Have you bought your last car?

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Damnthematrix's picture
Damnthematrix
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Have you bought your last car?

You've bought your last car

by André Angelantoni

Actually, you've probably bought the last of a lot of things, but I remember being struck when I first heard James Howard Kunstler say, "Most Americans have bought their last car." So I'm going to use the example of cars to demonstrate why that is and why we won't get off of fossil fuel in time.

The Magic Price Incentive Band

In my public talks, I often hear people say that my predictions for the future are wrong because when the price of oil goes up we will move to something else. The high price will provide a greater incentive to move to alternatives. That's true — but it's not the whole story. The price of oil must meet all of these conditions:

  • it must be high enough to encourage the move to alternatives
  • it must be sustained, that is, not volatile, and
  • it must not get too high.

If the price is too low, obviously there isn't much incentive to move to an alternative except for those who understand the damage our use of oil is causing or who understand it's not going to be abundant much longer.

If there is too much price volatility, people will be unsure it is wise to spend money on alternatives. They keep the equipment they have and wait for more certainty. That's why SUV sales have gone back up now that gas is (temporarily) lower. 

If the price goes too high too quickly, like it did in 2008, economic damage occurs. Businesses shrink, lay off people and struggle to survive. Now they don't have the money to purchase the equipment that would get them off of oil. In many cases they aren't in business at all any more.

The price must stay within the Magic Price Incentive Band:

Magic Price Incentive Band

 

We don't know what the Magic Price Incentive Band for getting off oil is. But we're pretty sure $147 per barrel is way too high. 

A sustained price of $50 for a few years, then $60 for a few more, etc. would probably have been enough of a market signal for people to clamor for alternatives like electric vehicles. 

Although sustained, stable prices are required, the market place cannot guarantee that — and there was no will by the population to pay more for gasoline. Legislation to increase the price of gas often would never even get to a vote. (In some areas, we humans are just lousy at preparing for the future.)

Recessions Follow Oil Price Increases

A recession has followed every significant oil price increase. (Consider my blog entry Estimating the Economic Impacts of Peak Oil.)

Although our current economic malaise is blamed on the credit crisis, people forget what happened to the price of oil.

In 2008 the average price of oil was $99 per barrel (per the Energy Information Administration). The year before it was $72 per barrel. 

Year Oil Price (WTI) Total Spent on Oil 
2007 $72 $2.160 trillion
2008 $99 $2.970 trillion

In just one year, that price difference sucked an additional $810 billion from the world economy.

The same level of increase happened from 2006 to 2007. Simply put, we were going to have a global recession even if the credit crisis hadn't occurred. See the paper by Hamilton "Causes and Consequences of the Oil Shock of 2007-8" for more detail (http://tr.im/jHan).

By the way, did you notice that the price increase is roughly the same as the current stimulus package? Do you think any future stimulus package will have any effect when oil goes back up in price?

High Oil Prices Undermine the Move to Alternatives

We can see this mechanism most easily with the auto industry. Annual car sales went from a high of 16 million in 2007 to just over half that now, 8.8 million, on an annualized basis (April 2009) and the fleet turnover rate went from 15 years to 27 years. At this turnover rate, every vehicle in every showroom could be electric right now and we still wouldn't get them out into the populace in time. As it is, there isn't even a production quantity electric vehicle available for purchase as I write this (the Tesla Roadster doesn't count).

When you consider that long-haul trucking, mining operations and construction machinery all use oil, too, you can start to see why we started too late.

 

peak oil, fleet turnover

 

The End of the Car Age

In other words, the recent high price of oil has destroyed much of the capacity for us to move off of oil. When you pull together these items:

  • the date of peak oil (most likely 2008 since so many oil projects are being canceled)
  • the still-increasing fleet turnover rate
  • a collapsing economy

you can see why Kunstler (and now me too) tell people that most Americans have bought their last car. I don't mean their last "gasoline powered" car, I mean any car.

Unfortunately, the same mechanism is playing out in the renewable energy sector. Investment is down by almost half. 

Enlightened government could have put a floor under oil prices for the previous three decades, thus moving us completely off oil while we had the economy to do it. Now it's too late.

Period of Receding Horizons

We have entered the Period of Receding Horizons. This is when our goal of moving off fossil fuels is getting further away every moment instead of closer. Our economy has actually lost the capacity to move off of fossil fuel without massive contraction first to a fraction of its former size. This will not be a pleasant contraction at all. The millions of people now being laid off will never find jobs at the same wage again. You could call it the Death Spiral and the name, I think, is apt.

Alternatives to the Car

As we get poorer (which is happening very quickly), we are going to become a nation of bicycle and scooter riders. There are several good electric scooters and electric motorcycles on the market, which are the products to buy if you want to avoid lining up for your gas ration.

Of course, a few of us will be driving electric cars by 2012 and by all means buy one if you can get your hands on one. However, there won't be more than a few hundred thousand highway-capable electric cars on the road before we are too poor to buy them. If we're really lucky then it might be a few million.

But a whole electric fleet? Never going to happen. We are entering Energy Descent largely with the fleet we have.

As well as cofounding Post Peak Living, André Angelantoni is a co-founder of Post Carbon Marin, an initiative in Marin county to prepare it for peak oil. Trained as a civil engineer at the University of Toronto and founder of Inspiring Green Leadership, Mr. Angelantoni has supported over 35 businesses in the Bay Area of California to obtain the Green Business Certification.

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SagerXX's picture
SagerXX
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Re: Have you bought your last car?

It's hard enough to get the average person to understand Peak Oil (and its implications).  Getting them to understand a concept like the Price Incentive Band is even more difficult.  Which is a shame.

If I've bought my last car, at least it gets 40+mpg.  Still trying to sell my pickup...

Viva -- Sager

Damnthematrix's picture
Damnthematrix
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The Peak Oil Crisis: Bankruptcy

www.energybulletin.net

Tom Whipple's take on where we're headed in the near future.

Published May 6 2009 by Falls Church News-Press
Archived May 7 2009

The Peak Oil Crisis: Bankruptcy
by Tom Whipple
A few years back peak oil all seemed so simple.

Worldwide oil production was going to stop growing; shortages were going to develop; prices would go higher and higher; demand would drop; prices would fall; demand would increase; and the cycle would repeat itself. Each repetition would send prices higher than the one before as more and more people would be forced out of the oil age.

Last summer, it looked as if this scenario were happening. Oil prices, which had been rising slowly for several years, suddenly shot up to $147 a barrel causing all sorts of economic havoc. Weak airlines dropped like flies! New car sales plummeted! Politicians postured! The Saudis opened the oil tap a bit! Exactly why this price spike was happening became a matter of national debate.

Many thought it was caused by speculators. Others blamed environmentalists for keeping us from all that oil waiting to be drilled just off our beaches. A few even thought that demand for oil was actually getting ahead of supply and noted the surge of Chinese imports in preparation for the Olympics.

We are going to have to let the historians sort out the causes of the great spike, for oil prices soon dropped even faster than they had gone up. Just as oil prices were spiking, economic activity was dropping. A year ago we were debating the possibility of an economic downturn. Now we are looking for the bottom of a major recession or perhaps something worse. It seems that for the
last 30 or 40 years we have been extending ourselves ever increasing amounts of credit. It had to stop somewhere-and it did - just as world oil production was peaking.

The economic waters have become so muddled with bursting bubbles, lost jobs, closing factories and failing banks that it is difficult to see clearly, much less attribute blame for the increasing ills befalling us. Many believe our current problems are from too liberal an extension of credit and can be cured with a firm dose of regulation. Others, wondering why an American mortgage crisis could spread so rapidly to every corner of the globe, are saying high energy prices deserve more of the blame. Again, we shall have to wait for the
historians to sort this out some decades from now.

The crisis du jour, however, is America's automobile industry. With new car sales now approaching only half of what they were a few years ago, the manufacturers are surviving on billions in federal aid. The Obama administration, realizing that the people and the Congress are unlikely to tolerate a permanent multi-billion dollar monthly dole to Detroit, is in the midst of pulling the plug.

Last week Chrysler went into bankruptcy and unless GM can reorganize itself satisfactorily before the end of the month, seems likely to follow Chrysler. While government and industry officials talk optimistically of quick 30 to 60 day bankruptcies that will cleanse the companies of unprofitable factories and liabilities accumulated over the decades, others are not so sure.

Chrysler is asking the judge to let it set up a new company to be called of all things "Chrysler" and to let the new company pick just which assets and liabilities from the old Chrysler that will return it to profitability in a few years. The rest of the factories would be sold off, or more likely scrapped, and much of the old Chrysler's debts and obligations would become close to worthless. The only liabilities that the new company must have would be car warranties without which the new Chrysler would be instant toast.

Needless to say, those secured lenders that are not under the thumb of the U.S. Treasury's TARP program are screaming bloody murder about their billions in secured loans becoming worthless. There have already been death threats, and lenders have asked the bankruptcy judge to scrap the proposed deal, but he seems likely to approve it anyway. It would all make grand theater if there weren't so much at stake.

There are a number of issues that should be clearer in the next few months. Can car firms in bankruptcy continue to sell enough cars to survive? Can the matter be settled quickly enough to keep Chrysler, which is currently in suspension, from simply melting away? Can FIAT, which is also flat broke and is being given the company to run, really return it to profitability in a reasonable amount of time? What are the implications for GM which is only three weeks away from an out of court settlement or bankruptcy?

Chrysler, the rest of the U.S. automobile industry, and in fact much of the U.S. economy could be in a lot of trouble. Should Chrysler's sales fall further in May or its bankruptcy bog down in protracted litigation, the company, the FIAT deal and hundreds of thousands of jobs are likely to disappear, setting off a chain reaction within the industry. The Chrysler melodrama will be replayed on a larger scale at the end of the month when GM faces its own deadline. With the federal government no longer willing to provide billions in monthly subsidies, and car sales too low to support the industry, it seems doubtful that letting FIAT run Chrysler, or cutting model lines and closing a few factories at GM can solve much of anything.

Despite optimism in the equity markets, those taking a hard look at the economy say that housing prices are likely to continue falling, foreclosures likely to continue increasing, and unemployment likely to continue rising for an indefinite period. In this environment the outlook for sufficient new car sales to support the size automobile industry currently envisioned is doubtful. This month's bankruptcies/reorganizations are unlikely to settle the matter.

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obamagasm
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Re: Have you bought your last car?

How do the commodities and futures markets fit into this model? I don't challenge the basic idea, just wonder how much you think trading will even out the "band."

The more volatile the movement in the price and the more cycles of volatility it goes through, the more money will go into longer term options, like in volatile stocks, which reduces the overall volatility.

Is that included in this idea?

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