Elephants and Ashtrays – A Reality Check on Oil Prices
Oil is nearing $110 a barrel, gasoline is approaching $4 a gallon and people are starting to freak out as if this is a sudden and unexpected thing. I don’t know where these people have been the past 35 years because, as far as I can see, the handwriting has been on the wall for quite some time. The problems is, American’s have chosen to ignore the obvious and go right on doing what they always have as if this day would never come. It’s not totally dissimilar from smokers who choose to ignore the warnings printed on each pack of cigarettes as if it doesn’t apply to them, we’re addicted, unnecessarily, to oil and unwilling to do what it takes to stop the dependency.
So, what is the outcry we are hearing and reading in the media today? Were hearing how we need to loosen the environmental restrictions so the oil companies can increase production… as if that is the solution. It’s not! That is like wanting to clean up the room and focusing on emptying the ashtrays when there’s an elephant standing in the middle of it. Our dependence on foreign oil isn’t the problem, it hasn’t been for quite some time. Oil is a global commodity and we currently import only 9% of our oil from overseas. If we stopped importing oil today, the global price of oil would not change because OPEC would adjust production accordingly and the prices would remain more or less constant.
In order to appreciate this you need to understand that, despite the fact that the US is the dominant user of petroleum today, we are not the reason for the increase in prices. The new kids in the petroleum market are the non-OECD Asian countries, China and India. Sure we’re projected to increase our oil consumption between now and 2030 but the increase in consumption by these two countries is going to make us look downright frugal by comparison. Fully 43% of the worlds increase in oil consumption will come from non-OECD Asia while half that will come from the US if current trends continue. Given this reality, there is no way oil prices will decline unless OPEC decides to flood the market or unless vast new fields are discovered in non-OPEC countries flood the market with cheap oil. Frankly, I don’t see this happening.
Further, if the US became totally energy independent meaning we didn’t import a single drop, do you think US oil companies would voluntarily lower the value of their oil below the global market prices? Yeah.. like that’ll happen. US oil companies are only too happy to realize $110 a barrel for their reserves and they will continue to mark-to-market their oil regardless if we become oil independent or even become so energy efficient that we can start exporting oil. The problem is, everyone is discussing is our reliance upon foreign oil… that’s the ashtray. The elephant is our obsessive dependence on oil, period, along with our total unwillingness to do anything about it. We still haven’t committed to quitting our addiction to oil, we just want it to be more affordable. The first step to treating an addiction is admitting we have one. We’re not there yet.
But wait, aren’t we finally making progress what with the new emphasis on hybrid vehicles? The answer is partially yes but, in truth, the real answer sadly is no. The first oil crises occurred in 1973 under an Arab embargo and gas prices spiked toward $1 a gallon from under $.40. In response to this first evidence of future problems, the automotive industry began focusing, a little, on fuel economy. At the time, the Honda N600 was the economy champ at 40 mpg but it was a sub-subcompact. By 1980 the Ford Pinto was getting 24 mpg and the Honda Civic delivered 28 to 32 mpg. On somewhat larger cars, the Chevy Citation delivered 24 mpg while the Malibu offered 20 mpg. At the same time, Volkswagen started producing a Diesel Rabbit that delivered 50 mpg overall and better on the highway.
In 2008, the Chevy Malibu is rated at 15-20 mpg city and 25-30 mpg highway (in 1980 manufactures published average mileage vs city/highway statistics). The hybrid model comes in at 20-25 mpg city and 30-35 highway. The Toyota Prius, the preeminent hybrid on the market delivers a combined mileage of 46 mpg. This is not progress. This isn’t even close to progress.
By comparison, in 1982 the Commodore 64 home computer came to the market featuring 64 kilobytes of RAM. In 1983 the Apple II joined the market also featuring 64 kilobytes of memory and a 1 megahertz microprocessor. Today top line home computers offer up to 8 Gigabytes (8,388,608 kilobytes) of memory and 3.67 Gigahertz (3670 megahertz) microprocessors. Now, that’s progress.
The one thing no one can dispute is that, given a challenge and a burning desire, few, if any, countries can compete with America. So, why so little progress in automotive efficiency? The answer is as simple as it is disappointing. We don’t want it. We say we do but we don’t. As gas prices have steadily climbed, we’ve steadfastly clung to past traditions. We want big cars and we want performance and the car companies oblige by giving us exactly what we want. If we were willing to change our attitude toward cars, things would change and change in a hurry.
Europe, on the other hand, has had expensive gas for decades. Today they are paying over $7 a gallon for it. As a result, people look at transportation differently. People walk, ride bikes and drive motor scooters in large numbers and the cars they drive deliver superior fuel economy. City buses are full “regular” people who leave their cars at home because it’s a less costly way to get to work. The gas version of the Renault Clio, a very popular sub compact, averages almost 49 mpg and the diesel version tops 64 mpg. No special technology here, no fancy and expensive hybrids either, just a different focus, a different set of priorities. The reason their cars deliver superior economy is simply because that is what they want. When your routinely paying $6 to $7 a gallon for gas it does that to you.
If we wanted cars that get 100 mpg on average, we would have them today. If America decided in 1973 to put as much effort into developing petroleum free automobiles, either electric fuel cell or hydrogen powered, as we did in the 60’s when John Kennedy challenged us to put a man on the moon, we would have them by now. Instead, we stick by our traditions, preferring power and style over economy, cars over scooters, bikes and walking and pretty much rejecting mass transit and car pooling in favor of the American tradition of one-person-per-car.
Global consumption of oil is going to continue increasing regardless of what we do and OPEC is not going to turn into a benevolent group of do-gooders who want to provide the world with cheap oil. It’s time we quit focusing on cleaning the ashtrays and started focusing getting rid of the elephant.
Eliminating our dependence on oil through nuclear energy, more efficient coal technology and renewable resources such as solar, geothermal and wind energy would enable the US to become an oil exporter rather than an importer. Then we can then all relish the prospects of $200 a barrel oil just like the Saudis do. Imagine how that could impact our balance of trade and fund our growing superiority in alternative energy production. The ability to imagine and and a willingness change is where it starts. We’ve mastered one, we need a lot of work on the other. Perhaps if we imagined changing……
Very good article and disapointingly true. The only alternative is to continue to invest in oil related stocks or etf’s such as uso,dbo.