When I read an interview with Arjun N. Murti, the Goldman Sachs Group Oil Analyst who has become famous with his vindicated predictions of oil price spikes, I had mixed feelings.
First, like Murti himself, I was actually delighted by the current trend -- it is about time that oil were properly priced so that it's numerous disadvantages could finally outweigh its artificial price advantage.
In my mind price was the strongest (if most suspect) of only three advantages that oil has ever had compared to other sources of energy. The other two are "high potential energy storage relative to weight and volume" and relatively easy transport as a relatively non-corrosive liquid (though still toxic, explosive and deadly). None of these advantages, in my mind, ever made up for the tremendous negative externalities we've all had to pay for, many of us with our lives.
And now, finally, the price advantage is gone.
Having lived, for the past five years, between the Middle East and Europe, I have seen bookends to the oil price situation I experienced growing up in the United States (the land of "middle priced oil"). And seeing these extremes has shaped my opinion of what different prices of oil can do to a country's true prosperity (measured not by GDP, but by the QOL or other Genuine Progress Indicators).
We have always had heavily subsidized oil in America (when not directly subsidized, it was certainly kept cheaper by direct subsidies to the transportation and highway sectors, to auto manufacturers, to builders and operators of refineries, to builders and operators of tankers, to military careerists who passed the cost of reducing market volatility by "securing supplies" on to the public etc.).
It hasn't done us any good, leading to sprawl, congestion, air pollution, water pollution, poor planning decisions, dependency on foreign oil ("addiction", as Bush, like a latter-day reformed drug pusher or cigarette company insider, recently acknowleged), destruction of habitat and biodiversity... you know the litany.
But living in Egypt (and spending months in Lebanon, Syria, Jordan and Kuwait) you see the effects of cheap oil in extremis.
Cheap oil comes at a high price: total disregard for the health and living conditions of the citizenry, a fouled and toxic environment that is painful to spend one day in let alone years, and complete technological and educational stagnation. And I'm only talking about the problems that directly correlate with cheap oil. In Egypt there is absolutely no incentive, other than an undirected and impotent concern for your children's future health, safety, and comfort (never a good motivator for social change, especially if you are one of the bourgeoisie and can pay to move away from your country's problems to some faux "Beverly Hills" on the desert road -- "it's the economy stupid".) In my study area, among the poorest of the poor, gas and oil that are subsidized to be at least 5 times cheaper than world market prices force people to use the filthiest and least efficient technologies, from ancient smoke-belching car, bus and truck engines, to water-heating stoves that coat the walls (and the lungs of the children) with thick black soot.
On the other side of the bookend scale of energy prices, I can attest to the living conditions in Germany, Austria, France, Italy, England, Spain and Switzerland where the price of gas has traditionally been more than 5 times higher than what we paid in the U.S. (even now, with Americans moaning about gas at 3 to 4 dollars a gallon, my wife's family has been used to paying 8 dollars equivalent per gallon, and can't for the life of them figure out what all the fuss is about).
Here in Europe, the land of truly expensive fossil fuels, the breeze outside my window is fresh and clean, the sky is blue, we can drink the rainwater, and swim in the rivers, and the paint on the houses is resplendent with hues of blue and yellow, orange and lime green. This is no small achievement: I am looking outside the window at the town of Essen -- once the capital of coal mining here in the Ruhr region. And whenever we visit the old coal mines (like the Zeche Zollverein, now a UNESCO world heritage site, and the Bochum coal museum) we get frightful reminders of the social and environmental costs that cheap fossil fuels had on this region. A few decades ago all the houses were grey and the lungs of the citizens black. The town had a pallor over it, both physical and pyschological, that reduced productivity. As my father in law, who worked in the coal industry, tells me "people died all the time, and it was unpleasant to go outside. The rich were getting rich, but the poor were getting killed."
But when the cheap coal ran out and the industry shut down, literal breaths of fresh air and rays of sunshine tranformed the town. Today this part of Northern Westphalia is competing to be one of Europe's renewable energy capitals, containing true solar cities called "solarstadts". One town over, in "Solarstadt Gelsenkirchen", Shell Solar has its massive photovoltaic manufacturing facility. A visit there is quite unlike a normal factory visit or a visit to a coal mine. The building is spotlessly clean, looking like a cathedral of glass with building integrated PV, with a central courtyard filled with vegetation and footpaths and fountains. A church like vestibule next to the garden is filled with hands-on exhibits on the clean manufacturing processes of the solar industry.
Around the towns we see apartment complexes, like that of my wife's aunt, covered with smart looking PV panels, with LED signs facing the street telling the public how much CO2 and other pollution their apartment buildings have offset.
From the top of the old Coal Mine tower at Zeche Zollverein you can see fields of majestic windmills, their gentle giant blades sweeping slowly in grand arcs of triumph - the triumph of truly cheap, clean energy.
But this triumph has been paid for by keeping oil and other dangerous fuels properly priced.
Prior to the wonderful price spike situation that Murti says is going to last, Europe kept its prices high through taxation. American's scoffed at the Europeans, but economists with heads on their shoulders could see the writing on the wall: Society could and should internalize the negative externalities and charge "Pigouvian taxes" on industries producing social and environmental bads, turning them into "Pigouvian subsidies" for industries producing social, environmental and economic goods (that didn't magically make Germany superclean of course; "the optimal Pigouvian tax is equal to the marginal social cost of pollution at the socially optimal quantity of pollution", as Paul Krugman's introductory text on Economics points out; it's just that when fossil fuels are priced at a level where cleaner, more efficient industries have a chance to compete, and when startups are given a boost through Pigouvian subsidies so they can quickly ramp up to capture economies of scale, the positive externalities progressively wipe out the pollution and other negative externalities of the fossil dinosaur industries.)
When I look at the spectrum of oil prices and their effects, having lived and worked in the countries with the cheapest oil (the Middle East, Indonesia, North Africa), in America (the country with the cheapest oil in the industrialized world) and in the countries with the most expensive oil (Europe, Japan) I see a clear trend -- the more expensive your oil is, the better your quality of life.
So what are American's whining about?
I agree with Arjun N. Murti - oil between $150 - $200 a barrel is the best thing that could happen to us (that is, if we have the right leadership who understands real, not voodoo, economics!).
It isn't as though expensive oil means real energy itself is going to become ever more expensive or that the true cost of living is necessarily going to go up.
Keep in mind that OIL IS NOT ENERGY. OIL IS JUST ONE FORM OF ENERGY STORAGE. In fact oil is a form of solar energy storage. And it just so happens that burning it to liberate the potential energy contained within its ancient photosynthetic chemical bonds is a really wasteful, dangerous, filthy and inefficent way to go about getting the sunshine back out .
When we do full cost accounting ("from well to wheels" as they say!) oil's first and second order efficiencies are so dismal that there is no way it can compete with other ways of capturing and storing sunshine. That is why at even a paltry $100 a barrel of oil real energy prices are really more likely to stabilize.
Renewable Energy doesn't necessarily go up in price with time, and can even decline, but it does demand a high initial investment and then requires minor maintanenance and replacement costs. The initial investment in R.E. always made it more expensive that oil and gave it an ROI that was less profitable than investments in other industries. So there was little incentive for people who didn't have vision (remember that once oil was in this position, and it took a Rockefeller to see that oil could become profitable if an infrastructure were built around it. Hence we really need a Rockefeller of Renewables, as David Houle points out). But once oil hit $100 a barrel it lost its price advantage.
Even at about $5/watt of installed solar power, for example ($3.50 uninstalled), without any appreciable economies of scale, the solar industry was merely waiting for oil to to roughly double in price from the previous $60 per barrel to be able to position itself as a worthy competitor.
But the price increase on oil has to remain stable (a lot of the profitable solar industries that showed such promise in the 1970s tanked in the 1980s when Reagan's policies brought the pump price of oil down again; each time entrepreneurs have gotten a leg up in the solar industry a new wave of price crashes made them lose their shirts and bred reluctance to play again).
With oil staying at any price over $100 per barrel, renewable energy is now a safe a stable investment, and can assume its proper role in the energy mix that sustains our economy. Economies of scale are kicking in and new R and D is driving the price of renewable energy down and down and down, following a kind of Moore's law for energy.
Won't that be a hoot -- anticipating that next year your energy bill will be LOWER than this year!
So what's to worry?
My ambivalence comes from the way the market is reacting to the high oil prices and what is happening on two fronts:
1) In powerful countries that are still addicted to oil, like America, companies will use the spikes in price to justify raising the prices of all other commodities, claiming that "everything depends on oil". Paul Krugman, in his lecture in Essen the other night, pointed out that while the productivity of our economy has expanded to heights never before imaginable, almost none of that wealth has trickled down into the pocket books of consumers. Instead it has clotted in the bank accounts of the very very very rich (which is why they are very very very rich). There is enough surplus to keep commodity prices down even as oil prices go up, but the oil companies and their cronies are keeping almost all of it, and not reinvesting in infrastructure.
The result will be (and maybe this is part of "the plan"!) that prices of glass, cement, copper, aluminum, steel, silicon, thermoplastics and other vital components of the safe and easily built renewable energy industry will be too expensive to buy for us to build the necessary renewable energy infrastructure that will keep real energy prices stable or indeed make them go down. And this could mean that the only energy industries that can capture the necessary investment for growth will be the ones already subsidized by huge aid packages (i.e. the deadly and complicated nuclear industry).
With irresponsible nuke pundits like Jesse Ausubel claiming to be "green" and actually arguing against investing in what he disparages as renewable energy's "vast infrastructure, such as concrete steel and access roads" for "environmental reasons", even using platforms like New Scientist to state that "Renewable are not Green" and can 'rape' nature, we are at a very dangerous crossroads!
2) The oil dictator club (Iran, Venezuela, the Saudi's etc.) will continue to take advantage of the high price of oil and gain disproportionate power over world affairs. With no incentive to give their own people access to decentralized power (of any kind, political or technical) and more power on the world stage, they could force us all back into dependency on centralized command and control (which is what addiction to centralized energy sources, like oil, coal and nuclear, creates the conditions for). See Thomas L. Friedman's excellent articles on "green is the new red white and blue" and petro-dictators causing imbalances of power for more on this topic.
These two fears explain why I am ambivalent, and am having mixed feelings about Murti's predictions. I am afraid of how the market, controlled by folks whose minds are caught up in the inertia of the zeitgeist conspiracy of business as usual, is going to react to this otherwise blessing of more expensive oil.
If we want a free market economy with diminishing prices instead of diminishing prospects, we need to move fast and invest money into RE Infrastructure now, while the building blocks of a renewable energy economy are still within reach. If it gets too expensive for entrepreneurs to build the solar cities we need, the entire energy situation could get hijacked by the oligarchs who are sequestering our investment capital for their own purposes (Krugman estimates about 20 families control most of the world's wealth).
On the other hand if we build our solar cities now, tons of downstream benefits will flow.
If we can acheive an economy primarily supplied by renewable energy, I predict we are going to see some interesting things. For one thing, in the future THE PRICE OF OIL WILL DROP AGAIN. And this time it will STAY low. Why?
Simple economics, the law of supply and demand. Once most domestic, civic and industrial energy is supplied by renewables, even if we don't shift our transportation fleets completely off of oil, we will still have plenty. More than enough actually. Enough so that oil will once again seem abundant.
The DOE says that around 28% of our energy goes to the transportation sector, and of that 96% comes from petroleum. Fine,supposing we were to keep it that way. Suppose we were to continue to use oil in our hybrid engines, or in our hydrocarbon fuel cell engines, or our hy-boosted turbo combustion engines. Supposing we were to simply use cleaner variants of our beloved fossil fuels (turn them into hydrogen if you like and sequester the carbon), and more efficient ways of turning the stored energy into kinetics, but nonetheless were to keep powering them with oil.
Why not?
With 72% of our energy demand completely freed from oil dependency, and our car, boat, bus, truck and plane engines engineered to the highest achievable levels of Carnot efficiency, we will then have a greater supply of oil than we have demand for.
By the laws of supply and demand, the price of oil will naturally drop. (It is VERY easy to supply a city with solar and wind power -- using landfill and other garbage-gas powered micro-turbines for peak load backup and to stabilize fluctuations -- since the principal need is for electricity. Electricity is easily supplied by such renewables. I know this because I lived off grid near downtown Los Angeles for 3 years using renewables I installed myself).
When the price of oil reaches an all time low, and when oil is considered "just another fuel" in the energy mix (and one that finally must be considered on its own merits - its costs being finally fully accounted for and weighed against its marginal beneift, having to compete fairly for the first time with gaseous and liquid fuels from many many sources, some biological, some fossil) the oil dictators will collapse in a puddle of their own filthy muck, screaming like the wicked witch of the west "I'm Melting, I'm Melting".
True Democracy can finally expand and spread and realize its promise to the world, this time PROVING that it is a better system. And we'll have nothing but blue skies...
But only if we move fast and act now.
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