Soaring Energy Costs to Change Everything

Soaring Energy Costs to Change Everything

Back in the 1990s, when Osama bin Laden was still giving interviews to journalists and didn't have a $50-million bounty on his head, one of his biggest grievances with the West was over the price of oil. At around US$30 a barrel, it was far too cheap, he reasoned. The Western world was ruthlessly bleeding the Middle East by not paying fair market value for oil. It had to be stopped. A more appropriate price? At least US$100 a barrel, he once said, maybe even US$200.

Mission accomplished. Suddenly a world in which oil costs well over US$100 a barrel isn't just the dream of a terrorist bent on destroying the United States and its allies. It is reality. Oil recently hit US$135 a barrel, more than double where it was a year ago. And the once unimaginable prospect of oil at US$200 a barrel is gaining currency among the world's most respected oil watchers. Jeff Rubin, chief economist with CIBC World Markets, predicts oil will rocket to that level by 2012. Goldman Sachs figures we'll get there even sooner. Other analysts, meanwhile, have begun to float more startling figures, of oil at US$250, even US$300 a barrel.

The world is now facing an oil crisis few predicted and even fewer are prepared for. It's impossible to understate how crucial cheap oil has become to our way of life. It's shaped how we get our food, what we buy, where we live, how we work, and the way we play. Cheap oil opened up the world to millions of travellers via discount airlines, allowed thousands to buy their first homes in sprawling suburbs, and enabled consumers to get their hands on ever cheaper goods, shipped just in time, from around the globe. Now economists say all of that is at risk. Exactly how the end of cheap oil will change our lives is still far from clear. But change them it will, in profound and dramatic ways. If the price of oil continues to climb to US$200 a barrel, it won't just be that people will have to drive a little bit less or skip the family trip to Disneyland. Across the board the cost of living will explode, not just for luxuries but basic necessities as well. To hear some experts tell it, we're headed for nothing short of Oilmageddon. At the very least, they say, the age of plenty is over.

The pain has already begun. Gasoline prices in Canada now stand at around $1.30 per litre, up 30 per cent over the past year. That jump has hit car sales. Ford Motor Co. is slashing production of SUVs and pickups, putting thousands of already struggling auto workers out of their jobs. A poll last week found half of Canadians have either cut back on how much they drive or are planning to. And with gas prices so rich, a wave of gasoline theft has swept the continent. Forget locking gas caps, thieves are crawling under cars with cordless drills to drain tanks of their liquid gold. The police, meanwhile, may have to chase down those criminals on foot. Rising prices have many police departments parking their cruisers. In Georgia, the state police have been ordered to cut back driving time by 25 per cent.

In the skies, the price crunch is even worse. The airline industry is grappling with a 95 per cent jump in the price of jet fuel and companies are passing those costs right along to passengers through fuel surcharges of as much as $130 for a round trip ticket. Air Canada and American Airlines have even started charging for checked bags, while AA slashed 1,300 flights last week to cut costs. Air Canada is thinking of similar cuts. Now, there are fears of bankruptcies akin to the industry's post-9/11 meltdown.

It seems every day companies announce another round of price hikes, for everything from beer and vinyl siding to Starbucks coffee and diapers. Even then, rising energy prices take time to filter their way into the economy. Experts say we're only now feeling the effects of US$100 oil, and with no sign of a return to the carefree days of double-digit crude, the real storm has just begun to gather. Should oil hit US$200 in the next few years, the world will be scarcely recognizable.

James Howard Kunstler isn't one to mince words about what's coming. "The suburbs will turn to slums, salvage yards and ruins," says the author of the book The Long Emergency. "Expensive oil will thunder through the economic system cutting a wide swath of destruction." As Kunstler sees it, sometime during this decade half of the world's recoverable petroleum will have been extracted. From here on out, we'll be living on a dwindling supply of hard-to-reach fossil fuels. This is the cornerstone of the "peak oil" theory and Kuntsler foresees apocalyptic fallout. It will become unfeasible for people to drive from the burbs to distant jobs, and as the petroleum refugees flee their McMansions, the sprawling cul-de-sacs will turn to ghost towns. As the global supply chains collapse, major importers like Wal-Mart will go out of business.

Kunstler has often been dismissed as a crank. And the dismal picture he paints of the future comes straight out of the wildest fantasies of the anti-consumer, anti-development crowd. Yet the fact is a growing number of economists are starting to echo similar ideas that just two years ago were seen as the domain of the lunatic fringe. As the predictions for $200 oil grow louder, so too does the realization that huge changes are coming.

The agony that's been felt at the pumps so far is nothing compared to what will transpire if oil keeps marching higher, and the repercussions will ripple out from there. More than 60 per cent of the oil consumed in North America goes to fuel transportation, with the largest amount used to power passenger vehicles and transport trucks. By some estimates, eight out of 10 Americans rely on cars to get back and forth to work. (In cities like Toronto, that figure is more like 55 per cent, according to Statistics Canada.) If oil tops US$200 a barrel, Rubin at CIBC World Markets has said the average price of gasoline could reach $2.25 per litre, a 75 per cent jump over what it is today. At that price, it would cost $135 to fill up the average gas tank; $180 for those with deep enough pockets to still be driving SUVs (double that for the two-car garage suburban set). Someone earning $12 an hour, the average wage of Canadians between the ages of 15 and 24, would have to put in a day and a half's work just to afford a fill-up. And for those who get behind the wheel of a large vehicle for a 100-km round trip commute, the average annual fuel bill could surpass $10,000 - enough to buy a sub- compact car with better mileage. "If the price of oil gets to US$200 a barrel, one of my cars is going up on blocks," says David Carson of the Canadian Centre for Energy, a non-profit research group in Calgary, referring to his gas-guzzling Mustang. "I really envy my daughter for her Honda Civic."

Long before gasoline prices get that high, though, many people will have radically altered their driving habits. Cathy Hay at MJ Ervin & Associates, a Calgary firm that tracks gasoline prices, believes $1.60 gas could be the tipping point at which people dramatically cut back. Whether suburbs like Markham, Ont., Richmond, B.C., and Laval, Que., are destined to waste away is a matter for debate. But there are signs the sudden rise in oil prices has already had a profound impact on real estate prices in the U.S. Last month Joe Cortright, an economist in Oregon, published a report for the Chicago-based organization CEOs For Cities that looked at downtown versus suburban housing markets. He found far-flung neighbourhoods had both greater price declines and higher foreclosure rates than those closer to a city's core. What's more, he concluded the current housing crisis is about more than subprime mortgages. Years of rising gasoline prices have simply made suburban living too expensive. "The collapse of the housing bubble, punctured by the gas price spike, marks a watershed point for the nation's suburbs," Cortright wrote. "As the more severe decline in housing prices on the urban fringe over the past year illustrates, $3 a gallon gas has made low density development a false economy across the nation."

And don't think for a moment that Canada, even with its surprisingly resilient housing market, can escape unscathed. Experts see two separate real estate markets forming - neighbourhoods that offer easy access by bicycle and public transit, and those accessible only by car. "They're going to be the losers in the next economic downturn," says Anthony Perl, director of Urban Studies at Simon Fraser University. "Those people who didn't think it mattered where you lived and felt transportation would always be cheap made the wrong bet. They probably didn't even know they were betting."

Regardless of whether people live downtown or in the burbs, the soaring cost of heating residences through the chilly winter months will affect everyone. The price of home heating oil, at $1.29 per litre, has already jumped 115 per cent since 2004, gaining 30 per cent so far this year, according to data from MJ Ervin. Roughly 10 per cent of Canadians heat their homes with oil, particularly those in rural communities who must already contend with sky high gasoline prices. The annual bill to heat an older home with an old oil furnace has, in some cases, reached $4,000 a year. Mary Maifrini, who co-owns Ernie's Woodstove Repairs and Sales in Durham, Ont., says there's been an increase in sales at the store as oil prices have risen. "That's what frustrates people the most about oil - they can't control it," she says. And that sense of helplessness applies even to those who heat their homes with natural gas and electricity. Prices for natural gas in Ontario are set to jump 20 per cent on July 1.

Even if Canadians ratchet down the thermostat to save a few bucks come winter, there's almost no way to avoid the crippling effect that US$200 oil will have on the price of everything we buy, from food to home electronics to airline tickets. It's often said that it takes 400 gallons of oil equivalent to feed each person in America every year. The stuff is crucial to getting food from the farm to our tables, whether it's in the production of fertilizer, harvesting, processing or transporting fruits and vegetables halfway around the world. And as oil prices reach the stratosphere, there will be more demand for alternative fuels such as corn and grain-based ethanol, putting even more upward pressure on food prices. There have already been riots around the world as people find they can no longer afford to feed themselves the way they had just a few months ago. And just as bananas would emerge as luxury items if oil continues to climb, economists warn people will find the era of cheap clothes and home electronics will screech to a halt. Marine shipping rates have already jumped 72 per cent since last year. In the same way airlines are passing their costs on to consumers, so too will manufacturers. "Our way of life depends on freight transport and the whole thing is beginning to unravel," says Richard Gilbert, a transportation consultant in Toronto and one of the authors of Transport Revolutions.

No sense worrying about the price of airline tickets though - chances are, you won't be flying much in the future anyway. While US$100 a barrel oil has airlines in a panic, at US$200 the industry's business model completely falls apart. "Aviation will be truly, dramatically changed," says Gilbert. Short commuter flights from Toronto to Montreal, or Calgary to Edmonton, will be phased out. Air travel will only work with large, fully occupied planes flying medium distances, says Gilbert. Most air travel will need to be replaced by European-style rail networks. There are about 330 airports in the U.S. today with scheduled flights. Gilbert predicts by about 2025 that number will dwindle to 30 or 40.

In other words, after years of feeling like the world really was shrinking, our big old blue sphere is going to start seeming awfully large again, and it will redraw everything from how we work to how we socialize. "I think people will look back on the 1940s to early 2000s as an exceptional period and it will seem very strange that people would fly off to Las Vegas or Florida for the weekend, or drive their kids 20 km to play hockey and take piano lessons," says SFU's Perl. "Some people are going to have to adjust every aspect of their lives."

The idea of a 21st-century oil spike is by no means new. Back in the early 1980s it was widely believed that by the year 2000 oil supplies would falter and prices would hit US$100 a barrel. But throughout the 1990s, prices remained amazingly stable around the US$30 a barrel mark. By the turn of the century, oil was hitting 30-year lows and those dire predictions seemed downright crazy. Turns out they were just a few years off. Last week, the International Energy Agency said it will re-examine the oil supply in 400 major oil fields around the world - a sobering acknowledgement that there may be even less oil than once thought. Even industry insiders are waking to the idea that the world is nearing the supply wall. Last year, former U.S. energy secretary James Schlesinger declared, "the battle is over, the peakists have won." Peak oil theory isn't about the world running out of oil - that won't happen anytime soon. It simply describes the point at which the supply of oil can no longer keep up with the world's growing demand, which these days is coming more and more from the fast-growing economies of China and India. When supplies run short oil prices don't just go up, they skyrocket. A 2005 U.S. government report concluded that a four per cent shortfall would result in a 177 per cent increase in oil prices. It is possible that new reserves, like Alberta's tar sands, will help temper that jump in prices. But there's no avoiding the fact that the world has entered a whole new realm.

There could yet be a small silver lining in this grim future. In a society where drive-through banks and communities without sidewalks are commonplace, overweight North Americans might do well if forced to park their cars and walk a little. And there's no shortage of ways in which people could cut back their energy use. The U.S. Department of Transportation found that 67 per cent of car travel and 50 per cent of air travel is discretionary. "Oil has been so cheap and food so cheap that we use it in incredibly extravagant ways," says Gregory Clark, an economist at the University of California at Davis. Clark argues society could adapt in the long run to a world of US$200 or even US$500 a barrel oil. "In the ordinary course of technological advance we're getting about two per cent richer each year. A doubling of oil prices, at maximum, would take away about two or three years of growth." Overall, incomes might decline by about eight per cent, he says.

But even optimists like Clark admit that a painful period of adjustment is unavoidable. North America's car-crazy cities won't transform overnight. And even seemingly modest declines in income resulting from rising fuel costs can seem crippling to those already struggling in tough economic times. If the U.S. isn't already in a recession, as many economists believe, rising oil prices could provide the final nudge into a long and tumultuous downturn. Ditto for Canada, which last week reported a jump in inflation for the first time in six months, thanks largely to rising fuel costs, according to Statistics Canada. A 2005 report by the U.S. Department of Energy warned a sustained rise in oil prices would trigger inflation and unemployment and the "degradation of living standards." "The world has never confronted a problem like this," it concluded, "and the failure to act on a timely basis could have debilitating impacts on the world economy."

Unfortunately, failing to act in a timely way is precisely what we seem to be doing. "You can't replace hundreds of millions of private automobiles throughout the U.S. overnight. You can't even do it in five years," says Daniel Lerch, author of Post Carbon Cities. Public policy - from decisions to invest in multi-billion-dollar freeway projects to airport expansions - remains stubbornly rooted in the idea that oil will be available and affordable far into the future, says Lerch.

The cost of oil, however, is beginning to hit public purses. If filling your SUV up with gas has you feeling queasy, think how the U.S. military must feel. It buys about 340,000 barrels of fuel a day. Its bill last year was US$13.6 billion - a nearly 25 per cent jump from the previous year. It is now trying to cut its oil use and experiment with alternative fuels, but the widespread use of such alternatives is at least a decade away - probably too far for politicians in search of a quick policy fix. Hillary Clinton ran into trouble recently when she proposed a summer gas-tax holiday to ease pump prices. A nice gesture, but one that would accomplish nothing, except maybe further boost demand for gas, economists pointed out. Any serious public talk about energy has focused squarely on global warming - "a huge distraction" that has got in the way of dealing with the much more urgent issue of oil security, says Gilbert.

In Canada, politicians will likely find themselves fighting new fires, like the growing division between oil-rich Alberta and Newfoundland, and the erstwhile economic heartland in Ontario and Quebec, with their ailing manufacturing sectors.

All signs suggest that planning for real change won't come until it's too late. "People don't wake up until things are flying apart," says Matt Savinar, a California lawyer who runs the website Lifeaftertheoilcrash.net. Savinar is the kind of observer who not long ago would have been considered a dooms-day prophet. Nowadays, he says he feels more frustrated than he does vindicated by the surging oil prices. Everything that he's been preaching is coming true, but still no one is listening. "I bet that once we get within a few years of oil production peaking you'll see the U.S. invade the last large deposits. Oh wait, that already happened. You'll see rising food prices. Oh wait, that already happened. You'll see sky rocketing oil prices. Oh wait, that already happened. If you imagine your worst nightmare, we're right on track for that to come true. Just look at the news."

See also: PETROLEUM; ENERGY.

Maclean's June 9, 2008