Real, and here to stay

The consensus seems to be that energy prices in the U.S. have dodged the bullet of Hurricane Rita, which not only weakened from its category 5 status before making landfall, but hit well east of the Galveston target that would have been most damaging to the oil supply. The recent spike in crude oil prices above $70 a barrel appears to have been a panic peak that will not be exceeded soon.

Don’t exhale yet. While prices might subside from recent peaks, the question remains: which price will we see again sooner at the pumps: $3.49 a gallon or $2.00 a gallon? Over the past few weeks there have been a couple of straws in the wind that suggest that the former, not the latter, is the correct answer.

For a long time, major corporations dependent on oil have pooh-poohed the concept of “peak oil,” the idea that the world is fast approaching the point at which oil production starts declining. After all, if they admitted that they might have to accept boring (and profit-damaging) proposals like increasing fuel efficiency. But on September 13, DuPont, a chemical company that depends on fossil fuel as raw material for its products, announced price increases on 35,000 of its products due to their outlook on oil prices. This action was not dependent on the temporary effects of Hurricane Katrina. “This is real, and it’s here to stay… We are just starting to see the tip of the iceberg,” said Diane H. Gulyas, DuPont’s chief marketing officer.

A second indicator has been Exxon, which recently gave a presentation on the energy future that showed non-OPEC oil production starting to decline around five years from now. To be sure, Exxon still maintains that OPEC production will increase into 2030 (though some non-industry analysts dispute this notion). But either way the implications for U.S. oil prices, as India, China, and other up-and-coming countries ramp up demand, are troubling.

The first concept we need to grasp is that inflation is probably on the comeback, but will be temporarily concealed by the government’s concept of “core inflation.” The core inflation number subtracts food and energy from the monthly inflation measures because these two items have always shown wild short-term volatility but, in the past, have not increased over longer periods. In real terms, even the recent peaks in gas prices did not exceed the peaks they reached back during the crisis in the 1970s.

But if we have entered a period in which the demand pressures on oil chronically exceed production, oil prices are starting on a long, terminal uptrend. This uptrend will be the single most important element determining the purchasing power of household dollars over the coming decades. Wall Street economists will continue to crow for a while over the comparative mildness of “core inflation,” while it becomes less and less relevant to how much Americans can afford to buy.

The average American household cannot afford to be as slow to react to the new reality as government and Wall Street are. We are going to have to make different decisions, every day, than we are used to making. If your old oil furnace needs replacing, you probably want to think about replacing it with an entirely different heating technology, like the wood and pellet stoves discussed on pages 30-31 of this issue; or supplementing it with solar technology, as discussed last week on page 26. Time for a new car? Most of us can’t afford the new hybrids, but it is still possible to scale down to something that burns fuel a lot more efficiently than the dinosaurs that have dominated the road for the past 20 years or so.

Different decisions can be made on a community basis as well. The initiative to develop wind power in Sullivan County, for instance, becomes even more of an imperative. And while car-pooling is difficult in an area where many businesses are so small that they don’t have two employees coming from the same direction, local chambers of commerce could step in. How about developing a car-pooling directory for each town that would allow employees from different companies to travel to work together?

The extreme energy pricing prompted by Katrina and Rita will subside temporarily, but it is an indicator of what is to come. The end of oil is not a someday thing. It is here, it is now, it is real, and it requires us all to make different decisions every day, one day at a time. Only if we do so can we break this country’s addiction to oil and move on to the renewable energy solutions that are the only viable solution for the future.

Dr. Punnybone

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