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Death of the Oil Industry, Part One

January 20th, 2009
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Oil and gas
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With apologies to Mark Twain, rumors of the death of the oil industry are greatly exaggerated.

Well, some would opine, the US has seen the light, and its new leadership will take us away from the demon Big Oil and down the path of righteousness into the Energy Promised Land. Oil will go the way of the dodo, and in no time at all we all will drive Shriner clown cars fueled by algae-derived ethanol or Energizer Bunny batteries on steroids.

But I have read from the automakers’ marketing Book of Apocalypse about their Four Horsemen of yore—their names be Pinto, Gremlin, Pacer, and Vega—and shudder to see them supplanted by the Volt, Fit, Smart, and Vue (sounds like a line of energy drinks, doesn’t it?).

In the first half of 2008, when the Wizards of Wall Street were proclaiming the inevitability of $200/barrel oil, US purchases of SUVs and trucks plummeted. The public demanded tiny hybrid cars with huge MPGs. Fears of melting ice caps, crazed jihadists seizing oil states, and “peak oil” sparked a hue and cry across the land to forever end our “addiction” to oil.

(Can we please start a 12-step recovery program to wean ourselves of that stupid addiction analogy? Because it comports with reality, how about “lifeblood of the economy” instead? You take away an addict’s drugs, and he gets better. You take oil out of the equation too abruptly, and civilization grinds to a halt. Right after that, ditch the Apollo and Manhattan project analogies too. But I digress.)

Now we have the new messiah of economic stimulus to multiply the loaves and fishes—excuse me,  retool Detroit to multiply the Volts and Fits (now it’s sounding like electroshock therapy) and feed the masses with several million new planet-friendly, alternative energy-related jobs.

A funny thing happened on the way to this Eco-Friendly Auto Nirvana:  Oil and gasoline prices collapsed in the second half. Sales of SUVs and trucks outpaced those of cars in December, the first time that happened since February 2008, according to Edmunds.com.

Meanwhile, December sales of the Prius, which accounts for half the hybrids sold in the US, were expected to slump again after falling 48% in November from the year before.

Sales of hybrids and ultra-fuel-efficient small cars zoomed in the first half of last year because many Americans believed that gasoline would cost $5 per gallon or more for the foreseeable future (OK, I’ll admit a few Hollywood celebrities and some green acolytes also bought them to “save Mother Earth”).  Joe the Plumber and his friends would rather have the quad cab and the soccer mom her minivan, but whaddya gonna do when the monthly gasoline outlay has tripled? Even the added cost of the hybrid seemed to make sense then.

Six months later, gasoline is a buck-and-a-half, the big rigs are the ones moving out of car lots again instead of small cars, and suddenly that extra seven grand for the 40-MPG Planet Savior hybrid doesn’t seem to make so much sense.

That’s a 180-degree turnaround in six months, folks.

I agree with those who say oil and gasoline prices will rebound. When? You tell me when the economic recovery is in full swing again, and add 6-12 months to that date (Assuming geopolitics don’t intervene in the interim, which is not a safe assumption).

But when will oil and gasoline prices reach—and stay at—July 2008 levels again? The last recession-induced oil price collapse came in 1998-99.  Gasoline stayed below $3/gallon for most the of 2000s, not breaking that threshold on an extended basis until 2006.

Of course, in the interest of sustaining incentives to buy less gasoline, the new administration and Congress could push for a carbon tax on gasoline to bring it back up to $4/gallon. Hmmm…our idealistic, noble Congress, wanting to save the planet, approves a new tax to double the cost of gasoline, in the middle of the worst recession since—pick your hyperbole—say, biblical times. That sound you hear is the scuttling of congresspersons to the sideboards when the light switched on.

Today the Big Three automakers, begging for alms, are getting strong-armed by Washington to adopt a new mantra if they want a spot at the trough: Build a 40-MPG minicar fleet, and they will come…

Maybe not so much. Remember California’s ZEV mandate?  In 1990, the California Air Resources Board created new regulations that mandated that 2% of the seven biggest automakers’ sales in the state be emission-free starting in 1998, rising to 10% in 2003. Remember the scramble that ensued by automakers to build hundreds of thousands of zero-emission vehicles in California? Remember the explosion of demand for ZEVs among auto buyers there? If you do, you’re delusional. Never happened. After a number of grudging scale-backs in its hubristic goals, CARB last year settled on a new iteration of its mandate: 7,500 electric and hydrogen vehicles and 60,000 plug-in hybrids must be built in the state between 2012 and 2014—and no specifics beyond that timeframe. No one is happy about that mandate, either, with hydrogen and electric vehicle and hybrid interests squabbling about favoritism, environmentalists squawking that it isn’t enough to save the planet, and automakers meekly pointing out that the technology just isn’t there yet. Pretty grim outlook for a measly 67,500 vehicles. And to put it in perspective, California accounts for 12% of the nation’s 250 million vehicles. Further perspective: the average lifespan of a vehicle is an order of magnitude greater today than it was in the 1970s. And it takes about 14 years for the vehicle fleet to turn over. Do the math.

So, to recap: Gasoline is cheap again. Detroit is on its knees and needs to sell more vehicles quickly. The picture isn’t so rosy for Honda, Toyota, et al., either.  How long will take automakers to retool and build a million new ultralow-mileage vehicles? Two million? And what will those numbers mean in a 250 million-vehicle market? How much of that reduction in consumption caused by greater market share of low-mileage vehicles be offset by the added consumption by a growing population?

Americans love SUVs and big trucks, especially when gasoline is cheap. How many Americans will toss that love aside when the payback on their extra $7,000-10,000 stretches out beyond the life of the vehicle for a gas-sipping microsubcompact that forces them to go to Wal-Mart twice a week instead of once because of space limits? In these grim economic times?

And an afterthought: Think of how many Americans will buy SUVs and trucks when the economy recovers and gasoline is still below $3/gallon. Now think of the booming growth of the middle class in the new economic powerhouse of China. Expectations are that China will double the size of its vehicle fleet several times over the coming decade. Now multiply that number times four. And we’re not even talking about India yet.

Don’t tell me we absolutely need to do it for the planet, for energy independence, for a raft of green jobs. Needing and doing are very much different things. Sure, let’s build a bunch of funny-looking little cars that sip gas or run on switchgrass or plug into a socket. The beloved VW Beetle took America by storm in the 1970s, and US oil consumption in 1980 was about where it was in 1970. So don’t expect our oil appetites to disappear in a few years, or a decade. Think in terms of generations.

In 1980, when achieving energy independence for America was the “moral equivalent of war,” President Jimmy Carter launched the Synfuels Corp., hailed as a Manhattan Project (there we go again) tabbed at $100 billion ($400 billion if done today). Its first goal was yield 500,000 barrels per day of synthetic fuels by 1987. Some thought 1 million b/d was possible in another decade. That would have been about 3-5% of US oil demand.

Meantime, US oil producers, despite the windfall profits tax but buoyed by strong oil prices, jumped America’s oil output by about 500,000 barrels per day around the same time—in 4 years.

Remember how the SFC roared to life and yielded that extra half-million barrels per day to the nation’s oil supply?

Now there goes that delusional thinking again.

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