A Failure to Prepare for the What Should Have Been Expected
I occasionally read the Detroit newspapers and based upon some of their articles and commentaries it appears the present oil crisis came as a surprise to the U.S. auto industry. My impression is that many U.S. industries that are heavily dependent on cheap oil were taken by surprise, as well as most Americans.
I occasionally read the Detroit newspapers and based upon some of their articles and commentaries it appears the present oil crisis came as a surprise to the U.S. auto industry. My impression is that many U.S. industries that are heavily dependent on cheap oil were taken by surprise, as well as most Americans.
In the last few decades, the U.S. auto industry has relied heavily on SUVs and light trucks to make their profits. They assumed that cheap oil would last forever. Unfortunately cheap oil is now history and the U.S. auto industry is scrambling to catch up to foreign auto companies, particularly Japanese, in the manufacture of fuel efficient vehicles.
Toyota, a leader in fuel efficient vehicles, has steadily increased its U.S. and global market share in the last decade and in the first 6 months of 2008, it sold more vehicles globally than General Motors. Making fuel efficient vehicles isn't the only factor in Toyota's increased market share, but it's a significant factor.
The U.S. auto industry has a long history of fighting safety, environmental and fuel efficiency measures. In recent years, they have consistently fought measures to improve vehicle fuel efficiency. They did not have the foresight to prepare for the time when oil would no longer be cheap. To their credit, Toyota and Honda came out with hybrids years ago and have worked hard on fuel efficiency technologies beyond conventional hybrids.
An unbiased analysis of oil production data over the years should have made it obvious that there was a coming problem. Unfortunately most people believe their beliefs rather than believing data. I've been warning about a coming oil crisis for 15 years or longer. To make people aware of the problem, I wrote a book which was published in 2005. Below is an excerpt from the final chapter.
There are no dramatic revelations in what I wrote below, but it's worth pointing out that it should have been clear that an oil crisis was coming that would create major problems for the American and world economy. If major industries that rely heavily on cheap oil didn't see a coming problem, it suggests a desire not to see the obvious.
As oil resources become tighter, prices will rise. We are now experiencing early signs of oil resource problems as the average oil price in 2003 was $27.54/barrel and in the first 8 months of 2004 it was $40.56/barrel. Even with elevated oil prices, supplies are still tight. As the price of oil increases, it's reasonable to expect that the impact will be felt most heavily by people in poor and developing countries, people who can't easily afford paying higher prices. Gradually people in those countries will be squeezed out of the market, to the detriment of their increasing expectations.
In wealthy countries, people can absorb higher prices up to a point. In the U.S., there have been complaints in the last few years over higher gasoline and heating fuel prices, but most people can handle the increased costs. In time, price increases will seriously impact the majority of Americans. During the oil crises of the 1970s, shootings occurred in gas lines as tempers flared. Any cutoff of oil supplies or dramatic increase in prices could result in a repeat of such behavior.
Assuming that the price of oil increases significantly in coming years, there will be a concerted effort to produce the world's remaining conventional oil as rapidly as possible. In the early 1980s, the price of oil increased to ~$35/barrel from ~$3/barrel in the early 1970s. Due to the price increase, the number of drilling rigs in the U.S. increased dramatically, but oil production in the lower 48 states barely increased. The same situation is likely to occur globally in coming years and the economic impacts could be severe. Back in the late 1970s and early 1980s, there were undeveloped conventional sources of oil globally that could be brought on-line, ultimately leading to higher production and a decline in the price of oil. There will be few undeveloped sources of conventional oil globally after ~2010.
Economists argue that declining conventional oil production will stimulate the production of unconventional oil resources, and that is true. There is further latitude to increase oil production from the Orinoco Oil Belt and Athabasca Oil Sands, but production from those sources can only be increased slowly relative to conventional oil. Most of the world's oil shale may never prove to be economically or practically viable. As well as the slow production rate increases from unconventional oil resources, the maximum possible production levels and low energy profit ratios are problems.
Alternatives to conventional oil beyond oil sands and oil shale will be tried, but probably with limited success. The advantages of oil for transportation and heavy equipment use are substantial. There are no alternatives on the horizon that come close to the advantages of oil.
Increasing efforts at conservation and energy efficiency will occur as oil supplies tighten. In the U.S., urban sprawl has made much of the population dependent on motor vehicles. Americans will buy more fuel efficient vehicles in the future when oil prices get high enough, but it would not be easy to restructure urban areas so that people wouldn't need to rely on motor vehicles. U.S. motor vehicle manufacturers are dependent upon large fuel inefficient vehicles such as SUV's and light trucks to make profits. Those manufacturers could develop serious financial problems if higher oil prices lead a large part of the population now buying SUV's and light trucks to buy higher efficiency motor vehicles. Manufacturer's problems would be more serious if a significant portion of the population couldn't afford motor vehicles due to high oil prices.
Although the U.S. population is quite wealthy relative to much of the world, it is ill prepared for large oil price increases. The U.S. economy is heavily dependent on cheap oil and many industries depend upon it: construction, agriculture, logging, air transportation, trucking, motor vehicle manufacturing, etc. Those industries could experience serious financial problems if the price of oil rises dramatically. The home building boom in the U.S. is predicated on the belief that cheap oil will last forever. Modern industrial agriculture has been termed a process of converting oil into food. Dramatically higher oil prices would greatly increase food prices over what they are today.
If terrorist attacks target oil pipelines and refineries in the Middle East causing a sudden cut-off of oil supply from that region, it could have a devastating impact upon the world economy. The impact would be even more serious in the future as the world relies more heavily on the Middle East for its oil supply.
Roger Blanchard is Assistant Professor of Chemistry at Lake Superior State University, Sault Ste. Marie, Michigan. Roger is the author of "The Future of Global Oil Production: Facts, Figures, Trends and Projections by Region" published by McFarland & Company (2005).
