I’ve seen weirder news days than today, but not many and not by much.

To recap the highlights:

• GM’s June sales dropped 8.3 percent vs. June 2007, and that was so much better than the expected drop (-19%) as well as the results from Ford (-19%) and Toyota (-12%), that the company’s stock spiked by 15%. Of course, it would be impolite to compare their results with Honda’s (+14%).[1]
• Oil is up again, thanks to yet another gloomy outlook report–this one from the wacky funsters at the IEA (the Medium-Term Oil Market Report), plus growing fears that Israel will attack Iran, which would cause Iran to attempt to close shipping through the most critical oil shipping lane in the world, the Strait of Hormuz.
• The Alliance of Automobile Manufacturers issued a 77-page report saying that the new US CAFE standards are too costly to implement, as they would require a corporate fleet average of 35MPG in 2020. Um, not to put too fine a point on it, but do these people think that by 2020 they’ll be able to give away any vehicle that gets less than 35MPG?
• The Wall Street Journal is saying that the IEA’s Medium-Term Oil Market Report shows they’re joining the peak oil crowd. I haven’t read the report yet, but the summaries I’ve seen strongly suggest this is a reasonable interpretation, at least until the 2013 time frame.[2]

Dizzy yet? If not, hang on–you will be soon enough.

[1] Because some news outlets report sales trends based on “daily sales rate” and some just go by raw monthly totals, the measures of how well each car company did will vary a lot, as June 2008 had three fewer selling days than June 2007.

[2] I qualify this because I believe the IEA is talking about the oil market remaining extremely tight until then, and I’m not sure if that’s the end of their projection or if they’re saying the market will loosen up afterwards.

Jeff Rubin and Behjamin Tal of CIBC World Markets, Inc. have issued a short paper addressing what will happen in the US if we see $200/barrel oil and $7/gallon gasoline by 2010, as their analysis says is possible.

The paper is Getting Off the Road: Adjusting to $7 per Gallon Gas in America [5 page PDF], and it describes massive change (emphasis added, although hardly needed):

We stand at a turning point for US transport. Real gasoline prices have already surpassed the peak levels that followed the second OPEC oil shocks, and even when adjusted for potential fuel efficiency improvements, have increased to the point where they will dramatically change driving behaviour in America.

The some 57 million Americans who own a car and have direct access to public transportation will start to act more and more like Europeans, who have long paid much higher gasoline prices. By 2012, average miles driven will have shrunk by more than 15%. SUV and other light truck sales, which until 2006 accounted for almost 60% of total motor vehicles, will plummet to less than half that level, reversing the last fifteen years growth in market share.

More fundamentally, the freeways are about to get less congested. Not only will the number of vehicle registrations in the United States not grow over the next four years, but by 2012 there should be roughly 10 million fewer vehicles on the road in America than there are today.

For the past half century, America has spent the bulk of its infrastructure money on building highways—only to see that soon, $7 per gallon gasoline prices will lead to fewer and fewer people using them.

Gasoline prices in America have risen from around $1.80 in 2004 to the current $4 per gallon mark. The most recent surge in pump prices has, in inflation-adjusted dollars, already taken pump prices to a buck a gallon above the record prices seen in 1981 (Chart 1). And in percentage terms, the latest increase is almost twice the increase in oil prices that followed on the heels of supply disruptions after the Iranian Revolution.

Yet as daunting as these price increases have been, there is much more to come. Our updated oil price forecast of $200 per barrel oil by 2010 points to Americans paying as much as $7 per gallon for gasoline within the next two years.

Even the temporary 1979-1981 oil shock led to huge changes in driving behaviour. The prospect of a permanent price regime of $200 per barrel oil should trigger changes that will dwarf the adjustment we saw nearly thirty years ago.

See the paper for all the details of fewer cars, escalating transportation costs, people seeking public transportation, etc.

I won’t offer an opinion on the $200 oil/$7 gasoline projection, as talking about such pinpoint numbers (or even ranges) is the equivalent of trying to hit the bull’s eye on a dartboard while on a boat in very rough seas. But the ensuing analysis of what such prices, if they were to happen, would mean seem to be on the mark, with one glaring exception: There’s no discussion of the electrification of personal transportation.

Given that this paper is only talking about the years 2010 to 2012, for the most part, this seems reasonable–EV’s and PHEV’s will account for an infinitesimal share of the vehicles on the road in that time frame. But we’re very likely to see an “adjustment to the adjustment” once several mainstream companies have such cars in their showrooms (around 2009/2010) and production ramps up (likely by 2012). The per-mile cost of fueling an EV or PHEV is so much less than putting gasoline into even a Prius that they will be an economic game-changer all by themselves. Add in the virtually certain government support for residential solar PV panels, and suddenly you have many people in single-family homes (i.e. those with control over their own roof) using solar power from government subsidized hardware to partially offset the cost of recharging their plug-in Prius or Volt or iMiEV or whatever.

If there is an accelerated rate of retirement of gas guzzlers (like my Scion xA, as perceived in 2012 or 2015), combined with the people who have the longest drives flocking to EV’s and PHEV’s, we could see a higher than expected portion of vehicle miles fueled with electrons instead of hydrocarbons. And that, in turn, will reduce the incentive to make sweeping societal level changes.

In other words, we’re headed for not one major wrenching change, but a long, interrelated cascade of them, all triggered by much higher oil prices, that will pull different consumers, businesses, and institutions in different directions at various times.

And for the record, I wouldn’t bet against $7/gallon US gasoline in two years.

As the dual problems of global warming and peak oil become so pressing that even US politicians can no longer ignore them, they, and all Americans, will face a daunting series of public policy questions. In one way or another, all the questions raised by the need to rein in CO2 emissions and accelerate our transition away from oil as a primary energy source share one thing in common: An implicit decision about the “proper” roles of government and free markets in achieving these goals. It’s quickly becoming clear that the first of these painfully difficult decision points is already upon us, namely: What can and should the US government do about the imploding airline sector?

This is the question posed by the report “Oil Prices and the Looming U.S. Aviation
Industry Catastrophe: A Hole In The Transport Grid”[8-page, 94KB PDF], written by the Business Travel Coalition and AirlineForecasts, LLC. The report paints an stark picture, by any measure, as summarized in the press release (emphasis added):

At current oil prices, several large and small U.S. airlines will default on their obligations to creditors beginning at the end of 2008 and early 2009, according to a study issued today by AirlineForecasts, LLC and the Business Travel Coalition. The study shows that $130/barrel oil prices will increase yearly airline costs by $30 billion, while airlines will be able to generate only $4 billion in fare increases and incremental fees. The implication of this alarming trend is that several large and small airlines will ultimately end up in bankruptcy, and of those, some will be forced to liquidate.

…

“If oil prices stay anywhere near $130/barrel, all major legacy airlines will be in default on various debt covenants by the end of 2008 or early 2009,” the study conducted by AirlineForecasts for BTC states. “U.S. commercial aviation is in full blown crisis and heading toward a catastrophe.”

“Airlines are the primary source of inter-city transportation, critical to national and local economic development, the flow of human capital, movement of just-in-time parts for manufacturing, perishable food and other goods critical to our economy,” the study says. “With airlines gravely threatened, so is our economic well-being.”

Findings:

* The top 10 U.S. airlines will spend almost $25 billion in higher fuel costs this year over last year when jet fuel averaged $2.11 per gallon. Fuel hedge benefits could offset $5 to $6 billion of the increased fuel costs.

…

* Industry fares will have to increase at least 20% - across the board and on average - just to cover the dramatic gap-up in fuel costs from 2007. This is not possible given the level of uneconomic seat capacity in the system today.

* The upshot of higher fares is less traffic, and given a reasonable estimate of price elasticity, the industry will eventually be forced to shrink its seat capacity by 15% to 20%. However, there is no guarantee that a transition to a smaller, more expensive (for the consumer) airline industry would be successful and sustainable.

* Airlines have the ability to raise some cash, and moreover, suppliers such as aircraft manufacturers, leasing companies and travel management companies will have an incentive to support large airlines that provide a stream of value. Nevertheless, without a swift reduction in the price of fuel, the industry is headed toward a massive failure that will result in more bankruptcies, including liquidations.

“The U.S. airlines, and those who depend on them, are watching with growing alarm as their cash reserves fall precipitously toward zero as the price of oil, already at unsustainable levels, continuously spikes into uncharted territory,” the study says. “These airlines have never faced a darker future.”

“Brand name legacy carriers that we and American communities from coast to coast have depended upon for decades to provide us with affordable, frequent air service are running out of cash, and therefore, toward a date with bankruptcy and liquidation,” the report warns.

“Airlines can attempt to radically shrink the industry,” the study states. “But given the competitive situation they face, it’s highly unlikely that they will have the ability to reduce capacity to levels that will allow all of them to survive. Instead, absent direct policy intervention, the likelihood is several airlines will fail.”

“Stabilizing this ailing industry must become a national policy priority,” the report states. “Many Members of Congress, federal regulatory officials, state legislators and Governors have yet to fully appreciate the devastating impact an oil-crippled airline industry will wreak on our culture and our national and local economies.”

The report itself says (pages seven and eight):

To fully grasp the gravity of the current situation, it’s useful to reference some historic context. During the airline industry cyclical downturn in the early 1990s, the industry lost a cumulative $12 billion between the fourth quarter of 1990 and the first quarter of 1993. What followed were 6 years of profits
sufficient for airlines to repair damaged balance sheets. (US Airways even repurchased $2 billion of its stock.)

The most recent downturn in 2000 lasted until 2006 and reported net losses were over $44 billion. The industry only had one year of profitability, in 2007, at less than $4 billion, to begin the balance sheet repair work before it was plunged into deep losses again in 2008. Importantly, during this most recent downturn, significant costs were taken out of the industry, and for many airlines, virtually all assets were mortgaged. Most airlines have little flexibility now as they face both a slowing economy and record-setting jet fuel prices.

…

A catastrophic result for U.S. airlines can be averted if policymakers, particularly in the White House and Congress, step up purposefully to address this monumental challenge. There is still time to make a difference. This is important not only for airlines and their passengers, but also for every business that uses oil products.

In the weeks ahead, BTC will work with its allies to bring forward to Congress and the Administration some specific proposals that will help address the near and long-term implications of the aviation fuel crisis.

We urgently need a new energy policy that will give the airlines a fighting chance to survive and recover — and serve all members of the traveling public for many years to come.

Even if you want to apply a fudge factor to these claims–it’s a business sector claiming times are tough and asking for government help, not a condition that historically tends to result in understatement–it’s hard not to agree with the conclusions of this paper. We’ve already seen several airlines increasing fees, retiring less fuel efficient airplanes, laying off workers, and even flying slower. As I’ve pointed out in some detail (e.g. Airlines, Apocalypticons, and the rest of us), the essential problem is that airlines have no where to turn; they’re tied to the cost of jet fuel, with no substitutes in sight.

So, if you wake up tomorrow morning and find out you’re the US president (with far more time in office remaining than George Bush) or the Senate Majority Leader or Speaker of the House, say, what policy fixes for this quickly unfolding mess would you propose?[1] I’m not talking about blue sky, magic wand notion that we can talk about on a blog and then blithely ignore, but real world, honest-to-Orville-and-Wilbur solutions that must (1) pass through the legislative process intact, (2) actually address the problem to an acceptable degree, and (3) do so at an acceptable cost to the taxpayer at a time when the US Treasury is geysering red ink and the US has an astronomically high national debt.

The first step, clearly, is to define what “acceptable” in (2) above means. Do you try to save all airlines over a certain size? Or do you determine a minimal size for the overall airline sector and try to save just enough carriers to meet that level of service (meaning coverage and number of flights), regardless of which companies that means saving or throwing to the wolves of the marketplace? My gut feeling is that the latter is the best approach, since our goal is to save the country from the pain of an airline sector collapse, not save individual companies.

Once we have some sort of metric for “acceptable”, then what do we do? I think the only viable approaches are to subsidize tickets or subsidize fuel costs. Subsidizing tickets would quickly turn into a infinite mess, I suspect, as the sheer volume of tickets and the resulting logistics would outstrip the government’s management skills, especially in the short run. If we were to subsidize fuel, however, it would be orders of magnitude simpler to administrate and adjust the program, and we would be directly addressing the problem: Fuel costs.

So, we decide to subsidize all airlines to a set fuel cost. What’s the magic number, and how much does it cost? The above report has a table (page 5) that provides various oil prices and their effects on the airline industry. This table says oil at $130/barrel equates to jet fuel at $3.80/gallon, and $100 oil translates to jet fuel at $3.10/gallon. For the sake of example, assume we’re aiming for the $100/barrel oil, $3.10/gallon fuel price point, although I’m not sure that the airlines would agree that this is enough help.

The US uses about 1.6 million barrels of jet fuel/day, or 67.2 million gallons/day, according to the current TWIP report, and oil is just a bit over $130/barrel. So we’re talking about the government underwriting 70 cents of ever gallon of jet fuel, at a daily cost of about $47 million, which is $17.1 billion/year. Given that the US is spending about $12 billion every month in Iraq, an endeavor which should end sometime within the life of at least some people reading this, this doesn’t seem too bad.

There are some very serious issues here, obviously:

• How long do you subsidize jet fuel? Until oil prices come down on their own? Lots of luck on that front. Until airlines shrink enough that they can survive without subsidies, i.e. the conversion to a boutique industry that serves only the wealthy? That’s what we’re trying to avoid in the first place, so that’s out of the question unless your goal is merely to slow the collapse of the airlines enough to let the rest of the economy adjust and soften the shock.
• Lower fuel prices means you’ll have more people flying than if you hadn’t created the subsidies, so that means more oil diverted to jet fuel and less to gasoline, diesel fuel, and home heating oil, as well as more CO2 emissions that we have to deal with as part of that other growling monster under our bed.
• How do you pay for the subsidies? Do you generate some other revenue stream–windfall profits tax on oil companies, anyone?–or do you simply pile it on the mountain that is our yearly deficit?
• What do you do if the crazy people on the Internet, like, well, me, are right and we hit peak oil in just a few years and oil becomes much more expensive, pushing up the cost of your subsidies? Do you maintain your commitment to subsidize jet fuel at $X/gallon, or is your commitment to subsidize by Y cents per gallon? Even if you stick to the Y cents/gallon formula, how many other, equally dire demands on the government will materialize once we get into the age of truly expensive oil?

I often say that one of the things I’m thankful for on a daily basis when I wake up is that I’m not the president of the US, and this airline situation is a prime example why that observation is less amusing on some days than others. In light of the range of current and developing issues facing the US, all industrialized countries, and essentially the entire human race, I honestly have no idea what I would do about this.

See also:

• Airlines, Apocalypticons, and the rest of us
• Airline Armageddon
• Aviation articles on the TCOE discussion board

[1] I’m assuming that you agree that this is a very big problem that should be addressed if at all possible. If you think it’s either not a problem for the country to have the airline sector implode, or you think we should just let it “sort itself out” as the free marketeers like to say, then consider the rest of this post as an exercise in fantasy.

This article by Scott McCartney at the WSJ is so spot-on that I’m front-paging it here on the blog, as well as posting a link over on the discussion board.

Flying Stinks — Especially for the Airlines:

You can fly between New York and Los Angeles for as little as $370 round-trip, not including taxes and government fees, on JetBlue, and $20 more on American. And out of that, how much will the airline spend on fuel?

Almost $300 per passenger for JetBlue at current prices, and nearly $500 for American. Just Friday’s $10.75 leap in oil prices would raise the cost to JetBlue Airways Corp. to fly someone from New York to Los Angeles and back by almost $24.

While most consumers know all too well how much it costs to gas up their cars, few know how much they are paying for gas when they fly on an airline. It turns out to be shockingly high at today’s prices — well more than half the cost of the average ticket on many routes.

That doesn’t leave a lot of money to pay for all the other costs of running an airline — labor, airplanes, maintenance, insurance, landing fees, facilities and managers. And it goes a long way toward explaining why air travel has gotten so miserable for consumers, as airlines slash service, raise prices, pile on fees and nickel-and-dime in multiple ways. One tiny measure of the travel morass: JetBlue stopped giving away free headsets to watch its free television on June 1. Headsets now cost $1 (you can bring your own earphones).

Most other changes are far more disruptive to travelers. With airlines planning to ground airplanes and erase flights from schedules beginning in the fall in order to drive ticket prices up, the high fuel cost per passenger may well limit the opportunity of Americans to fly cheap, something millions have enjoyed for many years. Jet travel may return to its early days as something more of a luxury to be consumed sparingly.

…

Oliver Wyman analyzed the average trip on the average plane for U.S. carriers and found a per-passenger fuel cost of $137.60 round-trip, with oil prices at $135 a barrel. The current average round-trip domestic fare in the U.S., factoring in discount airlines and network carriers, is estimated at about $263, not including government taxes and fees. On average for U.S. airlines, more than half of the fare they get buys fuel.

That’s a staggering amount when just four years ago fuel costs sucked up only 10% to 20% of tickets. When fuel was $75 a barrel last year, the average fuel bill was less than 30% of the average ticket price. Today’s higher prices mean airlines have to get about $60 round-trip out of the average passenger over last year’s prices to cover the higher fuel costs — thus the flurry of baggage fees, fare increases and other means of wringing more bucks out of customers.

Please go read it all.

McCartney does a terrific job of bringing hard data into the discussion. It’s not information that the airlines will feel good about (not that any of it is news to them), but for anyone interested in the effects of the end of cheap oil on civilian airplane travel, it’s a Must Read.

And yes, the numbers he presents also support my running contention (e.g. Airlines, Apocalypticons, and the rest of us) that the airline business will be squeezed by current and future oil prices down to a sliver of its current size–the “boutique industry” I keep talking about.

This is also a very good item to send to your friends and relatives who are just catching on that there’s a lot more to the price of oil than what they personally pay at the gas pump.

OK, not really. I’m not going to show you some financing trick or scam or miracle piece of engineering so you can buy or build a hybrid car at no cost. But I will show you how you can effectively get hybrid-like mileage out of your non-hybrid (and even boost the MPG of your shiny new hybrid), with no out of pocket expense, no modification to your car, and you can start the very next time you get behind the steering wheel.

The trick, of course, is hypermiling, the driving technique I’ve mentioned here numerous times in connection with my Scion xA, which gets over 40MPG, at least when I’m driving it. [Glances off-screen with raised eyebrows in the direction of Mrs. Lou.]

In short, hypermiling is changing your driving technique to get to your destination while consuming less fuel. You do this by keeping your car in top shape, accelerating less aggressively, sticking to the speed limit (what a concept!), coasting up to stops (when you can do so without interfering with or annoying other drivers), not idling, and generally being on the lookout for opportunities in your route and surrounding traffic patterns to avoid stops.

I most definitely don’t recommend the more extreme hypermiling techniques, like drafting behind trucks. There are things even I won’t do or recommend to others in the interest of higher MPG.

For more detail, see Wired’s hypermiling guide, and Wired’s feature article on hypermiling.

The average American driver, who drives with all the subtlety of King Kong carrying a blond up a skyscraper, can easily save 20 to 30% on their fuel bill, nearly the same savings usually attributed to switching from a non-hybrid to an equivalent hybrid.

“But, but, but… this isn’t fun!” I can imagine people shouting at their screens.

My fellow Americans: You know what it’s like paying for your current gasoline use at $4/gallon, and I bet you’re not enjoying it much. If you’ve never tried hypermiling, then I’m willing to bet that if you give it a good faith try–three or four days–you’ll find that it’s nowhere as onerous as it sounds and is way more fun than paying for all that extra gasoline. You might even (gasp!) come to like the challenge, as I do. And trust me, this is the opinion of a real speed freak. In years gone by I lived for fast cars and fast motorcycles, and 0-60 times and horsepower ratings were my first measures of almost anything on wheels. If I made this transition I’m sure you dear readers can do it, too.

In case it’s not obvious, let me spell out why doing this is a good idea:

• Even if you’ve already taken some of the steps we hear about all the time in the news, like using more public transportation and combining or eliminating errands, hypermiling is still a good idea, as it applies to every mile you do drive, regardless of the vehicle.
• Because hypermiling requires you to pay more attention to traffic signals and other vehicles, it makes you a safer driver. You’re actually focused on your driving and not your iPod or your iPhone or any other distraction in your iMe world. (My favorite bumper sticker seen recently: A cell phone with the red circle-and-slash symbol over it next to the text “HANG UP AND DRIVE”.)
• Less gasoline used = less gasoline bought = more money in your pocket. (Duh.)
• Less gasoline used = less gasoline burned = less CO2 emitted. Each gallon not burned prevents another 20 pounds of CO2 from going into the atmosphere where we’ll have to live with it for a very long time.
• Less gasoline used = less oil consumed = lower US trade deficit, less reliance on other countries for a critical resource, more oil left in the ground for the post-peak period when we’ll really need it. (The US consumes about 9 million barrels of gasoline every day. You can do your own projection of what the fuel savings would be if a significant portion of US drivers started hypermiling. Think the price of oil and gasoline would drop then?)
• Smarter, gentler driving means less wear on your car, particularly the brakes, which means lower repair bills over time.

I know what will happen, though. Virtually every one of you reading this will ignore my advice, keep driving like you’re coming down the main straightaway at the Indy 500 on the final lap. That means you’ll keep using more gasoline, emitting more CO2, and throwing away more money than is necessary, all because you think it’s too hard or not fun enough or whatever excuse you care to trot out.

So here’s my challenge: I dare you to prove me wrong and adopt these techniques. Show the cynics like me that American drivers are smarter than a sack of rocks, and that we can take steps that help ourselves and others, both now and in the future. Help turn hypermiling into the Next Big Thing, starting today, through your own driving and telling others about it. If you don’t I guarantee that when gasoline hits $5 or $6 or more in just a few years you’ll be hypermiling. Unless, of course, you have the right combination of money and luck to buy one of the very scarce (and very much in demand) EV’s or plug-in hybrids that will come on the market beginning in 2010.

Since shortly after I wrote about the looming disaster in the airline industry (see Airline Armageddon), I’ve been engaged in an interesting discussion via e-mail with a reader that I thought worth writing about publicly.[1]

In essence, the questions raised by Airline Armageddon were: Have I joined the Apocalypticons? If so, why? If not, how can I write about the airline business in such stark terms and not be in that camp?

The first question is the easiest to answer: No, I haven’t joined the Apocalypticons.[2] I still believe, right down to my DNA, that for all the challenges humanity faces–peak oil and global warming being right at the top of the list–we will rise to the occasion. It won’t be fun, it won’t be cheap, and it will entail significant human pain. But it won’t trigger the end of modern industrialized civilization or any other Apocalypticon fantasy.

The second question is now moot, which brings us to question number three and the heart of the matter, not to mention my motivation for writing this blog entry.

Boiled down to its essence, the answer is that the unique circumstances of the airline industry make it a very special case that’s not representative of our overall peak oil dilemma; in other word, their goose is highly likely cooked[3], while that of humanity or modern industrialized civilization isn’t.

To help explain those special circumstance, let me very briefly detour into microeconomics. Two key concepts of micro theory are the price mechanism and substitute goods. The price mechanism is nothing more than a fancy term for how prices act as a signal throughout the economy, letting buyers and sellers make decisions in a way that (presumably) best serves their own interests. The critical balancing act that economies perform in terms of allocating scarce resources is built atop the foundation of the price mechanism working within the context of a reasonably open and free market.

A substitute good, as the name implies, is something you can use in place of something else. Just think of all the brands and models of consumer items, like appliances, audio/video equipment, clothes, etc. we’re used to seeing for sale, many of which offering very little or no significant difference from their competitors.

Combine the price mechanism and substitute goods in a free market and you have the basis for a very powerful system that works surprisingly well on autopilot. For example, you go to a sporting goods store to buy a tennis racquet, and find that the one you had planned on getting has increased in price, so you buy a different model or brand. This increases demand for the one you bought relative to the one you had planned to buy, and helps balance the prices, and therefore the allocation of resources to make them.

As far as airlines go, they have a problem: They were already under stress from ferocious competition, and then fuel costs rose dramatically in the last few years. In the usual abstract economics classroom discussion, Company X finds that resource Y needed to make widgets rises in price, so they stop buying Y and switch to resource W. When enough companies follow X’s lead, the price of W rises and that of Y falls until the amount they contribute to the cost of making a widget is equal, and then everyone goes home happy. The catch is that airlines don’t have a resource W to turn to–there is no short-term substitute for petroleum-based jet fuel.

But wait, you say–isn’t that that sneaky little “short-term” qualifier the loophole in the gloom and doom? There may not be a good substitute for petroleum-based jet fuel now, but once the rise in fuel prices creates a large enough incentive we’ll invent one, right? Isn’t that the classic economics view of the world. Yes, it is, and in this case the real world choose not to play by the rules of that quaint mental model.

Aside from shrinking the entire industry considerably, until it’s just big enough to serve those fliers willing to pay enough for a ticket to cover current (and likely much higher, in the coming years) fuel costs, what are airlines to do? There are efforts to make jet fuel from biological material, essentially the airplane equivalent of ethanol for cars. Similarly, there’s considerable work going on to make jet fuel from coal. Neither of these alternatives seems promising.

To begin with, consider the scale of the problem. The US alone uses 1.6 million barrels of jet fuel every day[4], that’s 67.2 million gallons/day, or 24,528 million gallons/year.

The biofuels option seems highly unlikely to scale to a useful level. A large ethanol plant produces about 100 million gallons per year. Replacing even half of US jet fuel consumption would therefore require 122 biofuel plants of that size. With the high and growing backlash against biofuels made from food, and the likely competition for arable land even if you’re using willow tress or switchgrass or who knows what, it’s ever more difficult to concoct a scenario in which this option works in the real world. Add in water issues, and it gets even nastier: Drought conditions mean we’ll have ever tougher decisions regarding the use of fresh water, and using more of it to grow biomass for airplane fuel and then even more to convert that biomass into usable fuel will be very tough to justify.

Converting coal into jet fuel looks like it’s technically workable, and the US Air Force is involved in developing this technology. The problem is that turning coal into jet fuel creates a lot of CO2, which we all know we can’t just dump into the atmosphere. So we’re stuck either trying to sequester it permanently underground or consuming it in some way, such as feeding it to greenhouse plants or algae farms and ensuring that a very high percentage of it is consumed. (The planes will make more CO2 when they burn the fuel, so this sequestration or consumption step handles only the emissions from the CTL processing.)

Even if you assume that we can cook up a zero-CO2 way to turn coal into jet fuel, something I find highly doubtful, we will still face enormous pressure to minimize air travel, which is currently responsible for over 240 million metric tons of CO2/year in the US[5] and offers virtually zero hope for CO2 capture and sequestration. Plus, there’s the delay factor–how long will it take to build out the infrastructure needed to convert coal into jet fuel (with no CO2 emissions) at a rate that will help the airline industry? And can the airlines possible hold their breath that long?

My conclusion from all this detail: If you assume that cheap oil isn’t returning, then the nature of the airlines’ business and the other pressures arising from global warming unavoidably leads you to one conclusion: The airlines will have to shrink, a lot, to stay alive, which is why I keep referring to that sector having a future as a “boutique business”. This is quite a contrast to the car makers, where electrified vehicles will be a mainstream alternative very soon and much can be done to increase the miles traveled on each gallon of oil even for plain old gasoline and non-plug-in hybrid models. Airlines have neither an escape hatch nor low hanging fruit to save them.[6]

I’m bringing all this up for a simple reason: I think it’s critical that each of us, when we’re making decisions about our own consumption or which public policies and politicians to support, avoids the error of reaching bad conclusions based on a too-broad analysis or, even worse, simply relying on a gut instinct or misapplied rule of thumb. Very often we can only find accurate answers by delving into the details. Yes, that’s a lot more work than simply assuming that “gasoline prices are high because the oil companies are screwing us”, for example. And yes, that exposes us to being lied to with numbers by people with all manner of hidden agendas, most of which don’t share our best interests. But with the peak oil and global warming situations becoming more urgent by the day, it’s never been more important that we do our homework so we can individually and collectively make the right decisions.

[1] For those who like to play blogger parlor games and will be tempted to guess who my correspondent is, don’t bother. The person isn’t even a registered member of the site or the discussion board, let alone one of the regular contributors. Even though I don’t understand the need for it, I’m keeping the person’s identity a secret by request.

[2] For those new to the site, “Apocalypticons” is a term I coined some time back to refer to the doomers who make ridiculous predictions, typically based on absurd, linear projections of current trends (or simply pulled from a particular body orifice which shall remain unnamed), with no (or virtually no) allowance for the dynamic nature of economic and political systems, not to mention humanity in general. (The opposite end of the spectrum is Cornucopians, the equally clueless fools who think we can achieve infinite growth on a finite planet.) A classic example of Apocalypticon thinking is the claim that after the peak in worldwide oil production we won’t be able to maintain wind farms because the necessary trucks and cranes run on petroleum-based fuels. I’ll leave the refutation of that gem as an exercise for the reader.

[3] Throughout this entry I will assume for that the price of oil will not make a major and long-lived retreat.

[4] It’s actually 1.624 million barrels/day in 2006, as reported in the latest Annual Energy Review, Table 5.11.

[5] It’s actually 243.8 million metric tons in 2005, as reported in the latest Annual Energy Review, Table 12.3.

[6] It should go without saying, but let me be painfully clear about this: If I’m wrong in this assessment of the airlines, please tell me. In fact, I would love to be wrong. I would be delighted to have someone point out that there’s a way for airlines to keep flying (and keep all their employees on the job) without continuing to contribute to CO2 emissions and/or making the biofuels debacle far worse. I’ve looked, and I can’t find that solution.

Every once in a while I read a news story that makes me wonder it gets written and published/posted without someone saying, “Wait a second… can this be right? And if it is, shouldn’t we explain how it could possible be true???”

See, I’m old school. I still believe in things like journalistic ethics and writers not just covering the facts accurately, but anticipating which questions a story will raise and then answering them. Any news story that leaves the reader with one or more huge unanswered questions is, in my quaint view of such things, a Bad Story.

Case in point: U.S. Gasoline May Hit $4.20/Gallon by Memorial Day, Study Says, which is dated today (May 20) and begins with the following two paragraphs:

U.S. retail gasoline prices may reach $4.20 a gallon around the Memorial Day holiday as demand rises amid limited supplies, a study said.

Demand typically rises during the summer driving season, which begins with the Memorial Day holiday, on May 26 this year, Kenneth Medlock III, a fellow at Rice University’s Baker Institute for Public Policy, said in a statement today on the study.

Since the average retail price of unleaded gasoline in the US is $3.80/gallon (as the article itself points out), this article seems to be saying that we will see another rise of 40 cents/gallon in just a few days.

Since no one seemed to bother asking this about the article, let me don my Journalism Man tights and cape and leap into action and ask, “Can this be right?”

Well, as a crude measurement, let us look at the historical record. If you go the EIA page with gasoline price data, you can download a spreadsheet with all the numbers from August 1990 until yesterday. (See link in the upper-left corner of that page.)

Doing minimal programming with the data in column E, “U.S. Regular All Formulations Retail Gasoline Prices (Cents per Gallon)”, shows that the week-to-week changes are, as one might expect, normally pretty small. In fact, only once have we seen a movement up or down of more than 40 cents/gallon in a week, and that was 45.9 cents/gallon in the September 5, 2005 data point, when gasoline reached the unheard of price of (brace yourself) $3.06/gallon. That was right after hurricanes cut a swath through the Gulf of Mexico and the New Orleans area, and the next two weeks the price fell by 11.4 and 16.9 cents/gallon. The data shows no one-week movements in the 20-to-40 cent/gallon range, but quite a few between 10 and 20 cents/gallon.

So, it seems that this study is predicting something Really, Really Unusual will happen to make prices leap that much. What could that be? A war? A big announcement of a major production cut by OPEC or one of the major non-OPEC oil exporters?

Careful readers are probably waiting for me to say something about the fuzzy time frame–”around Memorial Day”. Which brings up yet another uncomfortable question: Does the study actually say “around Memorial Day”, or is that a characterization by the reporter? If the study is hyper precise on the price but fuzzy on the time frame, that says something odd about the study; if the study says something specific, like the price of gasoline will average $4.20/gallon for the first week following Memorial Day (just to make up an example), and the reporter knew it, then the reporter has some explainin’ to do.

Note that I’m assuming “U.S. retail gasoline prices may reach $4.20 a gallon” refers to the average US price rising to that level, as I’m sure there are plenty of spots where gasoline has already exceeded that price, which would make the study pretty meaningless.

So, what’s the point of this exercise in nano-nit picking? Simply this: Please be extremely careful when you read articles about energy and environmental issues. Always be on the lookout for assumptions and missing data and bias, which can be horrifically tough to find at times (although I don’t think there’s anything like that at play in the article in question). And most of all, keep your antennae raised for unanswered questions; sometimes they tell you more than the information in the article.

Before anyone jumps on me and asks how I know that gasoline prices won’t leap by 40 cents in about a week, let me spell this out: I’m not saying that they won’t. My crystal ball isn’t nearly good enough for me to put my name on that cut-and-dried a prediction. I’m merely pointing out that that the historical record clearly suggests it would take something pretty remarkable for that sharp a price increase to materialize, so it appears to be a very low probability event. If we had just a bit more information about the study we might be able to make a better assessment of the probability.

And if the reporter didn’t have access to the information (or had it under a press embargo) and had said, “When asked what might trigger gasoline prices to jump so dramatically, the study’s author declined to comment”, then we would know pretty clearly that the article was effectively little more than a free ad for the study, even if that was not the intention.

I exchanged e-mail with a friend yesterday, in which she related a story that I think is all too common right now in the US, with far-reaching ramifications: Driving upside down.

My friend, whom I’ll call R, is extremely knowledgeable about environmental issues, particularly global warming. And I do mean extremely knowledgeable. The problem is that she’s also one of the many people I’ve met who have fallen into orbit around one of the Big, Scary Problems we’re facing, global warming, and tend to dismiss the other, peak oil, as being insignificant by comparison. (Yes, we’re once again about to delve into the “PO > GW?” issue. Don’t worry, it won’t hurt.) I know people who fall on the other side of that coin, as well, but not as many.

About a year ago, R and her husband wanted to replace one of their cars, and she asked me for advice. I gave her my standard line about buying the most fuel efficient vehicle that could possibly meet their needs, and suggested a Honda Civic. For reasons I’m not aware of, they bought a Hyundai Santa Fe, a smallish SUV.

Most of you can guess where this story is going, but let me lay it out for the newbies wandering into the lecture hall for the first time today.

I e-mailed R links to some oil-related stories, and when she replied she told me that she and her husband wanted to trade in the 2007 Santa Fe, so they looked at a Civic Hybrid, which they liked. When they tried to strike a deal they found out that the trade-in value on their 2007 Santa Fe, which cost $23,000 new, was only $13,000. That’s right–a $10,000 drop in roughly one year, or $200/week.

R and her husband decided that $10,000 in depreciation was too high a price to partially escape the clutches of $4 gasoline, and that they would find ways to drive fewer miles and otherwise economize.

The point of this anecdote is not to brag about being right in my advice (for which, read: guess), but to use it as an opening to talk about some aspects of this general phenomenon.

First of all, I have to wonder how many consumers across the US are in a similar situation. They have a vehicle they would love to trade in on something more efficient, but it’s either worth far less than they’re willing to take on a trade, or it’s worth less than they owe on their loan–a situation some of the more colorful people in the cur business refer to as “buried alive, face down”. So, they keep the vehicle, keep driving it while “upside down”, and keep using more gasoline per mile, and likely more in total, than is good for them or the rest of us.

And notice that R’s vehicle is a Santa Fe, hardly one of the block-out-the-sun behemoths like an Expedition or Yukon or Escalade. Selling one of those dinosaur-size dinosaurs-in-waiting would be a nightmare. I’ve seen references in the mainstream press to some dealers not even accepting some SUV’s as trade-ins, and I find it very easy to believe in light of current gasoline prices plus the growing plethora of predictions for $150 to $200 oil in the next few years. If you were a car dealer, how eager would you be to have a very large pile of money tied up in a row of SUV’s under those circumstances?

Also, consider how long those shiny new SUV’s and pickup trucks people are buying today, even as I type this, will be on the road and consuming all that extra gasoline, often to fill no genuine need other than the desire of the owner to tool around in something big. Given the high proportion of those vehicles on US roads right now, that effect puts a serious delay into how quickly we can make the rolling stock part of our infrastructure more efficient.

But we shouldn’t get carried away with this “tyranny of the installed base” effect. The well known Hirsch report famously talks about it taking 20 years to completely replace the vehicles on the road, but that’s a simplistic view of the situation. It’s true that we can’t turn all the vehicles over much quicker than that (barring some hideously expensive and complicated “buy to crush” program where the federal government buys the vehicles and then scraps them), but we don’t have to. The supply of oil isn’t going to hit a brick wall and end, so our adaptations to the end of cheap oil similarly don’t have to happen in an eye blink, either. We can ride the curve of oil depletion, using less oil over time and keeping truly horrific human and economic consequences (at least within the US) at bay.

I can’t help but come back to the basic issue of consumers’ perceptions and which vehicles they buy. Specifically, I’m shocked by the number of people I know who literally don’t think of things like what the price of gasoline will be during the time they own the vehicle they’re about to buy, even when they have someone like me virtually screaming in their ear about higher gasoline prices and peak oil.

How do we get the message across to people that there is more than one dragon chasing us? Yes, global warming is a very serious problem, and yes, because of the time factors involved it’s something we need to get serious about right away, as in 20 years ago. But that doesn’t mean it’s the dragon that will catch us first. I’ve long been convinced that even though global warming has terrifying consequences unless we head it off, peak oil was the threat that would sink its teeth into us first. (In the short run, PO > GW, but several decades out, GW > PO, assuming we don’t do enough about GW now.) Worst of all, the arrival of peak oil’s horrors will make dealing with global warming all the tougher–people stuck upside down in an SUV won’t have a lot of money to pay for things like solar panels or better home insulation or more efficient space heating and cooling systems, etc.

Finally, let me stress that I’m not blaming R and all the other people who bought (and are still buying) such vehicles, even though I desperately wish I could have convinced them otherwise. I do think it’s fair, however, to recognize that while they’re paying a price for those decisions now, we’ll all pay for them in the coming years in the form of more gasoline consumption and more CO2 emissions.

I ran across an interesting calculation in a presentation recently that I think serves as a good example of how careful we have to be about energy and environmental analyses and what conclusions we draw from them.

The number is in the presentation “Peak Oil”, by Paul Wallace, which was made at the event Peak Oil and Future Challenges: A Panel Discussion. (See that link for the Wallace presentation and others, all in PowerPoint format.)

One slide 9, Wallace shows a bar graph depicting the cost per tonne of avoided CO2 for various technologies, and he includes “Hybrids” at $250/tonne. Now, for anyone who follows such discussions, $250/tonne is several times higher than the CO2 prices that are bandied about. Could hybrids really perform that poorly according to this metric?

With one questioning eyebrow raised, I powered up my calculator and browser and ran my own set of numbers.

First, I picked a pair of car models. Since there is no non-hybrid Prius, I avoided it and used the Honda Civic EX and the Civic Hybrid. These cars are very similar in equipment, identical in size, and from the same manufacturer, so they present about as perfect an apples-to-hybrid apples comparison as one could hope for.

The 2008 Civic EX with automatic transmission costs $19,510 and gets a combined 29 MPG. The 2008 Civic Hybrid costs $22,600 and gets a combined 42 MPG.

Assuming the same number of miles driven, 12,000, and the same ownership period for the initial owner, 4 years, even if you assume that the hybrid has no greater resale value (which I’ll come back to in a minute), the cost per tonne of avoided CO2 is conspicuously high–depending on which factors you include.

The Civic uses 413 gallons of gasoline/year, compared to 285 gallons/year for the hybrid variant. That’s a savings of 128 gallons, or 2,560 pounds of CO2 per year, or 10,240 pounds, about 4.6 tonnes, over four years. At an initial price premium of $3,090 for the hybrid, that’s a “raw” savings of $671/tonne of CO2 avoided. Talk about a number that will raise some eyebrows.

But wait–during those four years, the driver is not just using less gasoline, but paying for less gasoline, which reduces that initial cost premium for the hybrid. Assume that gasoline in the US will average $4/gallon[1] between now and 2012, and suddenly the price premium shrinks dramatically–our hypothetical driver will buy 512 fewer gallons of gasoline over four years, for a savings of $2,048, dropping the premium to $1,042, for a price per tonne of CO2 avoided of $226, which is very close to Wallace’s number for a “back of the Internet” calculation.

I mentioned the assumption about trade-in value, which deserves more attention. If you assume that we’re headed for much higher oil and gasoline prices in the next few years, then I think you can assume that the resale value of a Civic EX (or any car of comparable size, efficiency, quality, etc.) will hold up pretty well.[2] The resale value of a Civic Hybrid (or comparable vehicle) should do even better, meaning it will further erode that hybrid price premium. With gasoline prices in the $5/gallon range in 2012[3], someone in 2012 choosing between a used Civic EX and a used Civic Hybrid, each four years old, would be looking at a fuel cost savings of at least $2,560 over the ensuing four years by buying the hybrid, assuming no further increase in the price of gasoline in the 2012-2016 time frame. If we allocate that $2,560 roughly equally between the resale value the initial owner of the hybrid gets at trade-in time and what the second owner pays for the car in 2012, then our first owner is actually receiving a premium for avoiding CO2, to the tune of about $51/tonne. (($1,042 - $1,280) / 4.6 = -$51)

My point here isn’t to disagree with Wallace’s number, but simply to point out via this example that we’re living in a time when shifting energy and environmental costs are putting major portions of the world and national economies in motion, in ways none of us has seen before. Therefore, the more real world factors we can (with reasonable accuracy) include in our numbers, not only the more accurate our conclusions, but the more surprising results we can find.

[1] Yes, I know, predicting the price of gasoline over a period of years is fraught with peril. But for the sake of calculation I need to plug in a number. Right now, I think $4/gallon will turn out to be slightly on the low side for the period May 2008 to May 2012. My gut instinct is that it will be more like $4.50 to $4.75, but I let it go at $4 to avoid the distraction of people saying I was cooking the books.

[2] The price of such cars probably won’t hold up much longer than 2012, though, as they’ll pretty quickly be seen as gas guzzlers compared to EV’s and PHEV’s. I expect this fact to be completely ignored by virtually all consumers, similar to the way many people buying SUV’s today probably aren’t thinking about where gasoline is headed in the next three or four years.

[3] Yes, another wild-eyed assumption. Again, I think this could be slightly low if we’re headed for a world oil production peak in 2011 or 2012.

This post is a market test, of sorts. I’ve long considered doing semi-regular posts focused on this kind of analysis. The goal of such a feature on the site would be to help answer specific questions about the economic decisions we all have to make, as well as help the energy geek wannabes out there gain some skill and confidence in their own calculator work.

So, tell me what you think, suggest new topics or a new approach for future “By the numbers” installments, or tell me it’s a dumb idea and where I can stick my calculator.

I have a dilemma regarding what to do about your dilemma. The people I’m talking about are my readers, friends, and relatives who are popping up in my e-mail, asking me questions about whether they should buy a new car, when they should buy it, what they should get, etc.

The dilemma is not that I’m hesitant to opine about such things (Hello! I run a blog about energy and environmental issues. Have we met?), it’s that I can’t provide a meaningful answer to most of these queries without going pretty far out on a limb in making predictions about the price of gasoline, what car companies will be selling in a couple of years, what the US government is likely to do in terms of creating an energy policy (something which we really don’t have currently, unless you consider “What the big, old energy companies want, the big, old energy companies get” to be an energy policy), and how other consumers will react. To put it bluntly, I have to either refrain from telling people what I really think or make a big, steaming pile of assumptions and then draw conclusions from them. I don’t like either option, but I’ve decided to go with the latter alternative.

So, here goes nothin’….

First, the obligatory caveat: If you change your car buying plans based on what I write here, you get 100% of the credit if things go well and 100% of the blame if things go badly. I’m a geek with a blog, and if you allocate real money, whether it’s buying a car or investing, based on what I say here, then you’re taking a ridiculously and unjustifiably large leap of faith.

For a long time, I’ve said on this site that when you buy or lease a new vehicle you should get the model within your price range that just barely meets your requirements and delivers the highest fuel efficiency. Yes, people will also take into account brand and even model loyalty, which models come in a really cool color, cup holders, etc., but I’m focused on the e+e issues; those other factors are personal and it’s up to you to decide to what extent they play a part in your final decision.

Based on the e-mail I’m getting it’s clear that that general advice isn’t nearly specific enough. People are asking me about whether they should buy a cheap, non-hybrid or a more expensive hybrid. They want to know whether they should buy a current generation hybrid or wait for one with lithium batteries, and whether they should convert both vehicles in their household to more efficient models or go with one really efficient model and a larger vehicle (like a minivan). Ponder those questions for a moment or two, and you’ll see how all those assumptions I mentioned above come into play.

Hybrid or non-hybrid?

This is the decision I faced in 2006 when I no longer needed my minivan and wanted to buy something that would go a lot farther on each gallon of fossil fuel. I opted for a my often-mentioned Scion xA mostly because I drive so few miles, only about 3,500/year. Unless you make a wildly high assumption about the price of gasoline, I had no chance of earning back the extra cost of a hybrid during the time I would own the car. Also, I plan to replace this car with an EV around 2012, and since I didn’t know what the car market would look like in 6 years (from when I bought the xA), I didn’t want to run the risk of getting hammered by catastrophic depreciation. So, a $14k, four-door mini-wagon from a major manufacturer was a pretty solid pick for me at that time, and I’ve been very happy with it in just under two years of ownership.

In general, the basic economic decision comes down to payback. Figure out how many gallons of gasoline you’ll buy for each vehicle you’re considering, for each year you’ll own it. Multiply those gallons by the assumed cost of gasoline for each year, and total these yearly gasoline expenditures for each car. Low number wins the fuel cost race.

What about trade-in value? And leases?

This is where things get really nasty, on two fronts: Trade-in value today vs. that of the car you’re buying now after however many years you plan to keep it.

If you’re looking to buy a much more efficient car now, then the odds are very high that what you’re driving now doesn’t get 50MPG. With gasoline prices yet to hit their peak in the US for this year, and the resale value on many less efficient vehicles already plummeting, you could get a lot less for your trade-in than you were hoping. If it’s a relatively new SUV in excellent condition, it could be downright ugly.

Conversely (and perversely), the vehicles you’ll get the best deal on for a trade-in are the ones that you’d be far less inclined to want to trade in right now. This is what happens when market conditions change suddenly and “everyone” wants to do the same thing at the same time.

Looking ahead four to six years, you’re deep into the “here be dragons” part of your planning exercise. Perceptions of vehicle efficiency will change very dramatically in the next few years as we see more (and more efficient) hybrids, plug-in hybrids, downsized engines, more diesels, and even electric vehicles hit the US market, all likely by 2011. My xA will look like a gas guzzler when I trade it in for that EV in 2012, and I suspect many of the shiny new hybrids people are snapping up like candy today will have a similar, if not quite as pronounced, perception issue. Fifty MPG? And it doesn’t even have an option to plug in???

This argues strongly for buying a “transition car”, something that will do the job and minimize your depreciation risk while the car business radically reshapes itself in a few years. Which brings me to another long-standing recommendation: The less efficient the vehicle you need, the more seriously you should consider leasing instead of buying. Leases are calculated based on the assumed depreciation of the vehicle, and those assumptions are likely to be laughably wrong for many vehicles, and the most wrong for less efficient vehicles. In crass terms, by leasing a lower-MPG vehicle for three or four years instead of buying it, you insulate yourself from the chance that said vehicle will go off a depreciation cliff during that time, and all the risk remains with the actual owner of the vehicle, i.e. not you.

I haven’t checked lease terms on vehicles in a long time, so it’s possible they’ve already started to adjust upwards to take this phenomenon into account. And if they haven’t, I think it’s a very safe bet that they will, and soon.

Buy now or wait for the Next Big Thing?

People are asking me if they should wait for a plug-in or buy a current generation hybrid. And one did ask about whether it’s worth waiting for lithium batteries, as mentioned above.

By this point in the conversation you can guess that the “should I wait for a plug-in” question is riddled with assumptions. You have to make your own assessment of the price of gasoline in the next few years, the burden of driving your current vehicle while waiting for a plug-in, how soon plug-ins will arrive, what kind of effective mileage you’ll get from them (taking into account how diligent you’ll be in plugging one in and the relationship between the battery-only range and your normal driving schedule), and trade-in value issues, now, in a few years, as well as when you trade-in your to-be-purchased hybrid, plug-in or otherwise. Good thing this stuff is simple, right?

My hunch, and that’s all that it is, is that unless you’ll get hammered on your current trade-in, you should buy a hybrid (or really efficient non-hybrid) now. It seems pretty clear that in the coming years oil and gasoline prices will find more than enough upward pressure from rising demand in China, India, and some oil exporting countries to continue their general upward march, and that nothing will counteract that trend. As a result, your pain at the pump will only increase with your current vehicle, and that could make for a very long and unpleasant two to four years while you wait for a suitable plug-in or EV to arrive. And if plug-ins arrive at a much higher price and/or with lower battery-only range than you assumed, you could find that your expensive wait wasn’t worth it, after all.

X Factors

I know this is a lot to think about, but I think it’s also valuable to mention the X Factors in our immediate energy future. I define an X Factor as anything that could have a large influence on your decision and is also prone to large, difficult-to-assess changes.

The price of oil. While I think there’s almost no chance of a significant, sustained drop in the price of oil, we could be set for a huge increase. Pick your scenario–a new war in the Persian Gulf region, a terrorist attack on a critical piece of oil infrastructure (like the Strait of Hormuz), a hurricane ripping through offshore oil platforms in the Gulf of Mexico, a public policy blunder on par with the US ethanol debacle, or the widespread recognition that the crazy people who think peak oil is real and imminent are right–and it’s not hard to imagine oil reaching prices that make $125/barrel look like a bargain.

Batteries. I have no idea what kind of price/performance the batteries hybrids and EV’s depend on will deliver in a few years. (And I include ultracapacitors in this group, even though they rely on a fundamentally different technology.) We could see a stunning breakthrough that drops their price to the point where a 100-mile battery range plug-in costs $25k, or we could see negligible improvement, which would greatly slow the electrification of personal transportation.

Public policy. Anyone who pays even minimal attention to e+e issues can concoct a whole range of outcomes here, from “enlightened and genuinely useful” to “so bad I wish we had Bush back”. We just don’t know. Personally, I think a revenue neutral (or even positive) feebate program on cars would be a huge step in the right direction, but I’m not holding my breath. Another unknown is how global warming related policies will interact with transportation issues.

Electricity prices. Electricity rates are going up almost everywhere in the US, largely thanks to the rising cost of fossil fuels. I expect prices to keep rising thanks to fuel costs, downward pressure on CO2 emissions pushing us to alternatives, the skyrocketing cost to build nuclear plants, impacts from drought conditions limiting thermoelectric generation, and increased demand from people plugging in cars. But how much will they rise in a few years? Ten percent? Twenty? More? Or will the combination of solar thermal plants, conservation, consumer-sited solar PV, geothermal, etc. hold the line on future cost increases? My very rough guess is we’ll see prices rise quite a bit for the next several years and then flatten out for a while. This will slightly reduce the attractiveness of electrified cars, but it won’t come near making them a bad option, thanks to the rising price of gasoline in the same time frame.

Your personal commitment to conservation. Face it, a lot of people talk the talk but keep driving their SUV’s at extralegal speeds on unnecessary trips. In all of this evaluation and discussion, you can’t overlook your own lifestyle choices. Are you willing to use even a mild form of hypermiling (as I do) to boost your car’s efficiency by 10 to 20%? Will you reduce your miles driven, keep your car in the best running condition possible, and always use the most efficient vehicle available in a multi-car house? Will you really plug in your plug-in as often as you should? In extreme cases, will you move closer to work?

Summary

I’ve been predicting for a long time that we would encounter a period of confusion in the car market as many more technologies compete, forcing buyers to make a lot of tough decisions. What I didn’t see was gasoline prices rising as quickly as they have recently, making that situation all the more urgent for pump-pummeled consumers.

Above all else, make a personal commitment to conservation no matter what forms of transportation you use, and take a broad, forward-looking view of the situation when buying a new car. You won’t get every detail right, just as I’m sure I’ve said some things above that will prove to be embarrassing in a few years. But you’ll still be much better off thinking about all these technology and economics issues than buying based on color options and the number of cup holders.

You would be hard pressed to find a better example of why “timing is everything” in our quickly evolving energy markets than the Airline Armageddon that continues to unfold before our eyes. First, a quick overview of the situation with a focus on hedging of fuel prices by airlines (emphasis added):

Hedging Against $200 Oil:

Rising jet fuel prices—one of the industry’s biggest costs—have helped send seven airlines into bankruptcy this year, and more could follow. One exception to the sea of red ink so far is Southwest Airlines (LUV), which has saved billions since 2000 by successfully hedging against increases in oil prices. But with each rise in oil prices, that strategy gets more and more expensive.

…

A hedge is a financial instrument that allows investors to lock in certain prices to act as insurance against the possibility that the open-market, or spot, price of that commodity will rise. If the price then rises, the company gets a financial payoff that cushions the blow of higher prices. In this way, investors can actually make money using hedging as insurance, giving them an advantage over competitors in the marketplace.

Southwest is currently the only major airline with most of its fuel costs hedged at lower prices, largely because it is the only large carrier with the cash flow to do so. For 2008, 70% of its fuel needs are hedged at $51 a barrel. That means that while competitors have to contend with spot prices hovering around $120 a barrel, Southwest can buy oil at less than half that. Access to this discounted price means Southwest feels less pressure to pass on higher costs to customers, which could afford it more market share as competitors hike ticket prices.

…

Even an expert like Topping, who spends his days consulting with oil experts and poring over analyst reports, says he doesn’t know for certain where oil prices are headed. But for now, indications point upward, which justifies more hedging. “There doesn’t seem to be hope for a big price drop unless an unexpected dramatic event took a big chunk out of demand,” says Topping. While high prices are beginning to slow demand for oil in Western countries, developing nations like China and India have an ever-growing thirst for oil. Consider that the U.S. currently has 800 vehicles per 1,000 people, vs. fewer than 30 in China and India. As those countries’ economies ramp up—and as hundreds of millions of people seek their first cars—energy demand will also rise.

…

Indeed, many airline executives shy away from the risks involved. “I think airlines have been reluctant to hedge because corporate culture views futures as a gambling tool,” says Stephen Schork, an energy consultant in Villanova, Pa., and editor of The Schork Report, a daily energy newsletter. “But they’ve been reluctant to their own detriment. If you’re an airline without a significant hedge, you’re in a difficult spot.”

All this stuff about hedging vs. not hedging won’t matter if oil prices stay essentially where they are for years. (And just to be clear, I would consider a price retreat to, say, $100/barrel later this year before a big run up to $150 or $175 in 2009 to fall into the category of “essentially where they are”.) Eventually enough of the right people will figure out that oil isn’t going to be cheap anytime soon, and the practice of hedging will all but disappear, whether airlines consider it “gambling” or not.

Consider, by contrast, the car business. A gradual rise in gasoline prices will push people to more efficiently use oil for transportation–higher MPG cars, driving fewer miles, driving smarter, etc. The increased demand for more efficient cars pushes car companies to develop and make them, and the adoption of them and the other oil saving measures lowers the overall consumption of oil and moderates the price. Or so says conventional economic theory. If the price rise is much quicker, then we have what we’re seeing today, with a rapid shift to more efficient vehicles and the sales and prices of new and used light trucks plummeting. But even in that scenario, which we’re living through as I type this, there’s still a huge amount of low-hanging fruit for us to pick. Picking said conservation goodies isn’t always cheap or fun, but they undeniably exist, and exploiting them softens the blow of the oil price increase.

As the pressure from rising gasoline costs grows, so will the market response, in terms of the mainstream marketing of electric vehicles and plug-in hybrids, as in the plethora of such cars all set for the 2010/2011 time frame. This is the ultimate response to a high price, the wholesale demand destruction through a mix of adopting alternatives and abandoning the consumption completely.

Back to airlines. They can’t dramatically increase the fuel efficiency of their planes (equivalent to trading in a 20 MPG SUV for a 35 MPG sedan), or they would have done it years ago. So they’ve been forced to fly fewer and smaller planes in an effort to maximize seat utilization–as they say in the movie business, it’s all about putting butts in seats. They can also resort to using hypermiling techniques–flying slower, taxiing with only one engine, carrying as little excess weight as possible–but that results in a pretty small savings on a percentage basis.

Their only hope in the short run is to raise ticket prices or impose other fees and hope that not too many customers switch to train travel or skip flying altogether. Unlike cars, there really is no chance for an orderly (which is to say pleasant) transition while “the markets sort themselves out”, as economists put it, aside from the arrival of large scale alternative ways to fuel jets (lots of luck with that one) or a huge drop in world oil prices (likewise).

The bottom line: Airlines have less and less room to stand in the market, thanks to the growing use of oil for non-air-travel purposes around the world. There’s nothing to suggest that that situation will change anytime soon.

Recent posts with related articles on the discussion board (all open in a new window):

• Squeezed airlines clip wings
• How do you solve a problem like jet fuel?
• Airlines discover hypermiling
• BA left on the runway

David Strahan, an author whom you should definitely read on a regular basis, has a longish, excellent post on his site delving into the nooks and crannies of the problems higher oil prices and the growing pressure to omit less CO2 present to airlines.

I can’t hope to do his post, How do you solve a problem like jet fuel?, justice, but let me give you just a taste:

First, the airline industry is rightly seen as the cuckoo in the nest of carbon reduction. Britain is now legally bound to cut CO2 emissions 60% to 65MtC by 2050, but under the government’s “best case” projection UK aviation alone will emit 15.7MtC in that year, almost a quarter of the economy’s entire carbon ration. According to the Tyndall Centre for Climate Change, if the additional “radiative forcing” impacts of aviation are taken into account, that figure could rise to over 100%. Either forecast is of course entirely unsustainable.

Second, aviation is uniquely exposed to peak oil. Whereas ground transport could in theory be completely electrified and run on renewable power, for jet engines there is no alternative to energy dense liquid fuels. And while soaring crude prices are already hammering airline finances at $110 per barrel, analysts Goldman Sachs now forecast potential spikes of $150-$200, a risk Sir Richard acknowledged during his biofuel launch: “In about four or five years’ time there’s going to be more demand for fuel than there is fuel on this planet. So fuel prices will go through the roof, and we’ve all got to come up with alternatives”.

If airlines are to have any chance of staying aloft in post-peak, carbon-constrained world, they must quickly find an alternative fuel with low emissions, but one which also matches the stiff technical standards of jet kerosene. Because planes have to lift their fuel into the sky, and carry every gallon for the entire journey, it has to be energy dense. Because they fly at altitude, it needs to remain fluid at minus 50C. Because they fly long distances, chemically identical supplies must be available all over the world. And because they have long lives, the new fuel must be compatible with the existing fleet. What’s needed, in other words, is an exact replica of fossil jet kerosene – a so-called ‘drop-in’ replacement – which also emits substantially less carbon. “Meeting all these conflicting demands is a very tall order” says Dr Mike Farmery, Global Fuel Technical and Quality Manager at Shell Aviation. “There are lots of exciting ideas, but it will be hard to achieve quickly”.

…

In the context of global aviation, the numbers are even more daunting. To produce the world’s current jet fuel from BTL would require – assuming the average European crop yields suggested by Mr Blades of 10 tonnes of biomass per hectare - nearly 1.2 million square kilometres. That’s well over three times the size of Germany, and makes no allowance for the predicted rapid growth in aviation. On the same assumptions, replacing all current transport fuel requires more than 10m km2 – bigger than China – demolishing any claim that second generation biofuels would not compete with food production.

…

The biggest shortage may be not so much space as time. At the Virgin launch, Sir Richard suggested that algae might produce enough fuel for the entire airline industry, and that such technological breakthroughs represented the only chance of mitigating peak oil, which he said could arrive within six years. But when asked if fuels like jatropha or algae could be ready by then, he did not sound so confident: “we have to try our best to make them available as fast as we possibly can”.

One of the things I’m grateful for in this life is that I’m not the one tasked with finding a way to keep commercial airlines flying anywhere near the same number of seats in five or ten years as they do today.

Barring some sort of techno-econo miracle, I can’t see how the airlines avoid a significant reduction in their passenger volume in the coming years. Flying is getting more expensive and far less pleasant, thanks to more crowded planes and passengers feeling like they’ve been nickeled and dimed to death, which will only push people to using alternatives, like making more use of trains and teleconferencing.

One of the biggest changes will simply be people not making trips. Very few people in the US can afford the time to travel from NY to LA via train, and teleconferencing isn’t much good as a substitute for attending a relative’s wedding, for example.

Hop on over to YouTube and watch this video showing various graphical depictions of US airline flights.

It’s almost like watching a new-age jazzy version of Koyaanisqatsi.

All the overwhelming immensity of modern life, now with 80% less guilt!

Come to think of it, if you haven’t seen Koyaanisqatsi in a while (and yes, I’m assuming you’ve all seen it at least once), go rent or borrow or dig out your own DVD and watch it.

No, not about his ludicrous proposal to give US motorists a summer “holiday” from the 18.4 cent/gallon and 24.4 cent/gallon federal taxes on gasoline and diesel fuel, respectively. That’s the purest and lowest form of political pandering I’ve seen during the current 17-year-long election cycle here in the US.

The thing he’s apparently right about, given his gasoline tax vacation idea, is his admission that he “doesn’t really understand economics”. Considering that he’s the presidential nominee of one of the two major US political parties, that should be enough to [1] disqualify him (or at least hand him a landslide-scale loss in November), and [2] seriously call into question the judgment of anyone who supports him.

But back to fuel taxes.

A summer hiatus for federal fuel taxes is a stupendously, stupefyingly bad, and just plain stupid idea, for three reasons:

First, it adds about $10 billion more the US federal deficit. I know, I know–when you’re burning $12 billion a month in a war in Iraq and racking up hundreds of billions in deficit annually, $10 billion seems like chump change. But why add to the deficit when it only makes our energy situation even worse?

Second, you lower the price of a good and demand goes up. It’s part of that whole economics thing McCain “doesn’t really understand”. Right now, we can’t afford to encourage more gasoline and diesel fuel consumption, plus more CO2 emissions, even by a small amount.

Third, we can never forget how shortsighted consumers can be. People do respond to higher fuel prices, but because of the lock-in effects of commutes and the expense and hassle of replacing a vehicle with a more efficient model, those changes come very slowly. This is why the demand for gasoline is extremely price inelastic in the short term (meaning that for a given percentage increase in price you get a smaller percentage decrease in demand). Now that we see US consumers abandoning light trucks in droves, our number one priority should be to continue that trend to ensure fewer gas guzzlers are on the road when peak oil really sinks its teeth into us in just a few years, plus consume less gasoline and emit less CO2 now. Lowering gasoline prices by 18 cents would instantly reverse much of the progress made via months of rising economic pain. Truck sales would rebound as many people would leap to the erroneous conclusion that the “good old days of cheap gasoline” just might return, after all.

So, what should we do about gasoline taxes? Instead of ignoring them we should use them as a policy tool to accelerate the changes we know we need to make. We could use a new federal tax on gasoline to create a price floor that increases every year for at least five years. If the market prices gasoline below a given year’s level, then the federal tax makes up the difference. If the market price exceeds the floor, then the tax is limited to the current, 18.4 cents/gallon level. (And yes, this would ease competitive pressure on oil companies to keep gasoline prices in check–feel free to laugh derisively at this point–so we would have to add a windfall profits tax on them.)

Such a tax plan would give consumers far more price certainty than they have now. They would know, without doubt, for example, that for th