Saying Crude Things About Oil

I frequently tell people that the issue most important to me is Energy. It's a complicated one, and because it's intimately tied to world politics, oil and coal lobbies, and it is often linked to the Global Warming issue, it is easy for people to misunderstand where I'm coming from and what motivates me.  So, I'm writing this post to explain myself. 

If you intend to engage with me on any topic related to Energy, it's important that you understand these things, and understand what research I've already done, so that you respond to what I actually think and not to what you think others think about this issue. For example, if you see me admit that I accept the overwhelming weight of evidence that mankind is causing Global Warming, you might be tempted to dismiss the rest of my argument as "environmentalist propaganda."  That would be a mistake. My motivation is not informed by the Global Warming debate.  You probably need to look deeper - and this is my attempt to help you with that.

So, carve out some time to read, prepare to open new tabs to read background, and take notes.  If you still want to argue with me when you're done, then you care more than you thought you did.

When I was a kid, just beginning to pay attention to the world around me in the 1970s, I remember seeing stories about gas shortages on the news, accompanied by images of long lines at gas stations and tales of rationing. This would have been the second energy crisis in the U.S., after our failed meddling in Iran led to the deposition of the Shah and Ayatollah Khomeini came to power in 1979. (The first energy crisis occurred in 1973, when OPEC retaliated for our decision to re-supply Israel during the Yom Kippur War.)  Don't take my word for it, though - I was only 7.  This lady was 18, and working in a gas station.

The Point: From my earliest memories, Energy has been a central issue.  It drives world politics, economics, and as the population of the Earth grows in size and demands more and more energy to survive, it makes all of our other conflicts worse.  I have wondered since those early days of my childhood how we (humans) might be able to stop relying so heavily on oil that we would be vulnerable to this kind of episode.

One way that is readily available - and has largely been rejected by the American public - is to use mass transit.  There are a lot of reasons (both compelling and frivolous) why mass transit is so unappealing to our population. I think some of them are well-articulated in this paper. My own desire (which people who know me hear about all the time!) is to see electric cars on the market.

Many people have pointed out that my pet idea is not a good solution, and they cite two reasons why:

1. It is expensive to develop and roll out a new technology, and electric cars "aren't there yet."
2. Shifting to electric cars only shifts us from dependence on oil to dependence on coal, as most electricity is generated by coal in the U.S.

The first half of that first reason is true.  It is certainly expensive to shift an entire population of 300+ million people over to a new technology.  But that kind of large-scale investment in ourselves has never stood in the way of American Progress(tm) before.  After all, we were motivated enough to build the Interstate Highway System in Eisenhower's time, and before that we built the railroads - largely thanks to federal land grants and assistance from State and local governments. So in itself, the expense should not be a game-stopper. It is, in fact, an investment.

The second half of the first reason is not true.  Electric cars are finally on the market after a long delay, and while there is a minority of people for whom their range will not be enough, these cars should already be able to meet the needs of the average commuter.  I do not pretend to know why the delay has been so long, and while there was a movie done speculating why a few years ago, I haven't seen it and I try to avoid assigning blame or wallowing in conspiracy theory.  That said, there are clear economic forces at work against a move away from reliance on oil - and it doesn't require a belief in some evil cabal or accusations of "greedy oil barons" as much as it requires an understanding of how investment works. (More on that in a moment.)

The second reason is also true, by the way. Trading dependence on oil for dependence on coal would not be a good solution. Apart from the climate impact (which won't really get into in this essay), the strain on our current electrical infrastructure would require some significant upgrades to that system. My favorite solution, though, is to take advantage of new renewable technologies - in particular photovoltaic solar - and make the production, sale, installation and maintenance of individually owned energy production a priority.  That way, individuals can scale up their own distributed electricity production as they need it, and large, centralized producers can focus on industrial customers or residences where it is impractical to have their own system.

But whatever direction we chose to go in a move away from oil, we would be threatening the oil market to some extent. The laws of supply and demand operate in a very straightforward manner, as the handy "What's Up With Gas Prices" infographic provided by the American Petroleum Institute can tell you.

A 2012 article in Forbes has a few interesting stats on this:

• Demand shrank "[f]rom 9.29 million barrels per day in 2007 to 8.2 million barrels per day [Feb. 2012] (that’s from 390 million gallons a day to 344 million gallons), a plunge of 12%."

• Drivers in the U.S. drove "about 100 million miles fewer [in 2011] than in 2007. Granted that’s only a 2% reduction in miles, or roughly a half-mile less for each of the 210 million licensed drivers in the U.S."

• Since hitting a low in 2008, drillers are pumping 18% higher volumes, totalling 5.8 million bpd. The U.S. now supplies more than half of its petroleum needs from domestic fields.

• John Felmy, chief economist at the American Petroleum Institute says that after taxes and refiners’ profits, 84% of the price of gasoline is tied directly to the price of crude oil. And who controls that? “It’s all the Saudis,” says Ed Hirs, professor of energy economics at the University of Houston.

According to that API infographic, worldwide demand is expected to grow - "The Energy Information Administration expects growth to accelerate over the next two years reaching 88.8 million barrels per day in 2012 and nearly 89.7 million barrels per day in 2013." 


I throw all of these stats at you to make a point about scale.  "Barrels per day" is clearly a good unit of measurement for comparison.  The U.S. approached 10 million barrels per day in demand, while supplying around two-thirds of that for itself. The World demands nearly 100 million barrels per day, and most of the production to meet that demand is controlled by the Saudis.  To show where the oil comes from, check out this neat map from APM.

The Point?  No matter what we do, we do not ultimately control the supply of oil.  We have been largely shielded from the results of that fact by aggressive foreign policies revolving around oil politics. But our adventures have cost us, and those we have offended over the last century are beginning to gain enough economic clout to take us on. At the end of the day, we can only count on 10% of the supply, if that - and much of that is hard to reach, expensive and dangerous to produce, and always vulnerable to volatile world markets.

So thanks to Supply, we are vulnerable.

In 2011, when Newt Gingrich tried to pin rising gas prices on the Obama administration, CNN reported:

Also, it's important to remember that oil and gasoline prices don't move in lockstep with one another. Gas prices lag behind oil prices by a couple of weeks.
During the oil price spike of 2008, gas prices were still trying to catch up as oil prices had already started falling.
That put refiners in a tight spot.
"[Refiners] couldn't sell their product for as much as crude was increasing," Rayola Dougher, a senior economic advisor for the American Petroleum Institute. "People lost money."

That's, literally, the money quote right there: "People lost money."

And people are going to lose money no matter what the Energy Policy of the U.S. is.

That's important to know.  No matter what we do, people will lose money.  And when they do, that loss will affect all of us. I'm not saying this to try to scare you.  It's just that if you understand how unavoidable that one fact is - people WILL lose money - it changes your individual motivation from one of "I'm only concerned with what I'm paying at the pump right now" to "I need to make sure that when the bottom falls out, I'm in a position to survive it."

In other words, we need to take control over our own Demand.

There really is no hope for avoiding some kind of financial fallout from the inevitable collapse of the oil industry. There is hope that we can make that collapse somewhat graceful, and less damaging. Staying on our current path, however, ignores the same problem that led to the housing market's collapse a few years ago: leverage.

Consider this from a recent Rolling Stone article Bill McKibben wrote about why the fossil fuels industry has fought so hard to discredit science supporting the notion of Global Warming (emphasis mine):

"We have five times as much oil and coal and gas on the books as climate scientists think is safe to burn. We'd have to keep 80 percent of those reserves locked away underground to avoid that fate. ... Yes, this coal and gas and oil is still technically in the soil. But it's already economically aboveground – it's figured into share prices, companies are borrowing money against it, nations are basing their budgets on the presumed returns from their patrimony. It explains why the big fossil-fuel companies have fought so hard to prevent the regulation of carbon dioxide – those reserves are their primary asset, the holding that gives their companies their value. It's why they've worked so hard these past years to figure out how to unlock the oil in Canada's tar sands, or how to drill miles beneath the sea, or how to frack the Appalachians."

Whatever you may think of the science supporting the Global Warming issue (and if you want to debate that with me, I'll just go ahead and refer you to this resource and save both of us a lot of time), the purpose of this essay is to convince you that there is a real financial danger ahead that can be mitigated if we are smart. Because there are hundreds of billions of dollars worth of money to be made in oil sales, and because companies (and entire nations) have already bet on the futures of those sales while the oil in question is growing harder and more expensive to reach, everyone is financially motivated to gloss over those expenses and risks - extraction, processing, and transportation are not going to get any easier or cheaper.

Oil and Coal are giants we should not attack and slay, but they are burdens that we should plan to set down gently. We are addicted not only because of our cars, but because we have allowed the hedging against supply & demand to creep into the rest of our money. We need to plan to put that money somewhere else. There will be severe costs for ignoring that plan.  There will be less-severe costs from investing in a way out.

My money (if I had any to bet) would be on the prudent course.  Put our policies behind incentives for moving electric cars and rooftop solar to market, and take our money out of coal and oil.