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Upsetting a delicate balance

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Until the 1860s, whale oil had been the main fuel for lighting and for use as a lubricant.  Until recently it was believed that excess hunting had resulted in the decimation of whale populations by the mid-nineteenth century.  However, while hunting had taken its toll, it appears that whale populations had also learned to steer clear of whaling ships.  As Ben Turner at Live Science explains:

“Catching a sperm whale during the 19th century was much harder than even Moby Dick showed it to be. That’s because sperm whales weren’t just capable of learning the best ways to evade the whalers’ ships, they could quickly share this information with other whales, too, according to a study of whale-hunting records.

“By analyzing newly-digitized logbooks kept by whalers during their hunting voyages in the North Pacific, the researchers found that the strike rates of the hunters upon their targets declined by 58% in just a few years. And it wasn’t because the whalers had gotten worse at landing their harpoons — the mammals had learned from their fellow whales’ fatal encounters with humans, and they weren’t going to repeat them…”

The resulting shortage of whale oil – at a time when the population was growing and demand was rising – resulted in a classic example of what economists call substitution.  The belief is that if the price of one commodity – in this instance, whale oil – rises sufficiently, alternatives will become profitable enough to be developed.  Moreover, as demand for the new substitute grows, economies of scale and production efficiencies will eventually bring the price back down.

The substitute for whale oil was kerosene – a hydrocarbon compound derived from the crude oil that was beginning to be recovered from oil fields in Pennsylvania and Oklahoma.  It wasn’t long before kerosene replaced whale oil as the lighting fuel of choice for Americans.  But kerosene production came with problems of its own; because it is just one of the substances extracted from crude oil.  Some of the heavier substances could be used as lubricants.  But petrol – gasoline – was, and is, the biggest substance to be extracted from a barrel of crude oil.

In the early stages of the industrialisation of North America, waterways provided the main transport routes.  And the biggest of all was the route down the St Lawrence waterway, through the Great Lakes, and on to the Mississippi River, which divides the USA.  But this raised the problem of moving goods over land between one waterway and another.  That required horse-drawn carriages – the ones which used to use whale oil and now used heavy oil as a lubricant.  It made sense to build the carriages next to the docks where the cargo ships landed.  And Detroit, at the western end of Lake Erie was one place which grew rapidly as demand for carriages burgeoned.

Various patents for “horse-less carriages” predated the US oil industry.  But the various gas and liquid powered internal combustion engines proved too expensive to be viable because of the high fuel costs.  The development of the kerosene industry changed everything though.  Two waste products of kerosene, one liquid and one gas, turned out to be just right for fueling the two most promising types of internal combustion engines – one using compression to ignite a liquid fuel, the other using an electrical spark to ignite a gas.

So far as carriage making was concerned, the only thing which had changed was the source of power.  It made little sense to build entirely new factories to build carriages based around internal combustion engines.  Far better- and more efficient – to simply convert the carriage-making factories in towns like Detroit – which is why it later came to be known as “the motor city.”

Initially – as is the case with electric cars today – the first internal combustion engine cars were primarily an expensive curiosity for the upper classes.  It would only be during the inter-war years that cars like the Model-T Ford and the German Volkswagen were widely available to a mass market.  Even then, it would take the increased popular income of the 1953-1973 boom years to bring car ownership to the working classes in the shape of small cars like the British Mini or the Italian Fiat 500.

In Britain, car ownership grew from four million in 1950 to over 34 million in 2010.  1970 was the year when half of the households owned one or more cars.  By 2019, around four fifths of households owned or leased one or more cars.  Similar patterns of growth occurred across Europe as economies emerged from the shock of the Second World War.  Where the economy between 1800 and 1950 had been largely steam-powered, the post- 1950 economy was powered by oil.  But, crucially, nobody planned it that way…  Petrol, remember, was a waste product of kerosene; which itself only became valuable as access to whale oil declined.

Less obviously though, petrol – by far the largest refined product of the oil industry – is arguably itself a waste product.  While outdated in many applications, coal is still essential to the production of a range of primary products such as steel and cement, without which the global economy would collapse overnight.  But the coal-powered limit of coal extraction was reached in the early twentieth century as the cheap and easy European coal deposits peaked.  It was only the additional, cheap and easy diesel fuel that allowed the development of coal extraction to hitherto undreamed of heights.  In transportation, too, diesel power was – and is – essential; even today moving eighty percent of the goods transported across the global economy.  And while techno-utopians may dream of battery-powered trucks, ships and planes, the power to weight ratio involved means that these can only ever be light weight and only for the shortest journeys.  Transcontinental flights, transoceanic shipping and industrial heavy lifting will either continue to be powered by diesel or it will not happen at all.

Remember that none of this was planned.  Indeed, the true driving force behind it appears to be the simple difference in the utility and energy density of the various power sources involved. Coal – a solid fuel – was superior to the renewable and animal power which preceded it.  Indeed, the best quality – anthracite – coal has an energy density (34 megajoules per litre) similar to diesel (38.6 megajoules per litre); although lower grades of coal are significantly less energy-dense.  But as solids, even the best grades of coal could not be used directly for motive power.  As liquid fuels, petrol and diesel were easier to move and store and, crucially, could directly power an internal combustion engine; making their application far more versatile.

The British Navy famously ordered the conversion of the fleet – the largest in the world at the time – from coal to oil in 1911 after discovering during the Agadir Crisis that oil-powered German ships could make the longer journey from Wilhelmshaven to North Africa than Britain’s coal-powered equivalents.  The same reasoning gradually led to the replacement of steam trains with faster and more powerful diesel and diesel-electric trains.  And, of course, with the development of new, multi-carriageway roads after World War Two, a diesel powered road haulage industry proved more efficient than rail.

So long as the day when the Earth’s oil deposits began to deplete lay well in the future, there was no reason why diesel need not continue as the lifeblood of the global economy indefinitely.  And since few economists, politicians or journalists have been prepared to even consider the day when oil production is higher than ever before for the last time; only climate change has threatened the centrality of diesel to our way of life.

Unfortunately, just prior to the arrival of SARS-CoV-2, the global economy reached what Kurt Cobb describes as a “stealth peak” in oil extraction:

“We who have been suggesting that a peak in world oil production was nigh almost from the beginning of this century looked like we might be right when oil prices reached their all-time high in 2008. But since then, we have taken it on the chin for more than a decade as the U.S. shale oil boom kept adding to world supplies—even as production in the rest of the world mostly stagnated or declined.

“But then world oil production turned down—not when the recent coronavirus pandemic and associated economic shutdowns hit—but more than a year before while few people were noticing. Monthly fluctuations will make it difficult to pinpoint a peak until long after it occurs. But, let’s note the difference between world output in November 2018 which was 84.5 million barrels per day (mbpd) versus December 2019 which was 83.2 mbpd when the world economy was supposedly still in high gear. (These numbers are for crude plus lease condensate which is the definition of oil on major oil exchanges.) Between these two dates monthly oil production was occasionally lower than December 2019, but never higher than November 2018.”

The response to the pandemic by governments around the world will serve to mask this peak in oil extraction.  This is because demand for oil products of all kinds has fallen precipitously in the course of the last twelve months.  Air and sea travel for leisure has all but ended.  Train travel has been curtailed.  And road vehicle sales have collapsed.  Far more people are working from home than ever before; and those who aren’t, are engaged in enforced idleness; either through furlough or unemployment.  As a result, commuting is at a bare minimum.  Loss of demand, together with prolonged lockdowns, has dramatically lowered the need for goods and services around the world; with the result that ships are being scrapped and shipping costs have doubled.  If only it were possible to remain in this economic stasis for the remainder of the decade, declining oil extraction need not become an issue.

Because climate change is the dimension of the crisis which most people are focused on, the imminent energy shock is almost entirely ignored; even by energy agencies themselves.  The International Energy Agency, for example, is still promoting the myth of “peak oil demand.”  This holds that as government plans to switch to renewable energy, electric cars and hydrogen-powered heavy vehicles progresses, so our need for oil-based fuels will decline.  For example, Cathy Bussewitz at Tech Xplore reported last week that:

“The world’s once-insatiable demand for gasoline is unlikely to recover to pre-pandemic levels, according to a report Wednesday from the International Energy Agency…

“Gasoline demand is unlikely to fully return because increased demand in the developing world will be offset by consumers shifting to electric vehicles, manufacturers improving fuel efficiency and businesses increasing telework while decreasing travel, the report said.”

This is wishful thinking on a grand scale.  While many states have indeed brought forward bans on internal combustion cars; all things being equal, it would still take until 2050 – probably longer – for the final used internal combustion vehicles to reach the end of their days.  And all things are far from equal.  The prohibitive cost and lack of infrastructure for electric cars means that even with state subsidies, electric cars – excluding hybrids – are still just 6.5 percent of British vehicles in 2020.  This despite a 30 percent crash in petrol and diesel car sales.  With unemployment rising above 2009 levels, millions of households are going to be looking to sell their cars to save money rather than to buy an electric replacement.

The less obvious flaw in the narrative, however, concerns the meaning of the word “demand.”  Demand is not the same as desire.  You might, for example, desire a sports car or a house in the country.  But that desire only translates into economic demand if you can afford it.  Lack of spending power in the economy following the various lockdowns and restrictions suggests that demand for a host of goods and services – including petrol – will be down for years to come.  But household and business income is only one side of the equation.  Price is also an issue.  And faced with falling demand in the economy, oil companies will most likely cut the price of petrol to a point where demand picks up again.

The reason for this is not immediately obvious.  When Americans adopted kerosene in place of whale oil for lighting, demand for whale oil was never restored.  Kerosene became so cheap that it was no longer profitable to risk ocean storms to hunt for whales.  At face value, if lithium ion batteries and stored hydrogen become cheaper than petrol, then demand for petrol ought to go the same way.  But oil doesn’t work that way.  Petrol makes up around 48 percent of an average barrel of oil.  And although refineries can be adapted to change this to some extent, they cannot avoid producing a large volume of petrol in the process of refining far more essential oil products:

The issue facing humanity – both in energy and climate terms – has never been getting people to give up petrol cars.  If it was, state-subsidised public transport and the increased use of electric trams and trains would be a far more effective alternative than electric cars.  The problem has always been the power-to-weight problem in attempting to shift from diesel to batteries for heavy machinery, large trucks, ships and aeroplanes.  Just as coal remains the only economically viable basis for producing essentials like steel and cement – and less essential solar panels – diesel will remain the only economically viable power source for mining, industry, agriculture and transport for decades into the future.

The planned shift away from petrol – which is planned by governments, unlike the unplanned way in which the economy developed to this point – threatens the delicate balance in pricing between the most essential oil products – diesel, aviation fuel and bunker fuel (35% of a barrel) – and waste products like petrol (43% of a barrel).  The present set up allows the essential products to be subsidised by the sale of largely non-essential petrol.  If the proposed shift to hydrogen and batteries goes ahead, the price of the essential fuels – which we have no choice but to keep on using – must increase to account for the lost revenue from the non-essentials.  At the same time, the price of petrol will be lowered to a point where enough people who still drive petrol vehicles are prepared to grow its use once more – most likely by shifting light goods transportation to petrol-powered vehicles.

In a growing economy some new balancing of prices might be arrived at; with essential products rising in price as non-essentials fall, so that the overall price of all the products combined remains the same.  Unfortunately, we have passed the point where this was possible.  The problem now is that the inevitable increase in the price of diesel and other essential fuels as governments ban the use of smaller petrol vehicles, will force the economy to contract.

Even before the pandemic, the oil industry was unable to raise oil prices to a level that would allow further growth.  Nevertheless, even at prices far too low for the industry to remain profitable in the long-term, they were too high for consumers:

Far from helping to resolve this predicament, government attempts to buck the market and impose the partial solution of battery and hydrogen powered vehicles is likely to prove more lethal than the climate change they claim to want to ameliorate.  This is simply because it is impossible to feed eight billion humans – at least not on any time scale that matters – without the diesel-powered industrial machinery and oil-derived fertilisers, herbicides and pesticides which – for better or worse – we all depend upon.

In this sense, messing around with the price of petrol while ignoring the problem of diesel looks more like a psychiatric patient’s displacement activity than a genuine attempt to manage the inevitable decline of industrial civilisation.

As you made it to the end…

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