highly offensive question. Does he seriously think that oil company executives believe that these prices are good for the economy? I know - and I have personally heard one oil company CEO say this in a small private meeting with employees - that they want to see prices cool off.

Durbin is pointing fingers directly - “This is your fault” - and then implying malice. Durbin either believes that oil prices are going up because oil companies are making them go up, or he actually knows better and would rather throw these guys to the wolves than have a serious discussion on energy policy. I am troubled by either option.

Committee Chairman Sen. Patrick Leahy, D-Vt., likely summed up the feeling of many senators on the panel. “The people we represent are hurting, while your companies are profiting,” he said. “We need to get some balance.”

You have “just a litany of complaints that you’re all just hapless victims of a system,” Sen. Dianne Feinstein, D-Calif., told the executives. “Yet you rack up record profits … quarter after quarter after quarter.”

Not “hapless victims”, Senator Feinstein. Beneficiaries of higher oil prices, to be sure. But they are beneficiaries of a system that is the result of bidding in a global market. These executives have little power to influence that.

More comments from the L.A. Times:

“Consumers are angry, and they have every right to be,” Sen. Herb Kohl (D-Wis.) scolded the oilmen at the Senate Judiciary Committee hearing on rising oil prices. “You’re making more money than ever. It doesn’t seem fair, guys. It just doesn’t seem fair.”

But senators became incredulous when Lowe was unable to tell the committee chairman, Sen. Patrick J. Leahy (D-Vt.), how much he earned last year. “I wish I made enough money that I didn’t even have to know how much I made,” Leahy said.

Yet I bet if Leahy was asked that question under oath, he would have trouble answering it exactly. After all, most people can state their base compensation, but throw in interest payments and any other odds and ends, and you are suddenly at risk of perjury by stating the amount incorrectly. But hey, it makes for a good sound bite.

Leahy also made perhaps the most ignorant comment of the day:

“People we represent are hurting, the companies you represent are profiting,” Sen. Patrick Leahy, D-Vt., told the executives. He said there’s a “disconnect” between legitimate supply issues and the oil and gasoline prices motorists are seeing.

Why is that ignorant? Because it presumes to define how high prices should be given a supply/demand imbalance. Does he think - as I have seen some suggest - that a 10% imbalance in supply and demand should cause prices to go up by 10%? Here’s an analogy I have used before in this case. Imagine that everyone in the world requires a certain substance every day, otherwise they die. How high would prices go if there was a 10% shortage of this substance? 10%? You have to be kidding. People would be willing to pay literally anything to get the substance. In the case of such a substance, any shortfall is going to have a disproportionate impact on the price. And in the case that the substance is a diminishing resource, over time you would have the rich bidding against each other and driving the price far higher than might seem rational.

While oil is not quite in that category, it is a highly demanded commodity, and demand is pretty inelastic. Shortfalls are going to disproportionately impact price. Look at the graphic up top. Supply and demand are out of balance, and the price is rising to bring them into balance. That some of our fine senators are too ignorant to understand the implications does not bode well for the U.S. to ever have a comprehensive, consistent energy policy.

Finally, why are oil and gas prices rising? Gas prices are being driven by oil price increases (whereas last year they were driven by low inventories). Funny that the committee would focus so much on gas prices, when the refining sector has seen profits all but vanish. Presently, oil company profits are being driven by high oil prices, and most of that oil is extracted from outside the U.S.

So why are prices rising? I believe this is Peak Lite in action. For those unfamiliar, the concept of Peak Lite is that we will have shortfalls and huge price increases before oil production actually peaks. This is what we are seeing now. Even as we are setting new production records, demand has far outstripped new supply.

The concept of Peak Lite is explained here: Peak Lite Revisited.