Assumptions abound

If there’s one thing people take away from this blog, I would hope it’s an appreciation for the perverse level of interaction between natural and man-made events, and therefore how easy it is to let simplistic assumptions lead us to horribly incorrect conclusions. I was in this frame of mind last night when I saw the report that NBC did on their nightly news broadcast about the new CAFE standards.

They talked about what the new requirements are, and then said that this will add $1,300 to the cost of every car by 2016 (without revealing the source of that estimate, as best I can remember). They said that the Administration says that the average driver will save about $2,800 on reduced fuel cost over the life of the vehicle, based on a price of $3.50/gallon.

I have no idea exactly what other assumptions went into that calculation, and I won’t waste my time and yours dissecting it. But $3.50/gallon for gasoline? In 2016? Seriously?

We have the IEA howling, yet again, about the coming oil crunch (“Downturn Sets Up Surge in Oil Prices“), and all those nasty predictions about peak oil being here or imminent, from the rank and file of the math and logic enabled (that’s us, dear readers) to Raymond James to Jeff Rubin. Assume for the moment that we haven’t yet peaked, and that Chris Skrebowski’s prediction of a 2011 peak will still prove to be accurate, investment-triggered crunch notwithstanding, then what do you think the price of oil, and therefore the price of gasoline, will do five years post-peak? It’s possible that we’ll be using oil at a low enough level that we’ll still be trundling along on the undulating plateau of world oil production, meaning we won’t yet have encountered true supply constraints because we’ll still be eating into excess capacity.

Right now, it doesn’t look like that will happen; even a moderate worldwide economic recovery in 2010 is likely to re-start the growth in oil demand in China and India, which should swamp out any conservation in other countries. Add to that dynamic the fallout from the current plummeting investment in oil field development, and the scene is set for supply constraints, significantly higher prices, and any talk of $3.50/gallon gasoline in the US in 2016 sounding terribly quaint.

Which begs the question: Are the new CAFE rules a major advancement in the greening of America, or will they prove to be much ado about nothing? I’ve been pondering this since the news broke, and I think I’ve finally come down on the side of much ado about nothing. I think they represent a very hollow victory; yes, sanity has prevailed, and the US government is finally acting like the adults are in charge, which is always a good thing. But what real effect will they have? Right now, it seems none at all, as the price of gasoline will provide more than enough incentive to move consumers to more efficient vehicles well before 2016.

One can make the argument that before consumers can buy those cars the car companies have to design and build them. Higher CAFE standards for 2016 put into place now will indeed provide the regulatory certainty that people are talking about (a non-trivial detail), but I’m not at all convinced that they will accelerate the development and availability of more fuel efficient cars. With the steady drumbeat of announcements from various car companies about PHEVs, EVs, diesels, etc., it seems that even the most reluctant companies have finally Received The Message.

I think the bottom line is that events are largely locked into place for the next few years on the oil front, barring any unforeseen above ground event, like an inconveniently placed/timed hurricane or war, and we’re headed for gratuitously interesting times.

At least that’s how I assume things will work out…