Saturday, June 07, 2008

The good oil: oil and the common good

One point where the rubber of individualism really hits the road is transport. We love our cars. What an amazing ability we have: to select a destination that would take hours to arrive at on foot and get there in minutes! But this has become so normal that we think we have a right to get anywhere we want in a minimum of time and without reference to others. Perhaps that's why we get so angry at traffic. Or high petrol prices.

Yet rising petrol prices are good. Because rising prices are a signal telling us that, as a society, we are using petrol faster than we can produce it. If there's not quite enough to go around, then prices will rise until demand falls to the level of the available supply. Of course, rising prices might be telling us something else: that petrol companies are ripping us off, that there has been a brief disturbance in the global oil supply due to political instability or natural disaster, that the government is unfairly taxing a useful commodity, that speculators are pushing the price up in order to make a quick buck. But sustained global price rises (the cost of oil has doubled in the last year, quadrupled in the last six) tells us that whatever other short-term causes there might be, something very basic about supply and demand is probably going on behind it. And that is something worth pondering.

Oil is a finite resource. There is only so much of it beneath our feet and so far we haven't worked out how to make any more any time soon.* This means that at some stage, we will reach a point where we can't get what's left in the ground out any faster than we already are.** If not now, then within a handful of years, most geologists think that the world will hit that maximum possible oil production. And from there the only way is down. And that means more price rises.

At least, that's what companies like Ford, General Motors, Toyota, British Airways, American Airlines, Dow Chemical and United Airlines - all of whom whom rely heavily on oil - are assuming, based on their recent moves to start radically reshaping their activities. They don't expect prices to significantly drop in the medium to long term and so are working out how to adjust as a result.

But it's not just companies. There are all kinds of implications for governments and individuals too. The end of cheap oil will affect all of us and not only when we fill up. Readily available oil has been one of the basic assumptions upon which our modern society is built. But higher prices are a signal that it's time for a re-think of many things.

For a start, we'll need to re-examine the way we build our lives around the almost ubiquitous use of cars. And one thing that might mean is working out how to live more locally. Another might be a greater reliance on public transport (for instance, you might like to support this campaign).

For the last six months, Jessica and I have been blessed with a car on loan from a friend who has been overseas. He returns this weekend, which will force us to be more deliberate about our transport options again - a good thing! The habit of believing I ought to be able to go anywhere anytime is hard to shake. Cars can be a lovely luxury, but they are also one of the primary sacramental experiences of an individualist culture. In my car, I feel I am master of my own destiny, able to negotiate a path through life to where I wish to go. The only community consists of paying just enough attention to one other's movements such that we might avoid bumping into each other. Perhaps rubbing a few more shoulders on the bus will be good for our soul.
*I realise that it is possible to turn coal and natural gas into oil, but this process is currently very polluting and in any case both coal and gas are likewise finite, and so even massive investment in this technology would simply postpone the issue a little.
**I realise that I'm simplifying here too, but not - I hope - irresponsibly so.

25 comments:

CraigS said...

Byron, you are right about the market sending signals. That is the good thing about the market - it forces such changes when they are necessary.

People will move to public transport - when it is cost-effective to do so. They will buy hybrid cars - when it is cost-effective. They will eventually buy battery electric vehicles - when it makes economic sense.

This is the reason I was never as terrified of the oil apocalypse as many seem to be - because I believe in the ability of the market and human ingenuity to adapt to new circumstances.

It will be an interesting (though uncomfortable) few years...

Emergent Pilgrim said...

Byron, I read some weeks ago that petrol prices are tipped to reach $3 within 5 years. The article (in the Australian) looked at how this would effect the way we live, the way we travel etc. For some reason I began to wonder if over the next century we might see a retun to communities rather than suburbs. Would places like Westfield still be the centre of our Councils (Shires)? Or, would we begin to see smaller more community based shopping centres that people could walk to etc?

I also wondered if this might begin to have an effect on the smaller local suburban churches that at present are currently in decline. The mass mega-churches attract people from far away. However, if we have a revolution in the way we design or live in community (even if it is based on the hip pocket effect) then maybe, just maybe, we will begin to see smaller churches flourish again. Within these pockets of suburban communities the community of the people of God may indeed be attractive because they are within walking distance.

Just some very random thoughts!

Mark.

geoffc said...

Having a heart for worldwide cross-cultural mission, and hoping to be a part of it, I wonder what the impact will be to the movement. 2 areas of concern come to mind:

1) Currently it is easy for folks on the field to head back and forth to their sending country. Most only serve 3 year terms, but come back for family issues (faily deaths, pregnancies) and so forth within that time. I wonder if it cross cultural mission will become more like the days of old. Pop on a ship and assume you are never coming back!

2) If Peak Oil brings with it some kind of recession, I wonder if some of the first things people will cut back on is their support of missionaries? Will a large number be coming back or forced to be tent-makers.

Interesting times ahead I think. How soon those times are...who knows.

byron smith said...

Craig - As I understand it, it is precisely because of market forces that those who study peak oil are worried. The market will indeed sort of the difference between supply and demand, by demand-destruction if necessary (i.e. high prices making the use of oil less attractive). However, if some of the modelling is correct, then the price could get very high very quickly. And it is not simply a matter of destroying demand for the use of petrol-driven cars, but of destroying demand for all the myriad other ways that oil underpins our economy.

Let's take one very important example - agriculture. One study estimated that for every calorie of energy we gain through food, we use ten calories of oil energy on planting, fertilisers, pesticides, herbicides, harvesting, processing, transporting, refrigeration and storage (the study didn't even include energy used in cooking). Global agricultural production (and so population) has increased more than threefold since the middle of last century, largely due to the widespread use of petroleum-based agricultural products.

If the price of oil also pushes the prices of food up high enough, the results may be uncomfortable for us, but for poorer nations it could mean riots, war, famine, failed states and more. There are already about twenty countries globally facing or in the middle of serious political instability due to the price of food. I might not have understood something, but this seems to be how the market is solving the present (smaller-scale) food crisis.

I am not saying this will necessarily happen (nor that economics is the only factor in political instability), but I'd love to hear how the world's poorest are going to feed themselves if and when there are even more significant rises in the price of oil.

Mark - You could be onto something. I think there will have to be a relocalisation (a scaling back or undoing of globalisation, which is a process heavily dependent upon cheap transportation). This will come with many costs, but also many opportunities.

Geoff - They are both questions I've pondered a little myself, having many close friends having just gone (or about to go) overseas on mission of various kinds. If there is a trend towards relocalisation, that will probably mean changes to how mission is conceived and practised.

CraigS said...

I'd love to hear how the world's poorest are going to feed themselves if and when there are even more significant rises in the price of oil.

I don't know. The only way I can see is for them to return to traditional, labour-intensive forms of agriculture. And also (of course) through charity from the west.

As I said, my attitude is to essentially let the market re-shape the economy over the coming post-oil decades. Byron, do you have a different solution, one that would address the issue of the developing countries?

derek said...

The "market" tends to over-react. At the moment the oil price is sinking upwards ... which of course will reduce demand ... which will reduce the price ...

The longer term trend is of course upwards but I suspect the rise will be gradual giving time for first world countries to adjust. Good point about non-first world countries ...

I don't see any easy alternative to market forces to control the price of oil.

Western governments could conceivably regulate price (but difficult), demand (by rules on how oil is used), or supply (tax incentives for new energy production? )but each of these options would have consequences.

Craig Bennett said...

Hi Byron.

You are right about the other issues that the high oil prices is causing.

But its not only fuel that is made by oil. A lot of fertilizers used are oil derived and farmers are paying double this year for fertilizer then what they were paying last year.


Craig S.

I don't know. The only way I can see is for them to return to traditional, labour-intensive forms of agriculture. And also (of course) through charity from the west.

You will find that the traditional ways of farming will not produce the needed surplus to feed the multitudes in the city, and if the workforce was there, the costs of production (Wages) again would out strip the profit margin for the sales.

The other issue to consider though is that while wages have increased the price of food has actually decreased remarkably over the years. My father in law when he came to Australia from Italy had to work a whole day to be able to buy a dozen eggs.

These days a dozen eggs will cost you about 15 minutes work time.

byron smith said...

As I said, my attitude is to essentially let the market re-shape the economy over the coming post-oil decades. Byron, do you have a different solution, one that would address the issue of the developing countries?
Not really, though there are some things that could be done at a government level that would help (both here and elsewhere): decentralisation/relocalisation, better local planning, improving public transport (esp freight rail), signing the Oil Depletion Protocol, encouraging R&D and investment in alternative energy sources, helping guide public expectations (i.e. not promising cheaper fuel or endless growth), avoiding interference in the market that serves to encourage car manufacture and use (because there is far from a free market in this area - we heavily subsidise an Australian car industry whose days are limited, at least in its present form).

But I'm no expert here. These issues are complex and I have only a very basic knowledge of economics. My main point was a theological or ethical one about our underlying attitude in this situation. Put simply, is it to look out for number one (whether personally or as a nation), or is it to seek the common good?

byron smith said...

Derek - I agree that there is no simple solution here. And as I said, rising oil prices do signal most effectively to most people the need to imagine and invest in alternative ways of living together that do not rely so heavily on oil. Yet, in many cases, there do not seem to be any viable alternatives because oil is just so extremely useful. As Craig B pointed out (and I mentioned above), fertilisers are a key example of this, but only one of many.

I'm really not sure whether the rise will be gradual. At the moment, it seems to be more a series of sudden rises followed by smaller retreats rather than a controlled, slow growth. This theory would suggest that the price might rise more quickly than most people expect.

Craig B - You're right that more labour-intensive forms of agriculture require a contraction of the economy as it is usually conceived and probably something of a reverse urbanisation (ruralisation?) demographically. Cheap oil has been one of the key factors behind both the massive population explosion and rapid urbanisation witnessed in the last hundred years or so.

Dave Lankshear said...

Brilliant discussion Byron and great answers.

As Dr Roger Bezdek said in his presentation to the "Smart Conference 2007", It was something to the effect of...

"Most people do not know what they mean when they talk about "demand destruction". That means higher oil prices creating inflation right through the whole economy, job losses, a recession, and that's just the beginning. The market "solving" peak oil is the problem, not the cure!"

Something like that... from memory... and Maxine McKew was there, 3 days after I also briefed her on peak oil. And what did we hear about it during last year's election?

Dave Lankshear said...

I highly recommend that anyone interested in this subject download this 87 mb Quicktime movie.

It starts off with Maxine McKew introducing Dr Roger Bezdek to all the CEO's and high flyers at the Smart Conference. The room was packed. They paid about $750 per head to be there.

I helped arrange for an SBS mate of mine to video this as proof of how surreal all this is. The "movers and shakers" know about this.

But what are they doing? It is utterly surreal.

CraigS said...

Thanks for your response Byron. I think some of your solutions would be somewhat helpful locally. I don't think they will do anything at all for third world farmers.

But to look at each -

decentralisation/relocalisation

I'm a huge believer in decentralisation. Some of this will be market driven as commuting costs rise. It would be more attractive if outer urban areas were more affordable in Sydney - I believe more expedited land release is required.

But you can't force people to move either. If anyone gets to the point of forced relocations, we are entering Soviet Union territory, and your solution is worse than the problem.

better local planning,

What specifically?

improving public transport (esp freight rail),

I agree, and I think a good way of doing this in the city would be via a congestion tax, and perhaps local tollways.

signing the Oil Depletion Protocol,

Not convinced on this. Bit of a pipe dream really, gesture politics.

encouraging R&D and investment in alternative energy sources,

We already do this (suppresses cheap political shot at ALP and solar subsidies). Once again, the market can inject much, much more money into alternate energy than the government can. And every time fuel rises, that makes these alternatives more attractive.

At the same time, it's unclear how much energy these alternates can deliver. And the renewables have an environmenal impact too - windfarms, for example, consume hundreds and hundreds of acres and shred the local bird population to pieces.

helping guide public expectations (i.e. not promising cheaper fuel or endless growth),

I completely agree. A plague on your team as well as mine in this regard.

avoiding interference in the market that serves to encourage car manufacture and use (because there is far from a free market in this area - we heavily subsidise an Australian car industry whose days are limited, at least in its present form).

Yes, yes, yes.

Dave Lankshear said...
This comment has been removed by the author.
Dave Lankshear said...
This comment has been removed by the author.
byron smith said...

Dave, I seemed to have missed the parallel discussion on your blog (comments are now off?) and so I'm a little puzzled at the tone of your last couple of comments, but I'm guessing there was some vigorous discussion that led to them. However, from Craig's most recent comment here, it seems there is a fair bit of common ground on a number of issues.

Craig S - To address some of these issues...
Decentralisation: no, I'm not talking about forced relocation, but there are many things governments can do (whether here or overseas, and whether national, state or local) to make a place more or less attractive to live in. One of the big things they can do is to plan new developments well, which leads to...

Better planning: I'm talking about not having enormous tracts of suburbia that are only accessible by car. There are so many clever ideas about how to build more sustainable and livable local areas, where shops, school, work, church, etc are walkable and where energy-use is made much more efficient and so on. I think higher planning and building standards in this area ought to be legislated, just as we do for safety standards and a range of other things. Regulation makes sense where the social and economic benefit of choosing the socially-responsible action is (a) long-term and (b) accrues to the whole community rather than the individual, that is, in situations where it is easy to make a quick buck by cutting corners that other people will really regret later.

The ODP does seem like it would be a vulnerable agreement (just like nuclear non-proliferation and so on), but in the absence of a global police force (and I do not advocate the formation of such), international treaties are upheld by a combination of mutual interest (esp economic) and moral weight. It seems that the ODP would be a good baseline framework for these kinds of international discussions that are going to only get more and more pressured as time elapses.

Since you suppressed your comment about the ALP about solar, I'll make it for you. Means-testing the subsidy stinks. It was a terrible decision that has gutted the local solar industry and since the benefits of individuals fitting solar panels are primarily for the community rather than individual, it makes absolutely no sense to penalise the rich. It is a bit like means-testing the tax break on charitable giving! Just to clear things up: I am no huge fan of the ALP.

R&D - You are right that the market can invest far more money into renewable technology than governments, yet governments can create conditions that are more or less favourable to corporations doing so (through subsidies, incentives, influencing the popular perception, etc), as well as directly contributing through grants to public university research (which has the bonus that the results are publicly available).

While these suggestions have arisen in an Australian context, I don't think they are limited to here, or even to developed countries. Of course, we have far more disposable public income than developing nations, but many of these policies require more political than economic resources.

Some further thoughts:
1) Cut funding for non-second generation bio-fuels (are they called first-gen?), which directly remove food from the world economy.

2) Encourage lower rates of meat consumption, since meat requires (on average) far higher input of energy and resources.

3) Encourage agricultural diversification, avoiding monocultures, to reduce transportation required and increase local food independence.

4) Pursue peace-making* international relations (no simple solution here, but it requires a change in mindset from pursuing national interests at all costs to seeking the common good) and racial reconciliation to avoid arms-races and de-escalate military spending, which often takes the lion's share of developing nations' expenditure.

Dave Lankshear said...

Hi Byron,
I just realised that because Craig removed the 'offending' posts on his own blog, I should return the favour here. I've changed my tone and summarised the remaining points below.

1. Town planning is a government responsibility — not a market solution. Last night's Australia Talks back ABC Radio program has a 45 minute piece discussing many of the themes Byron has been raising here. AV Jennings "Chief Marketing Officer" Tim Redway shares a little about how developers work within the confines of government town planners. He also recommends that sustainable homes and sustainable city infrastructure should be MANDATED! So that's the public face of AV Jenning's going on the record as demanding legislation limiting house sizes and some city infrastructure planning!

2. Rezoning town planning laws can achieve amazing results very quickly. My own RELOCALISE page shows how cities evolve over time, and how once rezoning begins, natural attrition can move people into the city plan within about 20 years (at least according to the "bright green" geeks at Worldchanging.)

3. The Oil Depletion Protocol is the kind of agreement we could have adopted a few years ago to prevent today's crisis in Ethiopia. If Christians are going to campaign for anything in regards to peak oil, I completely agree that the ODP is a good strategy to prevent some of the worst outcomes... a bidding war, or worse, a real war.

CraigS said...

I think higher planning and building standards in this area ought to be legislated, just as we do for safety standards and a range of other things.

One problem is that existing regulation standards already have greatly increased the cost of housing. I speak as a non-homeowner - further "raising of the bar" is going lock more and more people out of home ownership. Maybe thats the price we pay...but it shows how difficult solutions are. It's like mercury - you press down one lever, and another one pops up.

I fully agree that we have to kill the ethanol subsidy, as people are starving.

In fact, this demonstrates one of the reasons why I am so wary of subsidies and government intervention in the first place. It's possible for the government to do massive amounts of harm in the pursuit of good.

Conservative libertarians like myself are all about pushing responsibility for individual destiny into the hands of the individuals themselves - because each man is in the best position to determine what is good for him and his family. Governments enforcing sweeping and radical legislation "for the common good" - that really makes me feel very uncomfortable.

I am interested to see that market forces are already forcing changes in behaviour. Friends of mine are thinking of selling their car and making do on public transport. Others tell me that lots of people are walking to the grocery store these days rather than driving. I know of people who have canceled driving holidays and are looking at other holidays instead.

Human beings survived for 1000s of years before oil - we will survive for 1000s of years after (unless the Lord returns)

Dave Lankshear said...

Hi Craig,
if you listen to the podcast do wait till the last 10 minutes for the interview with the public face of AV Jennings, it is very revealing. For instance, in just 30 years AV Jennings have reported that the average home plan has increased 70% with FEWER people living in each home? That's just greed Craig.

The AV Jennings guy basically said as much, and clearly stated we needed legislation to bring the average house plan size down again. (The ridiculous size of McMansions out west is truly astonishing!)

Governments enforcing sweeping and radical legislation "for the common good" - that really makes me feel very uncomfortable.

1. They've already done it.
The experts I've met would call the last 30 years of suburban expansion exactly that... "sweeping and radical legislation". It was a vast experiment in suburban living based on the motor car. Sure they had good intentions, but like so many government experiments and assumptions, they got it wrong. No "Mr Fusion" arrived in time to save the day. 20 years ago I would have sworn that there'd be 'something new' by now. There isn't.

A little history: Suburban expansion exploded outwards so fast that it became a serious problem in the USA. They had a national competition to design a highway system to provide infrastructure to these isolated suburbs... and so the interstate highway system was born.

Then big oil got in the way, and started buying out and tearing up public infrastructure like the Californian highway system. Sadly our cities are not just products of town planners, but have been influenced by big oil as well. No one is really at fault here — they meant well — but 'meaning well' does not guarantee wisdom or success.

2. Current plans have failed.
The current plans have not brought prices down, so we may as well try smaller more compact homes. Rather than enormous McMansions we can learn to live in eco-apartments that are cheaper, and more intimately connected with an attractive community plan with all sorts of spin-off local facilities such as local community shops, transport, bike-sharing, park, pool, clubhouse or hall, and other "village" facilities.

Have you listened to the ABC podcast Craig?


3. How many humans existed before oil Craig?

Craig Bennett said...

Byron.

I think that means testing solar is a big question. Yes the subsidy has hurt the industry, but perhaps in reality the industry was riding on the back of the government.

I think it shows that those who were able to afford it the most were taking advantage of the subsidies. Perhaps a better way forward would be to substantially increase the subsidy for lower income earners and decrease it as income increases therefore making it more affordable for lower income streams.

Perhaps also a partnership could be entered into with energy companies to provide solar electricity back into the grid. That is the consumer saves on electricity a proportion comparable to the percentage that they have put into the system.

Eg, if they put into the system 40% of the total outlay, the energy supplier then pays them 40% of the total energy put back into the system. This could be worked out as actual cash or a subsidy off the bill - which would be more likely for such a small share. Though 40% will still cost the householder around $12000 dollars - though is still much lower then what is presently being paid with the current subsidy.

This also could be funded with the allocation of funds for alternative energy

I had to laugh today when I heard about the Toyota plant to produce 10,000 hybrid cars a year. They will be more expensive to buy then current cars and in reality 10,000 cars is not going to do a great deal for the general population % wise especially again for those on a lower income stream who can least afford those cars.

Dave Lankshear said...

Exactly Craig B — Hybrid Shmybrid!

Annual Australian population growth would most probably offset any savings from the hybrid, let alone the fact that once we are actually past peak oil the decline is permanent. If we waved a magic wand and converted all the cars into Australia into hybrids, we'd still have to wave the same magic wand a year or 2 later because of decline.

The sooner we start the better, but it's already too late to prevent a truly horrible economic crisis that, when accounting for all the industries affected by it, will probably make 1929 look like a dress rehearsal for some real economic pain.

Craig Bennett said...

Byron,

This is a serious question.

Have you thought about the costs involved in a few years time when you finish your studies overseas and it is time to come back home?

Pity you can't buy a 3 year return ticket.

byron smith said...

Craig - this is indeed a question we've pondered. Who knows, perhaps we might be catching a ship home!

Dave Lankshear said...

Could be Byron, could be. We're entering a weird makeshift world with a mix of high and low tech as people adapt.

J.Skjou said...

Bryon,

I sincerely enjoy when you discuss oil and the failure of modernities eschatalogical reachings. Wish i had more time to join the discussion, and hopefully i will be able to soon, but please them keep posting!

your friend,Joshua

byron smith said...

Joshua - no problem, I will continue! However, my posting my be a little more sporadic over the next couple of months while I move to Edinburgh.