After President Bush's SOTU address last night, his Energy Initiative may not be what gets the mainstream excited. After all, every President since Nixon has announced a desire to free America from dependence on foreign oil, and while there have been tiny steps of progress towards this, it has taken so long that few will believe that it will be any different this time.
However, I will come out and say that the next 10 years will, in fact, be different. Here's why.
When oil spiked in 1973 after the Yom Kippur War to a price that would be the equivalent of $90/barrel today, this caused a world-wide recession, including a very deep recession in the US. Most of the US economy was still dependent on manufacturing, with information technology being a miniscule sector.
However, at $67/barrel today, we are only seeing a slight economic slowdown, and even if prices were to rise to $90/barrel today, we still would not dip into recession through that alone, as the US economy has evolved to the extent of being only about one-third as intrinsically bound to oil consumption as 32 years ago.
The US economy produces 2.5 times as much economic output per barrel of oil, as in 1973.
We are already evolving towards making our vulnerability to oil prices an asymptotically dwindling problem. This is accelerating as advances in information technology accelerate. This is why world economic growth is accelerating at ever-increasing speeds.
High oil prices today are not triggering one solution to the problem, but many. At a sustained $70/barrel, numerous alternatives, like ethanol, Canadian tar sands, Colorado oil shale, solar power, etc. become much closer to cost-competitiveness. They were not options in 1973.
In addition, this market force has caused the stagnant innovation we have seen in automobile technology during the era of cheap gasoline to awake from its slumber. The real story behind all the buzz behind hybird vehicles is that the cost delta between a hybrid and traditional vehicle is now under 15% of the vehicle's price, and dropping. In about 10 years, the term 'hybrid' will not exist at all, as that technology will merely be a standard feature in all cars.
Credit goes to President Bush for increasing funding for basic research in energy technology. While this will not deliver benefits during his remaining time in office, it will bring us large dividends by 2015.
Prediction : Despite several scares in the next 2-4 years, by 2015, oil prices will not worry people nearly as much anymore, whatever the price of oil at the time. A much smaller portion of the US economy will be tied to oil prices. This new reality will be visible in many places, such as the typical 2015-model family car yielding 60 MPG (highway) despite having a 240 hp engine.
Gas at $4/gallon is not so bad, if you only need 5 gallons a week.
Turn that frown upside down. :)
Gas efficient cars have been around for 50 years. In 1950's, fiat sold a car that got 40 mpg. I have owned 3 cars that got between 40 to 50 mpg. Americans rarely buy these cars They buy cars in the 20 mpg's.
China and India are stepping up demand for petroleum products. US demand for petroleum products keeps growing.
Higher oil costs feed into high cost of living immediately and lower the disposable money in everyone's budget. This is BAD, not good. Black is not white.
No good commercial alternative exists now. The numerous alternatives mentioned have been heavily government subsidized programs and very small in scale. Promoting basic research produces no immediate price declines.
High oil prices are BAD.
Posted by: jeffolie | February 01, 2006 at 09:34 AM
Higher energy prices are BAD.
The enomy barely grew in the fouth quarter, at a 1.1% annualized rate. Energy prices will be deadly to manufacturing:
"The factory sector is battling higher energy prices but the expansion is still intact, leading some analysts to believe its resilience could give the Federal Reserve another reason to keep raising interest rates, after Tuesday's 14th consecutive rate increase."
"The Institute for Supply Management said its index of manufacturing activity fell to 54.8 in January, from December's 55.6 reading."
"Rising oil prices could squeeze manufacturers' profit margins in the coming months and two regional reports last week showed the sector may be losing steam as a result."
Posted by: jeffolie | February 01, 2006 at 10:04 AM
Short-term shocks perhaps (the article states that there will be a few scares in the next 2-4 years).
But innovation is on a favorable trendline, making this problem vanishingly small by 2015.
Weather a few shocks now, and let the free market get to work. It will take a few years, but we will all be better off.
Posted by: GK | February 01, 2006 at 10:24 AM
10 more years will make no significant difference.
The free market has been at work since the shocks of 1972 - 32 years. Do you have any idea how long it takes to go from the lab and experiment phase to commercial product on a meaningful scale.
Gobal corporations will not be motivated to make the investments required on a scale necessary to make a difference until they are convinced they will make a good return on the investment (ROI). It will have to be gobal corporations because manufacturing shrinks or gets outsourced from here.
If you truly believe that energy problems will be vanishingly small by 2015, then you are stupid.
Posted by: jeffolie | February 01, 2006 at 10:38 AM
Jeffolie,
It appears you don't understand :
1) The free market - $70/barrel makes many alternatives competitive, which did not exist in 1973.
2) The accelerating rate of technological change. It takes shorter and shorter times to from the research lab to the market.
It appears that you are trying too hard to find a reason to be pessimistic.
Posted by: GK | February 01, 2006 at 10:44 AM
"The accelerating rate of technological change. It takes shorter and shorter times to from the research lab to the market."
Look how long the internal combustion engine has NOT significantly changed. Look how nuclear power has NOT become a bigger and biger part of our energy sources. Look how coal gasification has NOT replaced oil products. Look how oil shale and sands have NOT replaced oil products.
"It takes shorter and shorter times to from the research lab to the market." This is NOT TRUE in this industry.
"The free market - $70/barrel makes many alternatives competitive, which did not exist in 1973." You have no idea how long it takes to retool and renovate industries to use a competitive alternative. Electric power plants take decades of regulatory and commercial deals to get built and then last 35 or more years. Hydrogen, electic, gas turbine powered cars never suceeded in the market place and industry refuses to market them until at a minimum the infrastructure is in place to fuel them. Corporations are happy to take all the money governments are willing to spend to make these demonstration plants and vehicles, then they do NOT turn the into commercial industries.
You have not seen the energy failures come and go.
Keep up your optimism, you will probably live longer with that attitude.
Posted by: jeffolie | February 01, 2006 at 11:07 AM
There was very little funding in basic research for energy over the last 30 years. This is only rising now.
PLUS, the time from lab to marketplace is shorting with better information-age infrastructure.
That's why it is different this time, for the first time in 35 years.
Posted by: GK | February 01, 2006 at 11:48 AM
"That's why it is different this time, for the first time in 35 years."
Car manufactures take 3 to 5 years to do a car model make over now in 2006 with "better information-age infrastructure". 3-5 years for modest changes with the current engines, transmissions,brakes, etc. that are mostly off the shelf and have previously met the approval of regulations. I personally have been involved with massive electric power plant building, so I have experience. Even with today's "better information-age infrastructure" it takes more than a decade to design, engineer; and, then the inside political and contracting deals take many years; and then the actual construction takes many years. You have no experience with the politics and deal making or any other part of this process.
You are pleasantly inexperienced and naive.
Posted by: jeffolie | February 01, 2006 at 12:11 PM
So you probably don't agree that an ordinary family car will have a 240 hp engine, but still offer 60 mpg, by 2015.
What do you think the average efficiency vs. hp will be in 2015?
Always remember that in many streams of innovation, the progress is exponential, not linear.
Posted by: GK | February 01, 2006 at 12:18 PM
So you probably don't agree that an ordinary family car will have a 240 hp engine, but still offer 60 mpg, by 2015.
NO For one thing most of the cars on the road now will still be on the road as old, gas guzzlers. You must look at all cars on the road in 10 years, not just the newest and greatest in 10 years. Also, consider that the average family car is most likely to not be a lightweight smallest vehicle. Most families want larger vehicles such as what are catorized as light trucks now labelled SUVs and MiniVans. These are not labelled cars and half the families drive them.
What do you think the average efficiency vs. hp will be in 2015?
I do not know and neither do you.
Always remember that in many streams of innovation, the progress is exponential, not linear.
And you must remmember that innovation and progress do happen at all in some areas for long periods of time. Innovation does not happen across all areas and all places. It can and often is very spotty.
Posted by: jeffolie | February 01, 2006 at 12:42 PM
opps - please insert NOT
progress do NOT happen at all in some areas for long
Posted by: jeffolie | February 01, 2006 at 12:51 PM
I mean 2015 model cars. Not some 10 year old 2005 model still used in 2015.
Read the post further down about why some technological changes take many by surprise. Tiny exponential innovations seem flat for a long time, until the 'knee of the curve' occurs. Then, what was a consistent exponential trend is mistaken to have appeared out of nowhere.
While time will tell, I believe the same will happen in the next 10 years, in this area.
Posted by: GK | February 01, 2006 at 12:51 PM
"I mean 2015 model cars." I do not know, and nobody knows. I do know that by 2015 we will not escape using oil products for our vehicles. If the 2015 does get 60 mpg, all the other cars sold until then will still be the inefficient cars, light trucks, and let us not forget the huge fleet of commercial trucks moving freight.
If by some innovation 2015 came with 60 mpg cars and $4 gas would we be significantly less oil dependant in 2015?
"...some technological changes take many by surprise."
How do you know the future? You don't know which changes will surprise us. You are making an unjustifiable 'leap of faith' that there will be a revolution in the energy and transportation industries.
Posted by: jeffolie | February 01, 2006 at 01:32 PM
Not a leap of faith, but assessing a cocktail of many subtle and seemingly unrelated trends, that may combine to ignite a jump in progress.
Anyway, I thank you for your input, and do come again for another discussion when another article catches your eye.
Posted by: GK | February 01, 2006 at 02:13 PM
Canadian oil sands are not a "future" that will require government subsidies; they are in production now on a normal commercial basis. Check out Suncor, for example.
Note also that higher prices can cause shifts in demand patterns by commercial users fairly quickly. There are many freight shipments, for example, that will go by truck or by rail depending on current transportation prices, which in turn are heavily fuel-price dependent.
Posted by: David Foster | February 02, 2006 at 11:33 AM
David Foster,
So you are actually even more optimistic than the article?
What are you views on jeffloie's pessimistic outlook?
Posted by: GK | February 02, 2006 at 03:10 PM
jeffolie is right.
There are no wonder solutions around the corner, and won't be in 10 or 20 years.
Government spending on research is a waste of money as all it's spending on energy research since at least 1970 has been.
Ethanol is nonesense, pork for agricultural-industrial interests, wasting more energy than it produces.
Leave the free market alone. Natural, unhindred evolution will produce the best solutions.
Boo to Bush caving in to populist nonesense.
Posted by: Jacob | February 02, 2006 at 04:02 PM
Jacob,
But an increase in basic research funding is still the critical component to achieving something 10+ years from now.
The free-market still needs that to get going.
Posted by: GK | February 02, 2006 at 04:12 PM
But an increase in basic research funding is still the critical component to achieving something 10+ years from now.
Posted by: Juno888 | July 09, 2007 at 08:53 PM
Optimist, pessimist, how about realist?
jeffolie reminds me of the buggy manufacturers circa 1900. Yes, never fear, those horseless carriages are just a fad. And in the future we are sure to drown in horse manure.
I seem to remember not so many years ago when oil was $ 8 to 10 a barrel. That was in the ancient past of...1997. So why have car engines improved so little over the last few decades? Because there was no incentive for them to do so.
Okay, so now we have $70+ oil. When did that start? Well the acceleration in oil prices started around...2002? So jeffolie, your pessimism is because car engines haven't radically improved much in response to oil prices over just the ...last five years?
But of course, they have improved. Hybrids are here, offering to double your mileage, and falling in price each year. Within 10 years expect ALL cars to be hybrids. Some will even be plug in hybrids for greater mileage.
I would argue that the Futurist prediction is conservative, if anything.
Posted by: Big D | October 05, 2007 at 03:47 PM
ORLY?
Posted by: uatu | September 28, 2014 at 09:52 AM
It's 2017 now and a Toyota Corolla gives a mileage of 30mpg on city roads and 40 mpg on Highway roads. This is almost exactly the same number as in 2006. So what happened? Have they stopped working on low mileage engines after all that Fracking boom? We are no closer to a 60 mpg family car
Posted by: lalit | October 12, 2017 at 05:14 PM
Hi Lalit,
False. There are many EVs and PHEVs that are much better than 60 mpge as they use electricity. They meet the 240 hp and $35,000 test as well.
The Honda Accord hybrid is 48 mpg, at 212 HP for just $28,000.
Posted by: The Futurist | October 12, 2017 at 05:25 PM