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Ruminations on Oil

Some months ago I commented on the issue of ‘peak oil’ and its impact on national security, economic development, and the prospect of balancing growth with quality of life. Powerful books such as The Long Emergency (James Howard Kunstler, 2005), have warned that drastic changes will occur in every community in America as oil becomes less abundant. Mobility is an intrinsic element to our way of life- it is part of our DNA and at the very core of American independence. When we read of gas prices reaching $5 to $6 per gallon as it is in some countries, it is easy to imagine the impact on every family, business and community. Transportation and travel is only a small portion of the challenges brought by declining oil reserves and growing reliance on petroleum products. The Earth Policy Institute has warned that agriculture will be one of the industries hardest hit by oil prices, due to rising fertilizer, transportation, irrigation and operating costs. Far into the future escalating food prices will be tied to the rising cost of oil.

The United States consumes 20.6 million barrels of oil per day. China, Japan and Russia are the 2nd, 3rd, and 4th leading oil consumers at 7.5, 5.0 and 2.9 million barrels per day. Even with strong economies and relatively mobile societies, India (2.7 bbl/day), Germany (2.5 bbl/day), Brazil (2.4 bbl/ day), and Canada (2.3bbl/day) are all far below the U.S. in oil consumption. To admit we are dependent on oil  seems a bit understated.

Unfortunately, the U.S. does not have enormous oil reserves. It currently ranks 14th in oil reserves (behind such countries as Angola, Kazakhstan, Nigeria, Libya, and Venezuela) with 22.4 billion barrels (for perspective, Saudi Arabia has 262 billion barrels, Canada has 178.9 billion barrels, Iran has 133 billion barrels and Iraq has 112 billion barrels). So, why does this matter?

In February 2005, lead author Robert Hirsch and a team of collaborators published a report entitled, Peaking of World Oil Production: Impacts, Mitigation, and Risk Management. Commissioned by the US Department of Energy, it provided a series of observations and recommendations that emphasized the importance of action in consumption and supply/ production if economic chaos is to be avoided. Since that time, and especially in 2009, renewed efforts on the supply side have resulted in many new oil field discoveries that could alter previous timelines for price escalation and supply decline. According to an article by Jad Mouawad in the New York Times (9/24/09), over 200 discoveries (some quite large) have been reported in dozens of countries by huge oil conglomerates (Exxon Oil, ConocoPhillips) as well as by smaller players (Tullow Oil). Oil prices have stabilized at around $70 per barrel after falling to $34 in late 2008. Oil companies have stated that prices must be above $60 a barrel to support development of existing and new reserves. The best bet is that oil prices will continue to escalate toward $85-$90 a barrel as exploration and oil field development continues. Gasoline costs will increase but revenue will support supply and production at a level that may extend peak oil predictions another two to three decades. This will allow time for technology to provide greater vehicle efficiency and sensible alternative energy sources as the global community begins to embrace conservation.

With global oil consumption at 31 billion barrels annually and growing rapidly, the discovery of new reserves merely delays the inevitable. With local government’s focus on current economic challenges it is difficult to turn attention toward the longer view. My feeling is that gas prices will increase in 2010 and escalate more in 2011 to support development of new oil fields and to buy oil that will cost more to produce and transport. Scenario plans should factor in escalating costs well into the future…gasoline will eventually cost $4, $5, or $8 per gallon – and it’s not far off. While gasoline won’t cost $12 to $20 per gallon any time soon, it will be costly and, along with water, become Earth’s most precious commodity.

In some ways, I’m relieved. The good news is that we’ll have enough oil to serve global needs as the economy transforms and we work toward stability.  Unfortunately, this respite may cause many to disregard the fact that oil is a finite resource and cannot last forever. Peak oil will be recalculated but even a cursory review tells us that consumption is rapidly drawing down reserves. While it may not be the immediate crises reported over the past few years, its long-term significance is huge. Local communities, state agencies, and the federal government must plan for higher costs associated with oil and petroleum by-products, and that covers a lot of territory. The sign says, Beware of Inflation Ahead…

With over three decades working in and with federal, state and local government, John Luthy understands public agencies.  Known for his real world, straight talking style, he is a leading futurist specializing in city, county, state, and federal long-range thinking and planning. An innovative and dynamic presenter, John is frequently asked to speak and consult on how to prepare public organizations and communities for emerging challenges. He holds both the MPH and MPA degrees as well as a doctorate in education.

Speculation for 2010

Speculation abounds regarding how 2010 will turn out, based on the not so stellar ramp-up we’ve experienced in Q4 2009. While economic factors are certainly more favorable than earlier in the year, unemployment stands at 10.2 percent, new housing starts are rare, commercial and residential inventories are large and growing, and hiring is lackluster. Not an indictment of 2010’s promise, but not the launch we had hoped for.

Economists have long cautioned the public to not expect employment to keep pace with stock market gains or industrial productivity. Yes, the U.S. is experiencing a remarkable resurgence in the Dow Jones, S & P 500  and NASDAQ, but the dollar faces ‘crosswinds,’ 130 banks have failed, and more financial bubbles are foreseeable.  The cautionary tale here is to go slow and make wise decisions that will carry forward as things shake out.

The Institute for Supply Management has reported that employment has expanded for the second straight month and manufacturing activity has now grown for four straight months; new orders and exports have grown slightly over the past two to three months. Certainly a good sign but a short gust of activity that may or may not portend continued growth into 2010. So…will next year be decent? 

From what I see, there are signs of slow but steady growth, with some occasional neurotic fluctuations. Globally, industrialized nations want stability, harmony and reasonable opportunity. While greed remains in play in many financial institutions, most institutional elements within the world of business are focused on avoiding stupid moves that produce catastrophic outcomes. In other words, it will be a conservative world as re-centering continues.

For state and local government, care must be taken to understand those forces and factors that will continue to impact economies. Communities are grappling with huge losses of personal wealth, generations may be just beginning to really compete for available jobs as more senior employees postpone retirement, and the necessities of triage create entirely new discussions about annual budget priorities. Not every area of the United States will experience recovery and the pace of recovery will have huge variations. Like an investment portfolio, diversity is the key. Regions having diverse economic bases or are blessed with industry fundamental to the New Economy (health care, for instance) will recover faster. Those without naturally magnetic communities and buttressed economic foundations will struggle… unless serious change occurs.

Here’s a tip: Economic policies founded on ‘no new taxes’ are flawed. Healthcare inflation coupled with the triple entitlement threats of Medicare, Medicaid and Social Security is significant enough to cripple long-term recovery. While there will be no short-term crises, a return to the swashbuckling economic days of yore are doubtful without facing the arithmetic. Recent cuts to state and local government budgets have moderated the impact but are incapable of reducing costs enough to balance reduced economic vitality. If there was political will, insight and courage (which it appears there is not) the retirement age for Social Security and Medicare could be raised, and funds wasted on dreadful highway projects and a variety of senseless agricultural subsidies could be trimmed. Consumption taxes are being heralded as a means to raise revenue through more elective participation.  Congress must find the will to enact laws that reduce spending, shrink federal government, and generate adequate revenue to provide a reasonable public service framework.

2010 will see a resurgence of innovation – some subtle, some predictable and some driven by remarkably creative approaches. I am not talking about new inventions. Some of the greatest innovations will come in the form of new methods of providing public services. Some will be fueled by public-private partnerships; others will be forged through new collaborative arrangements among cities and counties as they seek to serve communities through efficiencies that were overlooked or discarded in more affluent times. More than ever in the Nation’s history we will see, in 2010 and for years to come, more cooperation, joint planning, resource sharing, mutual support, and regionalization.

The questions are, ‘Where will your community be in this emerging equation? Will you be calling the meetings and creating collaborative agendas? Will your community’s elected officials be willing to share resources, methods, and insight? Will your community lead, follow or attempt to remain independent?’

As stated before, we are in a transformational time. The ‘Good Old Days’ are not coming back – they are hopefully ahead of us. Are we ready to embrace them and forge a new future beginning in 2010?

With over three decades working in and with federal, state and local government, John Luthy understands public agencies.  Known for his real world, straight talking style, he is a leading futurist specializing in city, county, state, and federal long-range thinking and planning. An innovative and dynamic presenter, John is frequently asked to speak and consult on how to prepare public organizations and communities for emerging challenges. He holds both the MPH and MPA degrees as well as a doctorate in education.