$20 Per Gallon: How the Inevitable Rise in the Price of Gasoline Will Change Our Lives for the Betterby Christopher Steiner
Imagine an everyday world in which the price of gasoline (and oil) continues to go up, and up, and up. Think about the immediate impact that would have on our lives.
Of course, everybody already knows how about gasoline has affected our driving habits. People can't wait to junk their gas-guzzling SUVs for a new Prius. But there are more, not-so-obvious changes on
Imagine an everyday world in which the price of gasoline (and oil) continues to go up, and up, and up. Think about the immediate impact that would have on our lives.
Of course, everybody already knows how about gasoline has affected our driving habits. People can't wait to junk their gas-guzzling SUVs for a new Prius. But there are more, not-so-obvious changes on the horizon that Chris Steiner tracks brilliantly in this provocative work.
Consider the following societal changes: people who own homes in far-off suburbs will soon realize that there's no longer any market for their houses (reason: nobody wants to live too far away because it's too expensive to commute to work). Telecommuting will begin to expand rapidly. Trains will become the mode of national transportation (as it used to be) as the price of flying becomes prohibitive. Families will begin to migrate southward as the price of heating northern homes in the winter is too pricey. Cheap everyday items that are comprised of plastic will go away because of the rising price to produce them (plastic is derived from oil). And this is just the beginning of a huge and overwhelming domino effect that our way of life will undergo in the years to come.
Steiner, an engineer by training before turning to journalism, sees how this simple but constant rise in oil and gas prices will totally re-structure our lifestyle. But what may be surprising to readers is that all of these changes may not be negative - but actually will usher in some new and very promising aspects of our society.
Steiner will probe how the liberation of technology and innovation, triggered by climbing gas prices, will change our lives. The book may start as an alarmist's exercise.... but don't be misled. The future will be exhilarating.
- Grand Central Publishing
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$20 Per GallonHow the Inevitable Rise in the Price of Gasoline Will Change Our Lives for the Better
By Steiner, Christopher
Grand Central PublishingCopyright © 2010 Steiner, Christopher
All right reserved.
The Road to $20 and Civilization Renovation
We used to turn to the weather when all else failed us as conversationalists. Clouds and sun, however, have been relegated to the backseat of chitchat lulls. Everyone wants to talk about the price of gasoline. Even if you don’t drive, this is fascinating fodder. Yes, the calamitous increases and the more sudden decreases of gasoline prices have been interesting to us purely as an economic curiosity—how can something that’s been around for so many years, in such utter abundance, suddenly see its value rise and fall with such confounding volatility? But there’s more to our interest than cerebral economics. The tales of gas price flux have regaled our nation in the manner that J. K. Rowling or Stephenie Meyer tames adolescents. You cannot open a newspaper, national or local, that doesn’t feature a prominent story with some angle on gas prices. And as it turns out, we’re not lemmings tethered to a petrol spigot. We have limits, and some of them have been reached. During 2008, a year when gas prices touched historical highs, Americans drove 100 billion fewer miles than they did the year before. That’s the first such decrease in thirty years, and easily dwarfs the driving decreases during the 1970s oil embargoes.
There’s something guttural, something personal, about the price of gas. Even though we’ve pared our driving, there’s a feeling that there’s more to this, more than $2 versus $4, more than the price of our weekly fill-up. At the gas pump, we’re egregiously offended by big numbers and comforted by small ones. Big numbers make us sick. But why? The price of commodities, the price of nearly everything we use in abundance, has shot up during the last five years. So what makes gasoline so special? We don’t have the same visceral reaction to, say, the price of grain—even though it goes into half of everything we eat and its price has more than doubled in recent years. Why does gasoline set off different, shriller alarms than other things we consistently buy? Perhaps that’s our human intuition—an evolved sense that there’s more to a situation than the mere face of it.
It turns out that our sense of intuition, honed by millennia of survival, is quite canny. The inexorable rising price at the pump represents several worlds of change beyond smaller cars and more cumbersome gas station charges. The price of oil—and thus, gasoline—affects our lives to a degree few realize. It’s not just the BP or Shell portion of your Visa bill. It’s the bricks in your walls, the plastic in your refrigerator, the asphalt on your roads, the shingles on your roof, the synthetic rubber in your ball. With every penny that gasoline moves up, so, too, does the price of most things we consume.
Stop what you’re doing. Look around. Look on your desk, at your shoes, at your shirt, at your windows, your kitchen—how much of it comes from oil? More than you think. Look out your window—look out at the world—how much of it owes its existence to oil? Again, more than you think. The United States imports 67% of its oil, but only 40% of that goes into our vehicles’ fuel tanks. The rest is used to make, fortify, and shape just about anything you can imagine.
Consider Bill McPetroman of Suburbia, USA, 2009
Bill lives like many of us do. He’s an American suburbanite with a good job, nice house, nice family. Bill isn’t rich, Bill isn’t poor. Let’s examine a typical Bill morning in 2009 as he gets up for a day at the office. For simplicity’s sake, Bill’s wonderful wife and children, who, let it be known, enjoy gasoline as much as he does, are on vacation at the family cabin; Bill will be joining them there this weekend.
It’s Thursday morning. Bill gets up at 7 a.m. to the sound of his Sony clock radio, which is encased in plastic made from hydro-carbon molecules ripped from sweet crude oil at a Houston refinery. Just about everything plastic in our lives is made in a similar process with one main source: oil and its derivatives.
Bill rolls off his sheets, and puts his feet on the carpeted floor, whose fibers are made of nylon, one of the original and most successful plastics made from petrochemicals. He pads to the bathroom and puts a hand on his bathroom countertop, made of DuPont’s Corian, a common household countertop material that is largely acrylic. DuPont makes Corian with a series of bonds between pigments, binders, and polymethyl methacrylate, a petro-chemical, which, of course, comes from an oil refinery.
Bill generously lathers his face with shaving cream that smells like a man should smell. The lather, incidentally, is formed by an endless list of ingredients; one of its major building blocks, however, is polymethyl methacrylate, which, of course, comes from oil. Smoothly shaven, Bill pulls his nylon shower curtain back and hops into his bathroom’s attractive preformed shower stall, made of chlorinated polyethylene, another one of those ubiquitous petro-chemicals. Bill washes his hair with shampoo and conditioners made mostly of goopy hydrocarbons, linked and processed from oil; the same goes for his bar of soap. The plastic bristles and handle on his toothbrush, too, came from black gold.
Bill dresses and heads to the kitchen for breakfast. He shuffles across the kitchen floor, installed during a recent renovation; it’s a beautiful engineered oak floor. This kind of floor holds up to all sorts of abuse and features a thin layer of oak, about one-eighth of an inch, glued on top of a rigid and burly pad of plywood. This common type of floor earns higher durability ratings than pure wood. It’s held together with binders and glue that come almost exclusively from petrochemical plants processing crude oil.
Bill puts his coffee cup and cereal bowl down on his new kitchen countertop, which is man-made stone called Silestone. It’s quite dazzling. The inch-and-a-quarter-thick Silestone slab is made of 95% quartz and 5% polymer resin. The resin, again, comes from oil. There isn’t much in Bill’s kitchen—in fact, in his whole house—that doesn’t trace some aspect of its origins to the grinding caco phony of an oil well.
The same can be said for where Bill lives: a suburb thirty miles from the center of Chicago. His existence, his town’s existence, and all of far-flung suburbia’s existence, be it in Los Angeles, Paris, Dallas, or Tokyo, owes its life to vast fields in places like the Middle East, the North Sea, and the Gulf of Mexico. Having finished breakfast, Bill walks into his two-car garage and climbs into his Ford Explorer. He rattles down his street’s immaculate strip of asphalt toward a six-lane highway that will take him to work, forty minutes away. Bill’s normal evening hours are spent shuttling his children from athletic events to tutoring sessions to music lessons to shopping malls, all of which are located in disparate corners of his megaburb, which is more than five miles wide. Bill’s Americanized materialistic existence, like all of ours, is wrapped in a cocoon of gasoline and its petro-bred brethren.
But there’s more to this than the price of your, my, and Bill’s stuff. The mounting cost of gas will dictate cultural changes, housing changes, civic changes, education changes—it will leave nary a spot on the globe, or how we live, unchanged. Not all of the change we face is gloomy. In fact, many people’s lives, including many Americans’ lives, will be improved across a panoply of facets. We will get more exercise, breathe fewer toxins, eat better food, and make a smaller impact on our earth. Giant businesses will rise as entrepreneurs’ intrepid minds elegantly solve our society’s mounting challenges as gasoline prices inevitably rise, changing the world economy and our lives forever. The world’s next Google or Microsoft, the next great disrupter and megacompany, could well be conceived in this saga. It could be a battery company, a breakthrough solar outfit, or a radically innovative vehicle manufacturer. This revolution will be so widespread and affect so many that it will evoke the Internet’s rise in the late 1990s.
But this revolution will be even bigger than that. The Internet allowed us to buy a book online, to peruse information at will and with speed. The rising price of gasoline, however, will reshape your house, your car, your town, your stores, your job, your life. America has never seen so great an innovation spur as escalating petroleum prices. This tale will bring with it all the global impact of a World War and its inherent technology revolutions—minus all the death. Some people even welcome oil’s coming paucity and expense as one of humankind’s grand experiments. And, in fact, it will be so. The future will be exhilarating.
This book acknowledges that future and embraces it. In these pages we want to tackle that omnipresent and intricate question: How will the rising price of gas affect our lives? There is a two-word, sophomoric answer to the question: a lot. But this is not a simple matter to debug. Oil and gasoline play such integral, piercing parts in our lives. At times their presence is beyond obvious, such as when we’re pumping gasoline into our car on a hot afternoon for $3.50 a gallon. And at other times, gasoline’s presence is more nuanced, but just as pervading, such as when a New Yorker buys a potato that’s traveled from Idaho to her grocer, or when you turn up the thermostat during a chilly evening, or when you wrap leftovers in Saran Wrap, or when your local high school stops playing in statewide tournaments to save money.
The polygonal changes that rising gas prices will bring cut a puzzle that’s hard to decipher. But the best—and the most entertaining—way to tame this subject is to section things according to what we pay at the pump. This book’s chapters follow the cost of gasoline in the United States: Chapter $6, Chapter $8, Chapter $10, and so on. Each chapter details the changes, consequences, and innovation that each price level will bring. This approach proves to be particularly informative because our lives’ adaptations will not arrive all at once, but will filter in gradually as the price of petroleum dictates. Each increase in price will bring with it new pain that will force us to adapt. Each dollar increase in the price of gasoline will crank different gears of change: $8 gas isn’t $10 gas, and $12 gas isn’t $14 gas. Each extra dollar unlocks new possibilities and ushers out an old product or way of life. Each chapter will focus on one or two major changes brought about by this particular gas price, as well as a coterie of other, smaller events connected to this price. Our lives will transform on innumerable fronts—socially, economically, and so on—as we go from $6 to $8 to $10 and beyond.
Why the Price of Gas Will Keep Climbing (Why the Following Chapters Matter)
The plausibility of these scenarios, these hypothetical worlds that each chapter will project—America at $8-a-gallon gas or $14-a-gallon gas—depends on gasoline’s increasing scarcity and, of course, its increasing cost. There still exist thousands of people, some of whom preach from very public pulpits—editorial pages, magazines, television—that say expensive oil will be a temporary blip in our continued and apparently endless path of gluttonous consumption. Gas prices, these people say, are artificially goosed up by nervous traders and reckless speculators; normalcy will return soon, they assure us, as it did in the latter months of 2008. But normalcy, for better or worse, is already gone. Gas prices had to go up, and so they did.
The sunny “this is merely a passing bubble” outlook—unfortunately for Hummer drivers and the airlines—has taken no measure of world economics, demographics, or capitalism. The following two statements, in most sane circles, are accepted as fact:
1. The demand for oil will gradually increase and will continue to increase as the global middle class expands.
2. The oil that remains in the earth will be more and more expensive to locate and extract.
Those two statements lead us to a third conclusion:
3. The price of gas will climb to prices far past where we’re at right now.
The swooning momentum of oil prices can be a tricky bull to corral. Wild upward swings in gas prices will usually be mitigated by a downward correction. Oil’s price volatility is not anomalous to the ridiculous and heady explosion—and resulting implosion—of housing prices that we’ve seen over the last eight years. But the oil market moves much faster. A price spike can last several months and its resulting correction another month or two, compared with the years of booming home values and the subsequent multiyear downturn. The difference, however, is an important one: There is always less oil and always more people who want it. We’re always building more houses, but we can’t make more oil. So while gas prices will swing up and down, season to season, month to month, the consistent, durable trend will be one of increasing price.
Though global oil demand eroded in 2008 and 2009 owing to the world’s acute economic malaise, that lull will be temporary. Any future economic expansion in the near term will mean further increases in oil demand. Oil demand has risen—and will keep rising—in tandem with a burgeoning worldwide middle class, the fastest-growing segment of global population. The world’s total population will jump by 1 billion in the coming twelve years, but the middle class will add 1.8 billion to its ranks, 600 million of them in China alone. Researchers at the Brookings Institution estimate that the middle class will comprise 52% of the earth’s total population by 2020—up from 30% now. China’s middle class will be the world’s largest in 2025, and India’s will be ten times its current size.
Consider this: The United States has 750 cars for every 1,000 people. China, on the other hand, has 4 cars for every 1,000 people. If China gets to only half the ownership rate of the United States, it means an additional 400 million cars on the road, looking for gasoline. That’s almost like adding another two United States’ worth of cars to the world. Moreover, even if the price of oil gets so high that it creates serious demand destruction in places like the United States and Europe, the use of oil will still increase in economies such as China’s, which is growing at a 10% clip. Growth that size doesn’t evaporate overnight. And economies, especially China’s, need oil and energy to grow.
What does it mean to be middle class? It means to have a home, to have a regular income, to have consumer freedom, to drive a gas-burning vehicle, and in general, to consume. When people consume, they consume oil. It takes oil to power your car, to make your plastic yogurt cup, to harvest the grain that makes your bread, to transport the livestock that will be your meat. It takes fuel to ship the clothes, gadgets, and items that middle-class people buy and use. It takes petroleum to create the chemicals and compounds that go into so much we use today, including computers, cars, homes, and infrastructure. Car sales may be down or flat in Europe and the United States, and they may remain that way, but places like China, India, and Russia will, over the long term, continue to add cars to their roads.
As more people make more money and ascend toward the middle class, globalization works to pull the middle class down toward more people. India’s Tata Motors began making a car called the Nano in 2008. The Nano has become an international superstar, burnishing Tata’s emergence as a world automotive player and ginning demand for the car before the first one even left the factory. At the 2008 Geneva auto show—usually the glitzy province of strutting Porsches and BMWs—the diminutive Nano stole the show, its displays consistently mobbed by Europeans and international press. The car has a Facebook page that draws millions of hits. Before the vehicle was released, bootleg video clips that caught test models on the highways of India soared in YouTube popularity.
What makes the Nano so popular? It’s pushed along—literally, the engine is in the rear—by a tiny two-cylinder, 623-cubic-centimeter engine made out of aluminum. Its dashboard features three things: a speedometer, a fuel gauge, and an oil light. It has one windshield wiper, a small front trunk, and on the basic model, no radio, air conditioning, or power steering. So—again—what’s the hype about? It’s about the car’s cost: $2,500; and its efficiency: 48 miles a gallon, no batteries necessary. That’s a new, ultraefficient car for the same price as an upper-end laptop computer.
The Nano and scores of other equalizing products like it (most of them not quite as dramatic) have made being middle class a reality for billions of people traversing the murky zone between poverty and comfortable living. Even with gas topping $4 or $5 or $10, billions of previously carless people can afford a vehicle that costs them a mere $2,500 and gets such fabulous mileage.
Tata has dubbed its phenom “The People’s Car.” Indeed, millions in India are champing to dump their mopeds and bicycles for Nanos. One of those people is Uttam Shivhare. He drives a three-wheeled motorized rickshaw for a living in Varanasi, a holy city in Northern India populated mostly by Hindus. The forty-year-old makes $150 a month for weaving his rickshaw taxi in and out of the cramped streets and alleyways of Varanasi, picking up and depositing customers as he goes. Shivhare’s rickshaw has a canvas roof but no doors, and if passengers scrunch, as they often do, it can fit three people in its backseat. As an owner of motorized transportation, he is respected. But, Shivhare says, real community respect comes with owning a legitimate automobile—doors, roof, trunk, and all. The cheapest car on the market before the Nano’s launch was the Suzuki Maruti 800, at about $5,000, well beyond Shivhare’s means. But a Nano, at half that price, makes joining the car-driving middle class possible for Shivhare. Shivhare’s teenaged daughter, Shubham, and his son, Samiksha, first told him about the Nano after reading about it in English dailies. “All their friends who are from rich families have cars but we could never afford one,” Shivhare says. “Now we can,” he beams.
People like Shivhare, who make money and live with fierce desires to upgrade their families’ lives with an automobile, exist by the millions. Perhaps even the billions. Those people, through the emergence of their countries’ flourishing economies, will get their chance. And they deserve that chance. But it means more people needing more oil. Imagine if the Nano adds a mere 3 million new drivers to the roads across the world and each one of them drives an average of 15,000 miles a year. That creates demand for an additional 1 billion gallons of gasoline a year. And 3 million new drivers is a wildly conservative number, considering India and its neighbor China, with 2.4 billion people together, have more than a third of the world’s population, most of whom don’t yet drive cars.
Not only are places like India, a net oil importer, devouring more and more oil, but the net exporters, places like Iran and Saudi Arabia, are gobbling up more, and shipping out less, of the resource that their economies are built on. The population of the Middle East has doubled in the last thirty years. That population demands more oil, meaning that less and less of it makes it into world markets each year. Iran and Saudi Arabia actually subsidize gasoline for their populations. Part of that calculus is economic, part of it pure survival tactics by the ruling powers, trying to ensure their popularity with fickle yet subdued electorates.
Saudi Arabia is building dozens of power plants across its sandy expanse to handle the growing demands of its petrochemical business, which turns hydrocarbons into useful industrial compounds. The new power plants don’t run on coal or enriched uranium, as they do here in the United States. They run on oil, keeping billions of barrels of oil from gasoline refineries. Iran used to export 70% of its crude, but now sends out only 50%, as their own middle classes have grown and domestic demand has increased. Saudi Arabia’s oil consumption has increased 6% a year during the last five years while Iran’s has jumped 8% a year; Venezuela, another big exporter, has seen domestic demand spike 10% a year during this time. The Saudis have made a lot of noise about their plans to become a provider of all energy, be it solar, wind, or oil, but those plans are existentially tied to their oil reserves. Nothing the Saudis will do can replace the boggling wealth that pours into their country like oil oozes from its desert. The turn toward alternative energy on the Arabian Peninsula amounts to window dressing for its one real industry: oil.
As the middle class continues to explode in China, India, and scores of other spots circling the earth, hundreds of millions of additional cars will hit the roads, giving rise to more demand for gasoline and other petroleum-based products. People want what Americans have had for decades: easy cars and an easy life. These people will get what they want, but in the process they will catalyze a global economic reformation on a scale never seen, changing our lives, changing their lives, changing the earth.
New people every day get introduced to levels of lifestyle and income that add to the demand for the world’s oil. That pressures demand on one side. On the other side, the supply side, petroleum has been getting harder to find and extract from the earth. Of all the statistics telling us oil is getting harder to find, none are so compelling as this: For each six barrels of oil we consume, we find one. The Texas and Saudi Arabia–style gushers of yore are exactly that: the past’s myth and lore. There are no more undiscovered fields such as those. We now work harder than ever to get a barrel of oil to the surface, especially from deep-sea wells and aging fields that require all manner of expensive and complicated tricks, such as injecting water into source rock to force out more oil. We have hit what’s popularly known as peak oil, meaning that global production of crude is at a zenith that will never again be realized. The evidence supporting peak oil as a current phenomenon is compelling.
A founded argument for oil’s increasing scarcity has been made best and most famously by Ali Samsam Bakhtiari, a former director of the National Iranian Oil Company, who died in 2007. In one of the Ph.D.’s last research essays, he wrote this about the world’s oil production:
After some 147 years of almost uninterrupted supply growth to a record output of some 81–82 million barrels/ day [mb/d] in the summer of 2006, crude oil production has since entered its irreversible decline. This exceptional reversal alters the energy supply equation upon which life on our planet is based. It will come to place pressure upon the use of all other sources of energy—be it natural gas, coal, nuclear power, and all types of sun-dry renewables especially biofuels. It will eventually come to affect everything else under the sun.
He is not alone in his dire outlook. T. Boone Pickens, a man who has built a $3 billion fortune on oil and gas, said at a Forbes CEO conference, “The world has been looked at. There’s still oil to be found, but not in the quantities we’ve seen in the past. The big fields have all been found and the smaller fields, well, there’s not enough of them to replenish the base… If I’m right, we’re already at the peak. The price will have to go up.”
Pickens has taken things a step further. The lifelong oilman is calling for the United States to stop blowing $700 billion a year on foreign oil and has tried to create a pop buzz for wind power, on which he and other investors plan to dump $10 billion for a massive project in the Texas panhandle. Perhaps this is an eighty-year-old trying to cement an eternal legacy. Perhaps this is just T. Boone, the billionaire, trying to make another billion. Whatever it is, the shrewd Wall Street raider wouldn’t be jamming himself into this business unless he thought that conventional energy—oil—was on the wane.
It doesn’t help that the ten largest holders of oil reserves in the world are state-owned oil companies in countries such as Russia, Iran, and Venezuela, which aren’t particularly friendly toward the West. The world’s giant independent oil companies, like Exxon Mobil, Royal Dutch Shell, BP, and Chevron, have the most experience and best methods for bringing hard-to-get crude to the surface and for maximizing the value of maturing fields. These companies once controlled more than half the production of the world’s crude, but have been reduced to 13% as bouts of resource nationalism have pushed them out of countries such as Nigeria, Venezuela, Bolivia, and Russia, reducing efficiencies in those countries as well as supply out of them. The big multinational oil companies are desperate for places to spend on exploration, but have few promising places to do it. As a result, these companies spent only $11 billion on exploration in 2007, while spending $58 billion on share buybacks, five times what they spent on exploration.
The United States has now burned through 70% of its oil. But we’re so desperate that we’re drilling at a pace we haven’t approached in more than two decades: 40,000 wells a year. No matter, our production continues to decline. But that’s hardly surprising to most people. What’s jarring: The declining production of half of the twenty largest oil-producing countries. These countries comprise 85% of all oil produced. What’s more, half of the world’s oil is supplied by just .03% of its oil fields. This underlines the importance of the megafield—when the megafields’ productions start ebbing, then it’s likely the world’s supply has begun an irreversible decline.
Production in many of these fields, such as Mexico’s mammoth Cantarell Field, has already begun slipping, according to Pemex, Mexico’s national oil company. Many experts also believe that Gharwar, Saudi Arabia’s monster field and the largest in the world, has begun declining as well. Oil fields typically go into decline after fifty years of use. The average age of the world’s fourteen biggest oil fields: an alarming forty-nine years. Oil from these sources can cost as little as $1.50 a barrel to produce. Easy production from places like these helps alleviate price pressure from newer, more expensive sources like Alberta’s tar sands, where oil can cost $60 a barrel or more to produce. Even at $5 a gallon (a mere 31 cents a cup), people don’t realize how inexpensive gasoline really is. Compare that price with Budweiser, at $13 a gallon, or Coke at $8 a gallon, or Evian water at $7.50 a gallon. The decline of old and cheap sources of oil will push the cost of gasoline, which handles the incomparable task of moving us around the world, well past the price of a gallon of bottled French water, which is no better for you than what comes out of the tap in America for mere pennies.
Our Oil Infrastructure Is Crumbling and It Needs More Than Rustoleum
In addition to the simple economics of rapidly rising demand and decreasing supply, there exists another future pressure on gasoline and energy prices: deteriorating infrastructure. Matthew Simmons, founder of Simmons & Company International, one of the world’s premier oil investment banks, says that 80% of the world’s refineries, pipelines, drilling rigs, and storage tanks are corroded, rusted to the point where replacement and retrofitting must begin soon.
This problem manifested in 2006 when BP’s thirty-year-old Alaskan pipeline carrying Prudhoe Bay crude sprung a leak, spilling 270,000 gallons of oil into the pristine Alaskan bush. The pipeline sprang another leak in 2007. Our aging refineries face the same problems. In 2005, hydrocarbons spewed out of a breach in an isomerization tank at a BP refinery near Houston. The gushing stream ignited when it hit the air and killed fifteen people. Later that year at the same plant, a hydrogen pipe blew up. Again in the same year, at a BP plant nearby that handles hydrocarbons derived from crude oil, a fire engulfed part of the facility, its flames bursting fifty feet from the ground. The blaze couldn’t be tamed; it burnt itself out after three days.
Simmons says without rebuilding, failing infrastructure will bring massive declines of supply in the next decade as more and more pipelines, tanks, and refineries fail. Rebuilds and repairs could cost a boggling $50 trillion. Those are costs that, whether through decreased supply or through money spent on direly needed renovation, will be passed through the system to end users—us—and of course, will increase the price of petroleum at the pump.
The costs of other energy sources, such as coal, natural gas, ethanol, and even nuclear power, will march up in price with oil. These cousins are indelibly melded together as part of the global energy grid. When the price of oil climbs, so, too, do the costs of coal and crop-based fuels. The dynamic functions as a market. If the price of oil quickly outstrips the price of all other energy sources, businesses and commerce will find ways to migrate their consumption toward energy not derived from oil. Effects aren’t immediate, to be sure. If the price of oil doubles, causing heating oil to appreciate similarly, heating oil consumers won’t rapidly switch to natural gas–fired furnaces.
It’s important to remember that a future of higher gasoline prices means higher energy prices across the board. The provoking conundrum here, and what this book explores, is how will we adjust to this—not only to higher gas prices but also to scarcer and higher energy prices across the board? Expensive energy, for some, will be strictly a burden. For others, it will be an opportunity for innovation. How will our lives be different, worse or better? Where will we capture the efficiencies needed to sustain our elaborate civilization? Will our homes look the same? Our offices? Our vehicles? Our neighborhoods? Our food?
It will all change. The price of gas will leverage change, fundamentally altering nearly every facet of our lives.
Society Change and the Dead SUV
At $4 a gallon, Americans cut back their driving by billions of miles. SUV plants were shut down. Hybrid cars became best sellers. Detroit’s sales lots became lonely places. Families cut back on vacations, rationed car use, and left their 4Runners and Explorers in the garage in favor of driving their sedans. The economy stalled. Four-dollar gas sharply pierced American psyches with the realization that our lives must change, that the old way of living, the way we’ve built our society since World War II—bigger, bigger, better—could actually be in peril. The effects of $4 gas mimed those of the Arab oil embargoes in the 1970s. Except this time, there was no embargo. Just more demand. Just billions more people, from the African continent to central Asia and the Far East, realizing their economic ambitions and rising to become oil consumers of consequence. And those people aren’t going away. Their ranks will only grow. To be sure, investor speculation in the oil market played a role in crude’s swift rise, but that speculation was backed by a voracious global demand with roots in global economic expansion. That demand can be muffled by global recessions and regional slowdowns, but it will always reemerge intact, as more people demand more energy.
With so many changes precipitating with gas prices at $4, it’s clear that $6 gas will bring even more dramatic change. This price will set massive gears gnashing, gears that will eventually change nearly every aspect of our lives, some for bad, some for good. Six dollars will be a calling card, a dawn, a pendulum rocker. At $4, there remains hope in many people’s guts that expensive fuel will recede far into the past and that prices of $2, or even $1.50, will return for good. Those hopes, misbegotten and childishly optimistic, will be finally dashed at $6. The lusty days of $2 gas will be firmly in the forgotten past as our new world unfolds. At $6, our lives, our businesses, our families, will all be caught, unready for the coming cavalcade of evolution and adaptation that rising gas prices will bring.
Monthly gas station bills for families that were $400 at $2 will be $1,200 at $6. Our economy, and even our societal fabric, will suffer a stiff jab to the mouth when gas tickles $6. Changes that were merely budding at $4 will bloom in full. The $6 price level will activate change like no other. It will serve as a bellwether to American society that the way we consume energy is unsustainable.
What happens at $6 will be a prelude to $8, $12, and $20. It’s here where Americans will be truly shocked and deeply affected. But it’s also here where Americans will pause, take measure, and accept a future of higher energy costs. Denial still runs deep and swift at $4; people can convince themselves that cheaper gas—normalcy—will return. That moat of unfounded reasoning will quickly dry out once prices reach $6. Energy will cost more, but we’ll use less and we’ll use it smarter.
But our acceptance of things will not shield our economy and our lives from the pain that comes with more expensive gas. We will not be prepared. Our shipping services won’t be prepared, nor will our homes, our food, our children, our jobs, or our cars. Four-dollar gas made life more expensive. Six-dollar gas, however, will mark the beginnings of true change. Four-dollar gas meant our public transportation systems saw 300 million more trips in 2008 than in 2007. San Francisco’s rapid transit system, BART, once a neglected novelty, removed seats from its trains to make room for more people to pack on and stand. In Boston, the number of cars on its infamous Mass Pike dropped by millions in 2008 and public officials implored mass-transit passengers to travel during off-peak times to mitigate crowding problems on the city’s “T” subway system. In Chicago, riders swamped “L” trains even more than usual, despite the fact that, owing to massive overhauls on many tracks, some trains were running at their all-time slowest. At $6, public transit will be the absolute belle of the ball. Our subways will overflow further, trains will be added, and new routes proposed. But that’s not even half of the $6 story.
The Big Snowball: What We Drive, and How We Drive It, Will Change Indelibly
Six-dollar gas, though its specter may sound implausible, isn’t too far away, says Jeffrey Rubin, a respected economist and the chief strategist and managing director of CIBC world markets. Rubin says gasoline will likely cost $7 a gallon by 2010. As a result, he says, “Over the next four years, we are likely to witness the greatest mass exodus of vehicles off America’s highways in history. By 2012, there should be some 10 million fewer vehicles on American roadways than there are today—a decline that dwarfs all previous adjustments including those during the two OPEC oil shocks.”
No realm of our lives will be affected faster, and no corner of big business will be rocked harder, than that of the vehicles we drive. Of those 10 million vehicles that Rubin predicts will come off U.S. roads, many will be SUVs. In fact, if you examine things with an eye toward a kind of natural selection of automobiles in a world of $6 gas, it’s pragmatic and reasonable to expect that most of the vehicles coming off the road will be the guzzlers, the SUVs, the nonessential pickup trucks, the low-end sports cars. Those are the cars that people won’t want.
Small cars will be worth money. Large cars will be worth very little. Prices of nimble fuel sippers will hold up incredibly well. We’ve already seen this effect, in fact, when gas was $4 a gallon in 2008. Two-year-old Honda Civics, in demand for their brisk fuel economy and low-maintenance reputations, were selling for $16,000, or 85% of what a new Civic cost at that time, according to J. D. Power & Associates. A similar two-year-old Toyota Prius, the hybrid car that’s becoming ubiquitous in American cities, ran 87% of the new-model price. Used cars of that age normally cost 50% to 60% of what a new model costs.
When gas hovered at $4, our beloved SUVs rapidly depreciated. They were impossible to sell; nobody wanted a car that seemed to be facing its twilight. When gas reaches $6, our SUVs will look like scrap metal in our minds’ eyes. They will be intractably obsolete testaments to a time when oil came easy and cheaply. The whole country will sit up, take notice, and realize that, in driving our SUVs, we have been piloting vehicles that were simply unsustainable luxuries unique to this time in history. The SUV’s traction in the auto market teetered ominously when gas cost $4 a gallon. At $6, the SUV will die.
Many people enjoy slathering the blame for our bloated domestic vehicles squarely on the big three Detroit automakers. We bemoan them as out of touch and foolish when compared to their nimble counterparts from Japan. “What a bunch of morons,” we say. “Didn’t they learn anything from the 1970s and 1980s?”
They did. As consumers, we learned a few things, too. But we rapidly jettisoned these lessons of scrimp and economy with the gas-and-go 1990s amid blistering economic growth and ridiculously low gas prices. Detroit merely followed our lead; they made what we wanted. As consumers, our tastes for giant vehicles created the demand. Detroit simply filled that demand. And in the process, Detroit made a ton of money. And isn’t that the whole point, when it comes to a corporation? What should Detroit have done? Neglect their shareholders and the capitalist model to stubbornly crank out small cars that nobody wanted? No. They did what they did to make money. Toyota and Nissan noticed. They jumped in with their own giant vehicles, chasing the same customers. And it worked. It worked until the SUV party stopped bumping when gas prices sped past $3 a gallon in early 2008. Gas prices have since been tempered by floundering demand and a struggling global economy, but those conditions won’t last forever. Even with the downturn in gas prices, SUV sales have not perked up much; Americans have developed a sense of inevitability regarding the SUV’s ultimate doom.
The tale of the SUV and America is an incredible economic parable. It’s a study in elastic demand and its wild swings of enriching glory and muddy tragedy. It’s a story framed by lust, vanity, money, and—playing the role of protagonist, or antagonist, depending on one’s view—the price of gasoline.
How America Got Hooked on the SUV
To understand how we’ve gotten to become a nation of gas-thirsty, steel-craving gasoline munchers, it’s important to know how the last twenty years have unfolded. The last two decades have featured a collision of storms, economic and societal, that have shaped Americans’ tastes and stretched the limits of consumption. Some of the cheapest oil in history coincided with the rise of SUVs, which engorged the bigger-fatter-better trend to an exponential degree here in the United States. Our society evolved from being one of savers, scrimpers, and pragmatists to being one of flaunters, competitors, and cravers. The gross enlargement of the standard American vehicle came even after the severe oil scares in the 1970s and early 1980s deflated the size of most Americans’ cars. We blithely forgot—even with those memories of long gas station lines lodged somewhere in baby boomers’ heads—how volatile the gas pump can be.
The SUV’s early roots can be traced back to the middle years of the twentieth century, when companies such as Willys, Kaiser Jeep, and Chevrolet were turning out boxy passenger carriers bolted to pickup truck frames. The vanguards were the Wagoneer and the Suburban. Ford joined the fray in 1965 with a burly two-door Bronco model. Chevy added the Blazer soon thereafter. These vehicles were aimed at niche customers who needed robust ground clearances and superior traction to drive where they had to drive—and that didn’t mean to the supermarket for cold cuts and ice cream sandwiches. SUV owners were farmers, ranchers, and government land stewards. The trucks had little appeal to suburban families, who preferred their smooth-riding station wagons. Four-wheel drive existed, but it didn’t carry the cachet or desirability with the general populace that accompanies it now.
The modern SUV’s true birth came with the 1984 Jeep Cherokee. Its success with consumers as an alternative to the station wagon or the nascent but popular minivan induced Chrysler to acquire AMC, the owner of Jeep, in 1987. The Cherokee continued its success with baby boomers eager to differentiate themselves from those driving homey wagons and vans. But the Cherokee was only a snowflake to the coming avalanche: the Ford Explorer. The Explorer, debuting in 1990, got its owners 15 miles per gallon in the city and 20 mpg on the highway. That mileage came with its original V6 engine. In ensuing years, Ford made a V8 model available, which got even lower mileage. But that didn’t hurt its popularity. Even with the first Iraq war raising oil prices and a short recession blanketing the country, there was no dampening the phenomenon of the Ford Explorer, the undisputed champ of the SUV age. Ford has sold more than 6 million Explorers during the last eighteen years, making it, by far, the most popular SUV to growl across American roads. In 2000, the truck reached its pinnacle as Ford sold a record 450,000 Explorers. That was the same year Toyota debuted its Prius hybrid in the United States, selling fewer than 15,000 of the fuel miser. Things have changed: Annual sales for the Prius passed the Explorer in 2007. Toyota has now sold more than 1 million Priuses.
The Explorer and its 1990s contemporaries exploited federal fuel-economy laws that said an automaker’s car fleet had to average 27.5 mpg, but light truck fleets needed only to average 20.5 mpg. The Explorer and others of its ilk, such as the Jeep Grand Cherokee, were, thanks to the tireless work of Detroit’s high-paid Washington lobbyists, classified as light trucks. That illustrates the power wielded by well-funded lobbyists; nobody with a string of integrity could honestly argue these vehicles were light trucks meant to transport materials and goods. SUVs, clearly, are passenger vehicles. Anything with eight seats and twenty-seven cupholders is not a light truck. As the 1990s wore on, Ford improved its Explorer design—and made it even bigger—and customers kept flocking. Toyota crafted its 4Runner to fit the segment, Nissan launched the Pathfinder, GM rolled out a redesigned Blazer, and Chrysler kept pumping out Grand Cherokees and its new entrant, the hulking Dodge Durango. Each updated model, be it for the Explorer or the Blazer, got more luxurious and, more importantly, bigger.
Consumers’ appetite for larger, brawnier SUVs led to a new animal: the full-size SUV. To somebody paying attention to automobile nomenclature, this may have been bewildering. So-called full-size SUVs already existed. Explorers, Blazers, Cherokees, and similar trucks—they were full-size. But this existing full-size segment, suddenly, had been relegated to mid-size status. The new full-sizers—the Chevy Tahoe, the Lincoln Navigator, the GMC Yukon, the Cadillac Escalade, the Toyota Sequoia, the Lexus LX-450, the Hummer, and the Ford Expedition—were moving in. And Americans loved them.
No example better illustrates our obsession with monster vehicles than the story of the Ford Expedition. Its tale will be recounted in economics classes for generations. Ford’s Michigan Truck Plant, a Ford factory outside Detroit in the town of Wayne, began assembling the Expedition in the summer of 1996. Ford thought the giant Expedition would be a nice, profitable niche vehicle to go with its smaller, more mainstream Explorer. At 12 mpg in the city and 17 mpg on the highway, the Expedition, Ford thought, couldn’t appeal to a wide swath of customers. Ford was wrong. The Michigan Truck Plant originally was going to spend half its time producing F-150 pickups in addition to making Expeditions. That arrangement lasted a few months. Americans went bananas for the Expedition and Ford couldn’t keep up. The Michigan Truck Plant began making SUVs exclusively within a few months of the Expedition’s debut. Soon, the factory was running twenty-four hours a day, six days a week. Some unionized autoworkers were pulling down $200,000 a year with overtime. In 1998, the plant’s revenues—just this one building—were $11 billion, about equal to McDonald’s global revenues that year. Each year the plant was churning out 300,000 Expeditions and Navigators, generating as much as $15,000 in profit on each of the monster SUVs. Ford had fifty-three assembly plants across the globe in 1998, but the Michigan Truck Plant accounted for a third of the company’s profits by itself, nearly $4 billion. It was the most lucrative factory in the world.
The SUV revived the moribund American auto industry, which had been getting whipped by Japan’s more dependable and more fuel-efficient fleets. In 1998, just after Daimler and Chrysler had merged, the three largest companies in the world by sales were GM, Ford, and DaimlerChrysler, not in small part due to the SUV. Here was a vehicle that Detroit had been making for decades—the pickup truck—and to sell it for twice the normal price, all Detroit had to do was slap on a few more doors and a couple rows of seats. And why not roll out some luxury models? The most successful, the Cadillac Escalade, was nothing but a GMC Yukon spiffed up with additional sound dampening, some chrome, and a few minor modifications. And the GMC Yukon, of course, was nothing but a slightly nicer Chevy Tahoe, which was, of course, a Chevy Silverado pickup truck with some seats and a roof. GM made the Escalade for $25,000 and people scrambled to buy them for $50,000. Most carmakers—Toyota, Ford, Chrysler, and GM—got into the luxury SUV game; it was simply too profitable not to. In 1990, cars made up 90% of the luxury market. By 1996, cars had been relegated to 44%, with SUVs scooping up the majority.
The giant SUVs were expensive, inefficient, gaudy, and perhaps worst of all, unsafe. In his book on the SUV popularity surge and its dangers, High and Mighty, New York Times writer Keith Bradsher compared driving an Escalade to “a pig on stilts.” So be it, Detroit said. “If pigs are big and popular, I guess we’ll make pigs,” quipped Harry Pearce, vice chairman of GM in 2000. So the pigs, which were prone to rolling over and hard to maneuver, kept coming.
The dazzling rise of SUVs had roots in many things, not the least of which was Americans’ mercurial psyches. According to some of American automakers’ own market researchers, the type of people who tend to buy SUVs are insecure and vain. They’re people who frequently are nervous about their marriages and uncomfortable about having become parents. They have little confidence in their skills as drivers. And more than anything else, they’re self-absorbed and narcissistic, with little interest in their communities and neighbors. Those aren’t my own observations. They come straight from marketing folks on Detroit carmakers’ payrolls, who recounted their research to Mr. Bradsher. The car-makers, in this sense, can be depended on. Their market research is exhaustive, detailed, expensive, and massive in its scale. Perhaps you’re reading this and appraising your own character right now, on account of something you may park or have parked in your garage. I know the feeling. I drove an old Toyota 4Runner all over the country for a decade—running the odometer past 240,000 miles—and I loved it.
Oil Prices Enabled the SUV to Thrive, but They Will Ultimately Bury the SUV in its Grave
We can’t fully blame ugly American attitudes for the rise of the Jeep Grand Cherokee, the Expedition, and the rest of their brood. SUV mania and Detroit’s renaissance rose, not coincidentally, with the lowest oil prices the modern world has ever seen. Oil in 1998 averaged $15.35 a barrel in today’s dollars. The next cheapest year was 1946, when oil sold for $17.26. Many parts of the country in 1998—just a decade ago—saw gas prices of well below $1. Driving from Illinois to New Orleans on a trip with friends that year, I paid 59 cents a gallon at a gas station in Missouri. I filled the tank for 7 bucks. Gas wasn’t free, but it was close. Roaming the country was limited by one’s stamina and caffeine tolerance, not by money.
Low oil brought casualties, too. Amid the record-low oil prices in 1999, GM trashed its ballyhooed electric car, the EV1, which it had spent billions to develop during the 1990s. The car had just started rolling off a Lansing, Michigan, assembly line in 1996. Electric cars and subcompacts were of little use to Americans with gas at a buck or less.
Cheap gas also fueled a pickup truck boom. Ford sold 939,000 of them in 2004, a record. Pickup trucks, because of their functionality, will persevere at $6, but normal people won’t consider them for a spot in the garage, as they have in the past. The days of driving a truck purely as a statement of machismo, or a subconscious sense of insecurity, will be gone. These feelings can’t be indulged at $6 a gallon.
Excerpted from $20 Per Gallon by Steiner, Christopher Copyright © 2010 by Steiner, Christopher. Excerpted by permission.
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Meet the Author
Chris Steiner is a senior staff reporter at Forbes magazine; one of three writers in the Chicago bureau. Previously he worked as a civil engineer in Park City, Utah.
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