, 4/25/11.

One of the more intellectually lazy things that some transit advocates (including me) do is to expect immediate, sharp increases in the price of gasoline.

The “peak oil” argument is well rehearsed with this audience, so I’ll skip over it. It may very well be that argument is correct, immediately relevant, and we will soon see increases. However, there are plausible alternate scenarios where expensive gas is years, or even decades, off.

For one thing, we could have a sustained period of economic ruin, limiting demand. Alternatively, technology has a way of finding more reserves and making known ones more economic to exploit.

More interestingly, policy, both in America and elsewhere, could open up a lot more oil to exploration in the coming years. We could open up more offshore areas to exploration and drilling, which isn’t all that unpopular considering the worst developed-country spill in history is in recent memory. Canada could disregard the horrendous environmental impacts of tar sands exploitation and access another Saudi Arabia of hydrocarbons. Major producers with nationalized oil companies – like Saudi Arabia, Venezuela, and Mexico – could stop using those companies like cash machines and allow them to properly invest in developing their reserves. If the political pressure gets too hot, America might decide to have a gas tax holiday and simply top off the highway fund with more general fund dollars.

Of course, any of these policy decisions would be disastrous for the environment, the situation in most oil-producing countries, and human health.  It’s worthwhile to offer transit as a hedge against the possibility that gas prices rise substantially, and get started now on long-range projects to prepare us for the day that must inevitably come. Still, it’s not doing the movement any favors to assume that the price of gasoline will soon make our argument for us.

48 Replies to “Future Gas Prices”

  1. Martin,

    Glad to see your rational approach to the misguided extrapolations from recent trends that too often occurs. If one looks at the oil futures market which is where those most knowledgable in price trends are placing their bets we see the price of crude oil at $105/barrel in 2019, $6 /barrel BELOW today’s price. This is useful in tempering the “Peak Oil” hysteria.

    1. I think this report from the Department of Energy is enlightening. By their analysis, peak oil won’t happen in the near future, but it almost certainly will happen in the next 50 years or so.

  2. “For one thing, we could have a sustained period of economic ruin, limiting demand.”

    That was certainly a cheery start to my Monday morning ; )

    1. That’s the counterargument to “High oil prices will make the need for transit obvious” I find most convincing. Enhanced oil recovery and new sources will maybe keep us floating on the same level or at most give a small net increase. The main reason is the sharp decline in extisting mainstay fields.

      As the economy keeps stumbling downstairs, it’s very plausible that prices will stay moderate to moderately high with short price peaks interspersed. Demand destruction (maybe even when production starts declining) will keep prices from going too high – see, the market is working! It will thus be much more difficult to make the logical connection from moderate-to-high oil prices to transit. Why should we invest in transit when economically difficult times are not getting better and budgets are ever more constrained? ‘Why is this happening to us?’ people will ask. The economy of course can’t get much better when a large majority of the population is more and more squeezed by high costs in big items such as housing/credit, health care, and finally transportation. There is no short term fix, the economy keeps making a downward spiral, and that makes the investment in long-term fixes more unlikely. No exit.

      1. What he said. In spades. We spent the past thirty years pissing away our capital base in pursuit of Laughable Curve Free Lunches ® and the Next Great Thing in financial engineering. A nation of greedy self-delusionists.

        The Fed and the CBOC are about to take away what little punch is left in the bowl, and where exactly are we going to get the capital for these beautiful pipe dreams?

  3. At $4/gallon, getting into alternatives, be it oil, natural gas (a substitute for oil in home heating and commercial vehicles), or electric becomes much more plausible. So even pass peak oil, the price of oil may not rise all that much higher over the long run (10 years) in real terms. In the short term, it will take a sustained period of high prices, plus technology deployment time, to get a lot of these alternatives on line. This summer, I fully expect another run up in oil to $130 or $150 followed by another plunge in price like last time. Thank Fed policy

      1. You could use biogas. Why does it make sense to let landfills and cow manure to vent to the atmosphere? Also, methane is a more potent GHG than CO2, so diverting it to fuel use is a win in that respect too.

      2. [aw] Absolutely – it should be illegal to vent these gases without using them.

        That said, you’ll never get more than a tiny fraction of our fuel use using landfill gas.

        Check out one of my favorite graphics. Look at the size of that petroleum line – we’d nearly have to double our natural gas consumption and our coal consumption to replace it. Or we could replace it by taking every bit of our solar, wind, geothermal, and biomass energy and multiplying it by 7x. My point is taking more than a small bite out of it with landfill gas would be quite a feat.

        Fuel replacement with other fossil fuels is my largest fear. We need good carbon pricing in place before peak oil hits, and we need to start building up our infrastruture to offer alternatives. If the current spike really is the beginning of peak oil, we are nowhere near prepared.

      3. Burning the methane is better for the environment than simply venting it. Might as well get some use out of the heat if it’s economically feasible. Right now that’s just about a wash. If you could recover some of the heat for facilities it’s a win but most land fills aren’t near anything that can benefit from steam heat. I suppose commercial green houses could be built and equipped with solar cells in the glazing. But really burning the landfill gas is mostly about reducing the GHG levels and, in some cases the methane could actually be an explosion risk.

        More efficient is incineration. Europe does a lot this because they are short on places they can send garbage to bury and forget. This saves the energy of long haul transportation, the mining operation to dig, compact, and bury. The long term monitoring for leakage, methane, and who knows what. I think most of what can’t be recycled is plastic (often contaminated with food waste) and food waste. There is a lot of energy locked up in the plastic that will remain buried essentially forever. It’s not money for nothin’ but it does mean that much less crude needs to be used. It’s also another step in “filtering” the waste stream as metals and some other recyclables get shorted out.

    1. Also everyone will telecommute.

      Robots will take care of what cannot be telecommuted.

      Magic will take care of what cannot roboted.

  4. IMHO, another lazy argument is to believe that a massive modal shift to transit will occur at some near-term gas price level. I believe that prices will continue to rise, but that the threshold for radical behavior changes is much higher than transit advocates suspect. Canada has been paying $4+ for years, and they drive only 10% less than we do. Gas in Vancouver BC yesterday was $1.35C/litre ($5.32USD/gallon). Britain’s motorway culture is quite entrenched even at $8.25/gallon. Truth is we’re a pretty wealthy bunch, and we’re complaining because gas is transitioning from an incidental expense into a substantial one. Once we get used to higher prices people will make more efficient trips, but without new capital-intensive transit options the driving mode share will decline only slightly.

    1. I think a lot of this is also a reflection of the staying power of land use and the implications it has on long term travel behavior. If you live somewhere and can only drive to take care of most of your business, you don’t really have a choice, regardless of oil price. You might cut out some discretionary trips really very few of the trips you make are not necessary for you day to day life. It’s not like people just go for a drive to waste time and money.

      1. I dont think there can be a massive modal shift. Our devlopement patterns over the last 65+ years simply wont reverse themselves overnight. Now, as prices rise i think you will slowly see the exurbs get abandoned in favor of denser suburban and city living, with even the less dense suburban getting marganlized in favor of denser suburban devlopment which will eventually become urban in its own right. I’m talking probally 100-150 years out, definatly not in any of our lifetimes at present. The other factor in this is in the suburbs, i think they will still be heavily P&R dependant. There will be an increased demand, and there is a demand that is simply not being met. The money will have to come from somewhere, and i think as fuel prices rise the issue will become even more apparant that we need more higher capasity all day transit in a lot more areas than we have it now.

      2. Z,

        Humans will probably not be living a technological life in 100 years. The population will fall of a cliff in enormous famines and eco-catastrophies starting in a couple of decades. The truth is we’re a Trust Fund generation living off a 120 MYO treasure trove that ought to be saved for future humans too. It’s going to run out much sooner than our maturity as a species can ever hope to lead to social reform.

        We’re in a cul-de-sac of our own making and our own destruction.

    2. A large percentage of the price of fuel in Canada are taxes. Also, the bulk of the population of Canada lives within 150 miles of the US border. It is not uncommon for people in British Columbia to drive south of the border to seek relief from their high gas prices. And with the sudden rise in the value of the Canadian dollar, they have plenty of buying power to spend in Blaine and Bellingham.

  5. Conceivably we could get a surreal environment where transit agencies all over north america are advocating for oil reserves exploration. One more reason to electrify as much of the transit system as possible through rail at electric buses.

  6. I agree with Martin’s argument. Barring a crisis that disrupts oil shipments from Saudi Arabia, I don’t see gas prices continuing to rise as quickly as they have since the bottom of the recession. Even as demand continues to grow, in the medium term, there is potential for some additional supply.

    Given how sensitive many people are to the price of gas, politicians have every electoral incentive to do what they can to keep oil as cheap as possible, even if this is lousy long-term policy. Many people can’t reduce their oil usage quickly enough to compensate for price shocks, at least without reducing their quality of life, and end up materially worse off. There are changes some percentage of people can and will make in their daily lives that will reduce the rate of growth of oil consumption: some people can drive somewhat less, some can shift transportation modes, some people have the freedom to choose to move to denser areas, others can buy more fuel-efficient vehicles, but for many people these choices will be immediately constrained by their finances, the housing and employment markets, and existing land use and transportation infrastructure.

    At the same time, energy, environmental, land use, and transportation policy should be made with a horizon of decades, not a few months or a couple of years. If in 1973, we had altered the gas tax to grow faster than NGDP, and used the receipts to hedge against future price shocks by funding more transit infrastructure and energy research, while providing individuals and companies gradually greater incentives to seek out ways to reduce oil use, we might not be worrying so much about the price of oil in 2011.

    1. “Many people can’t reduce their oil usage quickly enough to compensate for price shocks, at least without reducing their quality of life, and end up materially worse off.”

      Quality of life decreasing and Materially worse off, aren’t the same thing, nor in our modern era are they even tied to each other. While alot can be said about the cause of the economy as a whole crashing, as individuals many Americans made the mistake of tying ‘materially better off’ with ‘higher quality of life’. When in fact once you reach a certain level, the opposite is usually the fact. Western Europeans are materially worse off than Americans (less sq per person, televisions per capita, automobiles per capita, etc. etc.) however almost every survey finds that they have a much higher quality of life.

      1. My quality of life has vastly improved since moving to Seattle, even though I’ve reduced my living space by 50% and my car and television ownership by 100%.

      2. I could have worded that more clearly. I didn’t intend to imply that material wealth and quality of life are identical, or even necessarily positively correlated. What I had in mind was this:

        When the price of gas increases, assuming their income remains constant, a driver has at least 5 (non-exclusive) choices:

        1) Keep gas consumption constant, spend more on gas.
        2) Reduce gas consumption by shifting some trips to transit, walking, bicycling, etc
        3) Reduce gas consumption by moving to a new home or job that would require less driving.
        4) Reduce gas consumption by buying a more fuel-efficient car
        5) Reduce gas consumption by eliminating some trips

        (1) Leaves the driver materially worse off. They’re spending money on gas that they used to put towards other goods or services, or into savings.

        (2,3,4) are options that are available, in the short-term, to some people, but not everyone.

        Some people live in areas with sufficient density, and transit service or bicycling facilities that shifting away from driving is relatively tractable, but others live in sprawling suburbs or exurbs with sparse, infrequent transit, and streets designed to carry cars at high speeds, driven by drivers unused to bicyclists.

        If you’re renting, then maybe you can move to a denser, more walkable area, with better transit, and more suited for bicycling. Or maybe you can find a new job closer to your home. But some people have houses they aren’t able sell, or jobs they can’t leave, at least in the short-term, because their housing and job markets are awful, or any other number of reasons.

        Likewise, some people are in a financial position to get a newer, more fuel efficient car, but others aren’t.

        With respect to (5), eliminating people should can shift modes, housing, jobs, or cars, for those remaining, there are roughly 2 categories of trips: mandatory and discretionary. Some drivers may be able to shift to telecommuting, or a 4 day work week, but for many, they have to drive to their job 5 days a week. They’ll have to buy groceries, clothes, and other necessary items, where you can maybe save gas by consolidating trips, but again, there’s a limit to how much they reduce their gas consumption on mandatory trips, which means that if you want to reduce your gas consumption, you need to reduce discretionary trips: going out to restaurants, going to movies, visiting friends, and families, going on vacation, etc. To most people, cutting those things reduces their quality of life, both directly, because they’re losing experiences they enjoy, and indirectly, because they’re worrying more about their finances.

        If (2,3,4,5) aren’t (in the short-term) possible, then you’re back at (1) spend more on gas and have less income left for goods, services and experiences, and savings.

        Given enough time, many people can change their home, job, car, or mode of transportation to reduce their gas consumption, and thereby reduce the economic effect of price shocks, both on themselves, and their families, and on the nation as a whole, but for many people, in the short-term, reducing their gas consumption sufficiently to negate the effects of prices shocks is difficult.

        As a matter of policy, I’d like a long-term, predictable rise in the gas tax to create incentives to reduce gas consumption, for environmental reasons, national security, but also to avoid the economic costs associated with oil price shocks.

        At the same time, I’d like to make it easier for people to reduce their oil consumption by increasing and improving transit infrastructure and service, and changing land use so that there are more walkable, bicycle-friendly, transit-accessible neighborhoods.

        Making these policy changes would hopefully, over the course of years and decades, make it easier for people to shift their transportation and neighborhood so when the price of oil goes up, people don’t feel as much of an impact on their finances or quality of life.

    2. If in 1973, we had altered the gas tax to grow faster than NGDP, and used the receipts to hedge against future price shocks by funding more transit infrastructure and energy research, while providing individuals and companies gradually greater incentives to seek out ways to reduce oil use, we might not be worrying so much about the price of oil in 2011.

      You mean like those cheese eating surrender monkeys in Europe?

  7. I find it amusing that many transit advocates seem to cheer for higher gas prices. Fuel-efficient autos are more energy-efficient than most transit, so moving towards more fuel-efficient autos, as the U.S. is doing by law, will reduce oil consumption more than using transit. And the most energy-efficient form of transit is the intercity bus, which is being provided by private companies, which is a very good trend — uses less oil, and doesn’t require tax subsidies.

    The U.S. has gradually been weaning itself off of oil. A few decades ago, about 20% of electricity in the U.S. was generated by burning oil. Now that is almost zero percent.

    A couple of decades ago about 20% of U.S. homes were heated with heating oil. Now, that is down to about 10%, and only 2% of all new homes in the U.S. are being built to be heated with oil.

    So, the price of oil has almost no effect on our production of electricity, or on most people’s heating costs.

    The same thing will happen with transportation, over time. We will use less and less oil per passenger-mile traveled. And miles traveled per person will drop, also, if oil stays high enough for long enough. The first thing that happens is people cut back on vacation travel. Nobody needs to fly to Hawaii for vacation, and if the price of that trip gets high enough, they won’t take it — they will just stay home, and save that money.

    1. “Fuel-efficient autos are more energy-efficient than most transit”

      Possibly the empty busses that Metro drives around the Eastside, yes, but not for the diesels in the city, and not for the trolleys and light rail that I use almost exclusively.

      1. You are wrong about that. Light rail runs around mostly empty also. Light rail is not energy-efficient. If it ran only during peak hours, it might be fairly energy-efficient, but it doesn’t — it runs about 20 hours per day, and most of the time it is mostly empty, and wasting energy.

      2. Light Rail runs on electricity which is (when produced in PNW) a near zero GHG producing energy source. All of the money spent on electricity stays right here in the Pacific Northwest economy (well, and to retire wall street financed bonds and buy big ticket equipment) but the money stays in THIS country instead of going into the pockets of regimes that are hostile to us. The US is spending close to $1 Trillion per year on foreign oil. We have to reign that in.

      3. Plus you have to remember that taking a trip on an existing public transit route that you would have otherwise made in a car reduces your personal GHG emissions and energy use to zero for that trip. Think about it.

      4. If it’s true that Link consumes more kWh/boarding than a bus (and I’d be interested to see the numbers for that) it’s only because the system is fractionally built out — we’ve had this discussion endlessly in the context of $/boarding. Metro is currently running a fleet of diesels at six busses an hour, 12 hours a day, six days a week from downtown to the U-District, in order to provide a painfully slow and overcrowded express service on that corridor; and that doesn’t include all the local service and peak express that’s used for the same purpose. It is not within the bounds of reason to suggest that Link will consume more energy that the service it is replacing on that corridor.

    2. “I find it amusing that many transit advocates seem to cheer for higher gas prices.” But then you go on to site many of the benefits of higher gas prices: driving up efficiency, reducing trips, etc. We’re warming our planet at an alarming rate and we’re lucky that one of the fuels we’re using to do this is running out. If we can cap carbon and stop using coal we’ll have a shot at a reasonably comfortable long-term future.

      Many of us are interested in transit because of how it can help The Environment and our environment, not just because we like trains.

  8. There are so many things that are just now beginning to happen, and will continue to happen over the next few decades, that will make oil less and less important.

    Telecommuting is growing at a very fast pace. This is the way of the future, and, obviously, it greatly reduces oil consumption.

    Electric cars will become more and more practical, and affordable. You can already buy electric cars that are practical for a lot of commuters, and they will only get more and more practical and affordable over time.

    A lot of fleets of trucks, buses, and cars will be converted to run on natural gas, which is easy to do. Right now, natural gas sells for the equivalent of about $1.50/gallon gasoline. And natural gas does not need to be imported — there is a huge supply of it in the U.S. If the price of gasoline stays high enough long enough, even a lot of private autos will be converted to run on natural gas. A little bit of that started back in 2008 when gas hit $4/gallon.

    There will undoubtedly be some sort of bio-fuel developed in the next decade or two which will compete with oil.

    The main thing high oil prices will do is force people to conserve and convert to other energy sources. It will take several years to move transportation in the U.S. away from oil, but it will happen, just like it has happened with electricity production, and home heating.

  9. Where to begin with this…

    It is true that there is “Plenty” of oil in the world. The problem is existing fields especially in the US are already in decline (e.g. have Peaked). The remaining reserves are in harder/more dangerous places to get to e.g. under the deep sea where we know what happens when you get greedy careless operators, in the tar sands and shale deposits of Canada, Venezuela and the Midwest USA which require horrendous environmental degradation to extract not to mention lots of energy.

    The recurring price spike behavior that was mentioned above, is a likely scenario but it should be a strong impetus to get us off of this single commodity as the controlling engine of our economy. The reality is that the price behavior is not affected by the reality that the US consumption is flat or declining thus confirming that demand is being driven by other countries especially oil producing countries who are using oil to drive economic growth and citizen satisfaction. The “BRICK” countries (Brazil, Russia, India, China, Korea) also are a major factor in demand.

    Couple the growing world demand with a finite supply of refined product and a time barrier to increasing that refinery capacity and you have your oil price trending up.

    The threshold for where “alternative” energy sources become competitive is approximately $90/bbl. But when oil pricing goes into cyclical patterns of drops and spikes, economic certainty can’t be established and alternative energy can’t gain a foothold in the market. This is THE case for where the people in the form of its government MUST make policy decisions about the over all well being and strategic direction of this country. A sane energy policy must be formulated and it should take into account real concerns about the environment.

    The policy should in my opinion mandate our transition away from oil over the next 25 years. It should call for a moratorium on any new highway construction and instead channel those funds into mass transit. It also has profound implications for our long term commerce. The strategy of wage arbitrage employed for the past 40 years by shipping low value commodity goods from overseas is going to be wiped out by high oil prices. That is a “bright spot” where “cheering” higher gas prices has a long term benefit for our country in that manufacturing of many goods will return to these shores.

    I happen to think a mix of technological (as well as conservation and land use) solutions will be the answer to energy needs in the future.

    1) As a transitional strategy, utilize Natural Gas in combination with fuel cells to create electricity and heat for buildings and homes. Electricity is generated at the point of consumption utilizing the already existing NG distribution network.

    2) Continue major investments in Wind and Solar and create energy storage solutions such as compressed air storage or hydrogen. Or creating catchement basins.

    3) New developments in Nuclear power look very promising including the “Traveling Wave Reactor” being developed right here in the NW by a Bill Gates incubator company. The potential is massive amounts of cheap energy that actually uses the US’s massive stockpiles of depleted Uranium as fuel.

    And lastly, don’t take my word on any of this, but I suggest you listen to this Canadian economist who has correctly predicted the economic behavior we have seen in the last several years.

    Here’s a short video that gives a general synopsis of his pricing theories.

    1. 1) is bad. NG prices are dropping because fracking is taking over, and fracking is another terrible technology. It requires vast pools of chemicals, can leak and spill, and has even been blamed for causing earthquakes.

      I’ll certainly take natural gas over coal or oil, but I’d rather we use renewables combined with reduced use.

      1. Well, I don’t disagree with you. But there are enough reserves on this continent that it can be used as a reasonable substitute for petroleum until we can build an infrastructure on alternative sources. And my understanding was that they were actually using fracking to inject “surplus” NG into the earth because they can’t sell it fast enough. Am I off base on that?

      2. Fracking uses all sorts of nasty hydraulic agents. I think diesel fuel is one of them. I think you’re getting confused with storage of natural gas in underground repositories. PSE does (or at least used to) use this method of storage down near Centrailia which incidently happens to be where the largest NG powered electrical generating station happens to be.

  10. Not to bang on about this, but I feel like some of this discussion misses the broader point, namely about investment, volatility and uncertainty. If we knew that oil would never go below (say) $100/barrel again, industries would invest heavily in moving away from oil as a matter of self-interest. The problem is that we don’t know that today, so a business that makes that choice will lose badly if the predicted high price doesn’t materialize, so they’re likely to hold of on such investment. That’s partly why the possibility that the US or Canada might open up more off-limits reserves is so damaging: it’s unclear what the elasticity of supply is, so it’s hard to put bet on the lowest likely price of oil.

    1. As I mentioned above, the uncertainty means no competitive products can gain market traction. In my view, this is a case where the market is basically broken in terms of there is no near term stabilization or new supply coming from the higher oil prices. It’s going to take a political choice to intervene in the market by setting an energy policy.

      1. Yeah, you wrote up a much more detailed version of what I meant to say, but we crossed in the ether.

  11. Here’s something the Seattle City Council and King County Council could do, on the cheap, to help a lot more people step away from the gas pump:

    Mandate that all employers, over a certain size, provide subsidized transit passes to all employees. And just to sweeten the pot and not make it a burden on business, allow employers that meet this requirement to get their parking requirements totally waived.

    1. I’d go one more and say “large” (> 2000 employees/contractors) employers should make available a “Connector” style service.

      1. But Charles, there are more efficiencies from running one bus service rather than every large entity running their own bus service exclusively for their own employees.

        For example, why have Metro compete with a King County Employees’ Connector Service?

    2. Perhaps we can do this in a more flexible way that gives employers more choices. Transit passes makes sense for companies that are close to transit. Transit Now contributions make sense for companies on an underserviced route (the 8 and 75 before Transit Now). For remote office parks (Boeing), private shuttle vans make more sense. Importantly, shuttle vans should go to the nearest transit center as well as to employees’ neighborhoods. The Caltrain shuttles in the Bay Area are a good example.

      Another thing I’d like to see is neighborhood improvement districts that provide their own shuttle vans to Link stations or major transfer points. Both businesses and residents would contribute. The small, inexpensive vans could potentially be free to ride. That would be a net benefit to non-residents in the area, but non-residents bring commerce and social contacts, and they’d be providing reciprocal service in their own neighborhood. It should appeal to “local control” types. They could contract to Metro or anybody else as long as they provide a minimum frequency and don’t make ORCA transfers more expensive or less convenient. There may have to be compensation for areas that overwhelmingly “receive” people rather than “send” people, but that can all be worked out.

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