A Priceless Resource: Human Nature
It’s hard to know which is soaring more these days -- oil prices or the rhetoric about oil prices.
Crude again hit $55 a barrel last week. Gasoline is selling at $2.20 for a gallon of regular. And while some experts debate the outlook for energy, oil patch professionals are unequivocal: Prices aren’t coming down any time soon.
David O’Reilly, chairman of ChevronTexaco Corp., said as much in a recent speech, proclaiming that “relative to demand, oil is no longer in plentiful supply. The time when we could count on cheap oil and even cheaper natural gas is clearly ending.”
No one doubts what has led to such ominous predictions.
China and India have increased their consumption of oil about 7% a year for most of the last decade. That’s almost eight times more than the United States and other industrial nations have upped their usage.
The Asian growth -- which few predicted -- has quickly absorbed an oil surplus that had kept the globe well fueled through the mid-1990s. Indeed, the world now uses 84 million barrels of oil a day, leaving only a 1-million-barrel-a-day surplus at best.
The Energy Department sees no relief in sight, either. In their short-term forecast released last week, department analysts said that Asian usage would boost world oil demand 5% in the next two years.
In contrast with the petroleum supply shocks that roiled the economy during the 1970s, this time “we have had a demand shock,” says oil historian Daniel Yergin, head of Cambridge Energy Research Associates.
But for all that, here’s a bet that few seem willing to make right now: Oil prices will not -- repeat, will not -- climb inexorably in coming years, for one simple reason. It’s called human nature.
Rather than sit idly by and let oil prices erode their standard of living, people will react and make changes in the way they do things. Industrial practices, technology, even our lifestyle -- all of these will inevitably evolve, tempering the surge in petroleum prices.
It has happened before.
In the early 1970s, as war-torn economies in Europe and Japan began to recover, they gobbled up more energy. Lots more energy.
“Few realized that supply- demand ratios had changed,” recalls oil economist Philip K. Verleger Jr., until they were awakened by a 20% increase in the price of oil in 1971. Then, two years later, the embargo by the Organization of the Petroleum Exporting Countries went into effect. Prices quadrupled.
The immediate reaction was confusion. Back then, everybody blamed oil companies and Arab countries. Economies fell prey to inflation.
Today, everybody blames oil companies and Arab countries (along with Russia and Venezuela). Interest rates are again rising, and so are fears of inflation.
Yet the lesson from the past that’s so often missed is this: Adversity breeds benefits.
Thirty years ago, industry invested heavily in energy efficiency and thereby altered a basic equation: Before 1971, a 1% expansion of the economy demanded a comparable increase in energy use. But that ratio soon was cut in half, and today only a one-third-of-1% increase in energy is needed for a full 1% -- or $100 billion -- expansion of U.S. output.
Attitudes changed back then too. People put insulation in their homes, donned sweaters and turned down their thermostats. Small cars came into fashion.
Granted, not all trends last. But fuel efficiency is making a comeback now. Sales of full-size sport utility vehicles are down 26% so far this year, according to J.D. Power & Associates. And hybrid gasoline-electric cars, which can get more than 50 miles to the gallon, are fast becoming more than just highway curiosities.
They’re “flying out the door,” says Fritz Hitchcock, who runs a big car dealership in City of Industry.
And that’s just the beginning. General Motors Corp. last week demonstrated that it could store hydrogen in solid form, theoretically allowing for a future fuel-cell car with a range of 300 miles or more. GM’s chairman, Rick Wagoner, says such a vehicle could become a technological reality by 2010 and be produced in commercial quantities in the decade after that.
The supply side of the equation isn’t static, either.
In the ‘70s, countries and companies focused their investments and found new deposits of oil in Mexico, the North Sea, Indonesia, Africa and Alaska’s North Slope.
Today, oil companies are fattening budgets for exploration and development in Russia, Africa, Central Asia and the deep waters of the Gulf of Mexico. Meanwhile, Congress is moving closer toward allowing oil drilling in Alaska’s Arctic National Wildlife Refuge.
“There’s 6 [billion] to 15 billion barrels in there,” notes Lawrence Goldstein, president of the Petroleum Industry Research Foundation, a New York energy economics firm.
Nor should one overlook more unconventional sources of energy. The 1970s brought early experiments in wind power and ethanol, an alcohol-based fuel derived from corn. Today, oil is being tapped from Canadian tar sands. Wind power has become a favored investment from Denmark to Australia. And ethanol, a hamburger-helper kind of product that stretches supplies of gasoline, is coming into its own.
In California and Oregon, where the need for clean air is greatest and the additive MTBE has been banned, two ethanol plants are nearing the start of construction -- one by Cascade Grain Products Co., the other by Pacific Ethanol. At least three more such facilities are planned.
What will the world do while waiting for these breakthroughs?
It will change. Today’s forecasts that China will consume more and more oil -- simply because it has done so in recent years -- are undoubtedly wide of the mark.
“China needs electrical energy but not necessarily more oil,” explains Joseph Tovey of Tovey & Co., a New York investment bank. As it happens, China has announced plans to develop 30 nuclear power plants in the next decade.
And if history is any guide, China and India and other emerging nations will themselves become more efficient and innovative.
Lee Raymond, chairman of ExxonMobil Corp., points out that developing countries use more than three times the oil that industrial nations do to generate the same amount of energy. Before long, though, ExxonMobil and other companies will apply the same efficiencies in those countries that we have in ours, Raymond says.
The real outlook? High oil prices will undoubtedly cause some pain for a while. However, history is clear: Nothing lasts forever -- or, for that matter, even close to forever.
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James Flanigan can be reached at jim.flanigan@latimes.com.
