Peak Oil, and the case for rationing

The term Peak Oil refers to the condition where the amount of oil that can be pumped out of the ground worldwide can no longer be increased to meet increasing consumer demand. It does not mean that there is no more oil left in the ground, but means that for technical and socio-political reasons, the amount pumped daily can no longer be increased. The major technical reasons can be summed up as a lack of large new oil discoveries in over 30 years; and the pressure in the producing oil fields has fallen as the oil has been extracted. Reduced pressure means decreased flow rates from the wells.

Presently, the world consumes over 84 million barrels of oil each day with the US using 25% of that amount. Up until 2005, Saudi Arabia had been the swing producer for the world. That means that SA had excess capacity which allowed them to increase production when needed, or throttle it back when demand slumped. By doing that, SA was able to stabilize oil prices somewhat. SA apparently no longer has any spare capacity, which means that the world is now pumping oil as fast as possible. However, most of the major oil fields have a declining output. Saudi Arabia, Kuwait, Mexico, Russia, Europe, and the US fields are now declining in production by up to 20% per year, while demand from the US, China, and India are still increasing. The result of this condition will be gasoline shortages in the very near future unless something is done to lower demand. Those of us who were driving during the oil embargo in the early 70’s remember what happened then, with long lines at the gas pumps, odd-even days to buy gas etc. It wasn’t a pretty sight for sure. But then, we knew it would not last forever. This time, it will.

It seems obvious to me that we as a country should have an emergency plan, and policies in place to deal with the moment in time when demand is 1 gallon greater than available supply. Each of us relies on gasoline to get to work, buy our groceries, get to school, and basically live our lives. In short, the entire American way of life depends on oil; it is our life blood. Think about all the things you do that depend on your ability to travel. Think about all the goods and services you rely on for your very survival.

We have passed the point where we can hope that some new technology will save us. The time span to implement anything is too long to prevent what is coming. Already, the price of gasoline and other liquid fuels has reached the point where it is hurting a lot of people. If nothing is done, the market forces will drive up the cost of fuel to ever higher prices to bring supply and demand into balance. Ethanol and other bio-fuels cannot make up for the decline in oil production. Hydrogen is not an energy source, and therefore cannot make up the missing oil. What we need in the short term is conservation, and we need it now. We need time to come up with workable solutions, and that means decades, not years.

Here are some interesting facts about US oil consumption for the following discussion. Numbers are approximate.
Daily usage of oil: 21 million barrels or 880 million gallons (varies somewhat with seasons)
Daily gasoline usage about 9 million barrels or 380 million gallons
Number of licensed drivers: 200 million
Number of registered vehicles: 245 million (cars, light trucks, SUVs, and motorcycles)
Avg mileage of passenger fleet: 17 mpg
Avg distance driven per day per driver: 32 (based on 380m gals, 200m drivers, 17 mpg)
Median passenger vehicle age: 9 years

Since world oil supply is not likely to be increased, but rather decreased, we as a country desperately need to decrease our consumption of oil, especially gasoline. Decreasing demand by 1 million barrels of oil per day would immediately reduce the price of gasoline worldwide. There are two major ways to immediately decrease demand, neither one of which are pain free.

The first way to decrease gasoline demand is to make it more expensive. This will happen naturally by market forces if no other action is taken. The results of allowing this to happen are not very appealing.

1) The lowest income groups and those on fixed incomes will be hurt the most.
2) Oil prices worldwide will increase, hurting the US politically.
3) More of our wealth will be transferred to foreign countries (OPEC)
4) We become more dependant on foreign oil producing countries.
5) Demand will decrease only enough to bring supply/demand back into balance. IE: Oil production will still be at maximum.
6) Periodic shortages at the pumps will produce civil unrest while market equilibrium is reached.

Of course, another way to make gasoline more expensive is to increase the Federal tax on it. This is the method used in a lot of countries, and is the reason that gasoline is close to $6 a gallon in Britain even though they pay the same price for crude oil as the US. Of course, like most of the tax money we pay, there is no guarantee that the money will be used for our benefit, but the demand reduction would help and would mitigate numbers 3 and 4 above above. Taxation is of course preferred by government but is not necessarily the best answer.

1) The lowest income groups will be still be hurt the most.
2) Oil prices worldwide will not increase as much with less US demand.
3) Less of our wealth will be transferred to OPEC.
4) We become less dependant on foreign producers.
5) Demand will decrease more (or less) according to the amount of extra taxation.
6) Less chance of spot shortages at the pumps.
7) More of our wealth will be transferred to the Federal Government. Whether this is a plus or a minus depends on how wisely the Feds spend the money.

The second major way to decrease demand is to force it lower by rationing. This has been successfully done in the US before, during WWII. If rationing were to be implemented:

1) World crude oil prices would decrease. A million barrel per day reduction cut in demand could have as much effect in lowering the price of oil as the supply destruction of hurricane Katrina had in raising it.
2) There would be a beneficial impact on the lower income and fixed income groups.
3) Less of our wealth would be transferred to OPEC.
4) We would be less dependant on foreign oil.
5) There would be less chance of shortages at the pumps.
6) Demand can be exactly controlled.

There are some other benefits to the rationing approach. Lets assume that the rationing is done on a per driver basis, and that the goal would be to decrease gasoline demand by 1 million barrels per day (about 11%). This target amount would be a ration of 50 gallons per month per driver. Lets also assume that the rationing is done by issuing coupons or some other method where the rations could be transferred easily. By doing this, people who do not consume their rationed amount could sell their coupons to the highest bidder. Not only would everyone enjoy a lower price for gasoline; those who conserve, and don’t use their entire allotment could gain from those who can’t or won’t.

At the same time, people would demand more efficient vehicles, and automakers would need to respond, thereby driving them to do what government CAFE standards haven’t. When a person has to bid for coupons to be able to drive a 7 mpg Lincoln or Hummer, that person is likely to start questioning his own choice in vehicles. A 50 gallon ration per month is slightly more than 10,000 miles per year for an average mpg vehicle, but is 30,000 miles for a Toyota Prius. There would definitely be pressure to retire the lower mpg vehicles in the fleet in favor of higher mpg vehicles, which would tend to increase the overall efficiency allowing a further cut in the ration in a few years. Trading ration coupons would even be an incentive for people to use mass transportation and leave the auto at home where possible.
A possible political benefit of rationing would be that other countries would see us in an entirely different light, where we would no longer be seen as the energy hogs we really have been. We might even be seen as leaders. Perhaps that would help heal our image problems with the rest of the world.

There is also the ecological benefits that using less oil brings, which everyone should be concerned about. We would not need to build any new refineries, pipelines, oil tankers, etc. We would not have to destroy our food production with the folly of ethanol production or other bio-fuels, and we would not have to destroy our water supply turning coal into diesel fuel with the Fischer-Tropsch method, or at least these things could be postponed for quite a while. Most importantly, rationing would instill in the populace the realization that the earth has limits as to what it can provide to us.

This entry was posted in Economy, Energy, Eschaton and tagged , . Bookmark the permalink.

Comments are closed.