Sunday, February 2, 2014

I must be psychic or sumpin'.....

Yesterday I was thinking about oil. That's because I've been reading Christopher Steiner's book $20 Per Gallon: How the Inevitable Rise in the Price of Gasoline Will Change Our Lives for the Better. Steiner has a degree in civil engineering and is a staff writer at Forbes (not your normal radical-liberal hothouse). So his message is rather startling.

Steiner is a firm believer in peak oil -- the theory which says that the worldwide demand for oil will continue to rise, production will stagnate (neither rise nor fall), and that discovery of new oil reserves will begin to drop. No one, not even the most optimistic oil company executive, really disputes the peak oil hypothesis. The real issue is whether peak oil already arrived in the early 2000s (causing the massive uptick in oil prices before the recession), or whether peak oil will begin around 2020, 2030, or 2040.

In June 2008, the price of gasline hit $4.10 a gallon in the United States. The public was outraged, Congress was frantic, oil companies were making obscene profits, and the pressure was on to drill in even the most fragile of ecosystems. The recession caused a massive drop in the demand for oil in the U.S.

So gas prices are going to stay that way, right? Right?? Er....right???

No. Despite the recession, gas prices have risen from $1.60 a gallon in the last week of December 2008 to $3.28 today. With economic recovery still struggling, and gas prices already under strong inflationary pressure, watch for gasoline prices to soar over the next year.

$4 gas is on the way again. It's here to stay.

But what effects will these price hikes have?

Steiner's book looks at what products, lifestyle choices, industries, and modes of transportation are the most dependent on petroleum, and which are the most sensitive to oil prices (not necessarily the same thing). Each chapter describes what sort of impact an increase of two additional dollars in the price of gas (and only gas) might have on the United States. Among his predictions:
  • At $8 a gallon, the airline industry will shut down, unable to afford jet fuel.

  • At $10 a gallon, Disney World will close.

  • At $12 a gallon, mass emigration from the suburbs to core cities will occur.

  • At $14 a gallon, Wal-Mart will be forced to shut down because it can't afford to keep its massive fleet of trucks moving. Most suburban malls will close.
The New York Times points out that Steiner doesn't seem able to back up some of his claims. Will gas prices really hit $20 a gallon any time soon? Er...um...

Nonetheless, $8 a gallon gas seems probably, and within 10 years. Shutting down the airline industry would be nearly catastrophic. Steiner, though, doesn't seem to have thought out what sort of impacts this would have on business or tourism-based economies. (Would every company suddenly take to video conferencing?) Nor has he thought through the shifts that would occur as people seek alternative forms of transportation. (Would the demise of international air travel in the next 20 years mean a resurgence of the train? of the ocean liner?)

Once commuters can't afford to drive into the city every day to their jobs, mass emigration from the suburbs into city cores will occur.  This will have immense implications. As the Times points out, rents and other housing costs in already-crowded cities (such as New York) will skyrocket beyond their already-high levels. Would this mean that new cities will arise??? Public transportation is already excellent in and around New York City, so it's not likely that mass numbers of people will crowd into Gotham. But what about Los Angeles, Atlanta, or Dallas -- where the automobile is the primary means of commuting? In such communities, housing costs will skyrocket, and there will be massive investment in public transportation.

But at some point an equilibrium will be reached: The cost of staying put in the 'burbs will equal the cost of over-crowded housing in the city. A new dynamic will take hold, where the "company town" will find new resurgance. Some businesses will move into a suburb, and all its workers will move to be close by. Instead of the traditional "hub and spoke" (a central city, surrounded by highways leading out toward suburban communities), you may find a cluster of cities, all of them close to one another, all of them equally big, but no single city predominant (like the modern relationship between New York City and the large cities near it).

But what about states and localities which rely too heavily on property taxes generated by those once-rich suburbs? Those states and localities are in big, big financial trouble. What about the businesses which once served these once-rich suburbs? They are in huge trouble. State and local governments paid billions to supply these communities with power, water, sewer, and roads. They floated 30-year bonds to pay for them. Those communities may be abandoned, but the bonds still have to be paid. That's a horrifying outcome to think about.

Steiner is no economist. If he were, he'd be much more concerned with the economic issues. Just take the effect of "sticky" prices. Economists have long recognized that the free market doesn't really function very well. Theoretically, if demand drops, prices should drop with it. In reality, prices are "sticky"; that is, prices tend to stay at their previous level, even as demand drops. In fact, demand has to drop a whole heckuva lot before prices begin to fall. Think of the homeowner who needs to sell their house. The house was once worth $1 million. But demand has fallen so much that most homes only sell for $750,000 now. The homeowner balks at that: He's sunk way too much money in renovations, his debt is just too high, he has to cover his existing mortgage as well as fund a new mortgage on his smaller, more affordable home. The homeowner will drop his price to $950,000...then $900,000....then $850,000... hoping against hope that the market will recover, hoping to avoid massive losses, hoping that someone rich might like his house. Maybe that strategy will work, but 99 out of 100 times it fails. Bankruptcy, economists argue, is essentially a sign that "sticky prices" have occurred, and sellers have not adjusted to the psychological reality of having to lower their price to meet demand.

In a world of $10 gas, demand for a lot of products is going to plummet. Yet, sticky prices are going to mean that a lot of companies will go bankrupt rather than adjust. Business bankruptcy means empty stores (no sales taxes, no property taxes), more crime (empty buildings lead to vandalism, become drug dens, etc.), abandoned pensions (the federal government insures those, and taxpyers pay for it), higher unemployment insurance costs, higher welfare costs, higher Medicaid costs, higher costs for education (as schools try to handle kids whose lives are turned upside down by unemployment). How does a society pay for those costs?

No, the shift from "free oil" to "peak oil" is going to be much more costly than Steiner likes to admit. More troublesome. More scary.

Some time ago, I happened to be crossing the Tappan Zee Bridge in New York state. In September 2008, New York state officials announced a plan to replace the existing bridge with a new one. The new bridge would be a double-decker structure. The lower level would have space for commuter trains and high-speed bus lanes, and the upper deck would accommodate auto traffic. Cost: $6.4 billion. The state also planned to spend another $3 billion building high-speed bus lanes from Suffern to Port Chester, and a whopping $6.7 billion to build a 13.5-mile commuter rail line from Suffern (in the west) to the bridge and to connect the Irvington and Tarrytown rail lines to the bridge. (The goal is to get people to stop building homes on the over-crowded eastern side of the Hudson and move to relatively uncrowded areas near Suffern, Sloatsburg, Tuxedo Park, Southfield, Dutch Hollow, Warwick, and the area beyond Harriman and Sterling Forest state parks.) Total cost: $16.1 billion. Total cost with interest (over a 40-year bond levy to pay for all this): $25.5 billion.

When you think about it, rebuilding the Tappan Zee Bridge to provide high-speed bus and commuter rail service makes total sense.

But that upper deck, for all the autos? By 2040, that's going to be a roosting place for gulls. There won't be a single car traveling on it.

New York State, however, abandoned the rail and bus decks on the Tappan Zee for cost reasons.

Smart?  I don't think so.

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