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Website Update: OK, we moved from the Stone Age to perhaps
the Bronze Age by creating a mirror of this website at newworldeconomicsmirror.blogspot.com. I personally like the
$1.95 black-on-white look of this site, but it's nice to be a bit more
presentable. Also, you can post your comments there, which is a nice feature.
Modelers of oil extraction rates
have centered on 2005 as the year that world crude
oil production reached its highest level. Production statistics are fuzzy at
best, but there is growing evidence that these guesses were right. The US Energy
Information Agency recorded May 2005 as the month of highest world oil
production to date. The price was about $52/barrel then, so we see that the
last 18 months of higher prices and to-the-limit development drilling has not
resulted in higher production. The Oil and Gas Journal says that total
production in 2006 was 0.17% higher than 2005 -- less than a rounding error.
There are differing opinions, including those of peak oil eminence Colin
Campbell, who expects a peak in 2010. However, the increase
in production from now until then is expected to come entirely from deepwater
drilling, and most of that from deepwater drilling in Angola. Everything else
rolls over in 2005, according to his modeling.
The rate of decline post-peak is relatively
slow, however, so there is time to adjust to new conditions as long as things
don't get out of hand with wars or other such breakdowns of the existing
order. Realistically, the great majority of people and their governments
won't do anything until motivated by price.
It is far easier to use less energy than it is
to create more. The reason so much energy is used today is not because it is
necessary for the industrial economy, but because it is so cheap that it can
be easily wasted. When it is not so cheap, it won't be wasted so much.
Already, Europe, Japan and most of the rest of the developed world have
energy prices much higher than those of the US. Consequently, they use less
energy -- in fact 50% less per capita than people in the US, and they aren't
shivering in the dark. In an environment of much higher prices and a general
intent to use less energy, I think it is entirely possible for Europeans and
Japanese to use 50% less than their present consumption, and for Americans to
use 75% less. Thus, the first 30% or so drop in fossil fuel availability is
probably not all that catastrophic. Let's look at how that might come about.
Electricity for the home:
I figured out that all of
a household's electricity needs could be provided by three 120W solar panels
for a one-person household, and another panel per additional person. This
powers a refrigerator, a few lights, and a computer or TV. Five panels for a
family of three! Solar is one avenue where there is tremendous potential for
technological improvement. We're still using 1970s technology, essentially.
While five solar panels today would cost about $4000, it is entirely possible
that, in the next ten years, panel cost could be cut in half and maybe panel
efficiency could go up 50%, from about 12% to about 18%. That would reduce
the cost of solar panels for our little family to $1500 -- for all the
electricity they need for a lifetime!
Transportation: There are huge
efficiency gains possible here. I was in Taipei, the capital city of Taiwan,
not too long ago. It's a lovely modern city with all the usual features of
industrialized life. Everyone there rode scooters. How about if people in the
US got in the habit of riding 200cc diesel scooters (or motorcycles) that got
125mpg and cost $3000? Let's compare with a typical US car, with a total cost
of ownership of $6,000/year for 15,000 miles, at $2.50 gasoline. That's
$0.40/mile, which is about what the IRS says a car costs. Now for our little
motorcycle: 15,000 miles/125mpg = 120 gallons of fuel @ $10/gallon = $1,200.
Repairs and maintenance: $1,000 (high). Depreciation: $500. Insurance $400.
Total: $3,100. So, at $10/gallon a motorcycle costs half of what a typical
(cheap) car costs today, and of course uses maybe 1/5th the fuel.
Easy to park, too, but tough in winter admittedly. (It would be nice to have
a 145mpg Loremo automobile as well.) You
may joke that Americans are NEVER going to be caught dead riding a dinky
little scooter, but I live in one of the nicer suburbs of New York and
scooters are appearing on the streets, driven mostly by people over age 40. A friend of mine, who
is a hedge fund manager, told me last year that his daughter asked for a
scooter for her birthday (she probably would have got a BMW if she asked). At
$10/gallon gas, Leonardo DiCaprio will sell his Prius for a little motorcycle and then the changeover
will be complete.
While some people are anticipating that higher
transportation costs will make today's long supply chains impossible, I doubt
that will be the case for at least a while. Ship transportation doesn't use
much fuel. Truck transportation does, but it takes just as much truck
transportation to move goods from a factory in Los Angeles to New York as it
does to move goods from a port in Los Angeles to New York. Higher prices will
work these things out.
Trains are wonderful high-efficiency
transportation devices, and one reason the Europeans and Japanese use so much
less energy than their American counterparts is that they ride the train more
often. Also, trains run on electricity, which can be provided by a windmill,
nuclear power plant, etc. while autos and trucks require liquid fuel. When
energy prices go up, the cost of running a train doesn't go up as much as the
cost of running a car, so trains become more attractive. Then, when more
people ride the train, trains become much more economical. The automobile
transportation system gets worse as more people use it, due to
traffic, limited parking, air quality, noise, the ugliness of enormous
roadways, etc. etc. but the train system gets better as more people
use it, because the train companies can then run more trains, which means a
more convenient schedule, costs go down because the costs of fixed assets
(rails and stations) are spread over more riders, service gets better because
the train company can hire more people, and they add more locations to the
train network, which makes the network more useful because it connects more
places, resulting in more riders and further improvements. People in the US
have no experience with a modern train system, which runs twenty trains an hour
(one every three minutes so you don't even bother looking at a schedule), and
has high-speed trains that go 150+ mph. It sure would be nice if governments
would stop subsidizing auto transportation, and instead direct some of their
efforts toward establishing a proper train system. By the way, for cities
that are interested in establishing subway systems, apparently an elevated
monorail system can be done for 10% the cost. Yes, the same effectiveness, a
nice and quiet modern monorail, and one-tenth the cost of digging tunnels.
Thus, while the shorter-term solution is to
trade your SUV in for a little motorcycle, the longer-term solution is a) to
ride the train, and b) to live closer to work, and c) to live in an urban
environment where a car is not necessary for daily living. The combination of
all three would reduce the transportation energy consumption of a typical US
household by 80%+ I expect.
Heating: Energy consumption for
heating in the US could be easily reduced by going to individual room heating
instead of central heating. We tried this for this winter, and it works
great. Total investment $200. Cost savings per month: $300-plus. Energy
savings per month: roughly a 75% reduction. In the longer term, people can
build superinsulated houses. I know of people in
Alaska with houses so well insulated that they can heat them with a light
bulb. Amazing what eight inches of styrofoam
can do. And what about passive-solar-heated houses? There are some people who
go through winter in cold climates with no heater whatsoever, and
maintain indoor temperatures of 60-70 degrees from passive solar heating
alone. For commercial buildings, did you know that New York skyscrapers have
to be cooled even in winter? They are heated by all the computers and lights
running there.
Agriculture: Modern agriculture uses
considerable petroleum inputs in processing, transportation, and fertilizer.
Let's just say that US grain production fell by 50% as a result of petroleum
unavailability. A problem? Not really. A full 70% of US grain production goes
to livestock feed, where its nutritional value is reduced by 90% as it is
converted into meat. Thus, for 100 units of grain energy, we get 30 units of
grain energy plus 70*10%=7 units of meat energy for 37 units of food energy.
At 50% lower grain production, we'd simply eat less meat, which is exactly
what the doctor has been saying all these years. (On a worldwide scale it's
not quite so neat, and a 50% reduction in total agricultural output may lead
to some problems.) In any case, it might be nice to use less petroleum in
agriculture anyway, since modern agriculture and livestock raising is
something of a horror.
Maybe, in the future, we'll just let nature
make the meat herself. Modern US agriculture looks something like this: sun+petroleum inputs+chemical/bioengineered
awfulness+depletion of topsoil and natural fertility+mining of groundwater resources+environmental
destruction from runoff of chemicals etc.+lots of labor = grains (which are the seeds of grasses) grains+hormone injection+livestock
abuse+lots of labor =
meat. So, we go from the sun > (the horror of modern agriculture) +
(environmental degradation) > meat. Now, before this process was
initiated, there was a natural process that looked like this: sun >
natural grass growth of the Great Plains > enormous herds of buffalo >
meat. Actually, the natural process was more efficient and produced more meat
than the modern process. How stupid is that? We see the same idiocy in modern
fishing. Today, many fish are produced in fish farms, which are none too
healthy by the sound of it. Yet, we know that nature is entirely capable of
producing fish in such quantities that people talk of times when rivers were
so thick with salmon that you couldn't row a boat across them. So, maybe US agriculture
in the future will look like this: 30% of land under cultivation today
produces grains (organically); 70% of land under cultivation today is allowed
to return to its natural Great Plains state, where buffalo are reintroduced
and multiply; natural fisheries recover to their former abundance and allow
people do less work to catch more fish. This stuff is so easy.
Politically, the process is simple. For
fisheries, give everyone a tradeable legal right to
catch as much fish as their average over the last five years. Open a market
in these tradeable rights. Then, have the
government step in and buy the rights on the market, reducing the overall
number of rights available. Do this until the number of rights is cut by 50%.
(Anyone caught exceeding their allotment loses their rights, and this is
another way to reduce the supply.) Then, after the fishery recovers and it is
possible to harvest much larger quantities of fish without reducing their
overall numbers, the government can sell rights back to the market,
eventually selling more rights than it originally bought. Result: more fish
for everyone and a profit for the government.
Conclusion: I've made many of these
points before, but it's nice to see them all together in one place. We see
that reducing energy use is not particularly difficult and indeed might be
quite a lot of fun. Maybe the pressure of less fossil fuel availability will
help push the process of evolution beyond its present, rather poor state. By
the time petroleum production is down around 50% of present levels -- maybe
around 2040 -- then things might get a bit dicier. However, by that time we
would have 35 years of experience with finding new and less energy-intensive
ways of doing things.
Nathan
Lewis
Nathan Lewis was formerly the chief international
economist of a leading economic forecasting firm. He now works in asset
management. Lewis has written for the Financial Times, the Wall Street
Journal Asia, the Japan Times, Pravda, and other publications. He has
appeared on financial television in the United
States, Japan,
and the Middle East. About the Book: Gold:
The Once and Future Money (Wiley, 2007, ISBN: 978-0-470-04766-8, $27.95) is
available at bookstores nationwide, from all major online booksellers, and
direct from the publisher at www.wileyfinance.com or 800-225-5945. In Canada,
call 800-567-4797.
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