If Oil Production Declines, Will HSR Opposition Decline With It?
Between 2000 and 2008, the price of oil rose by 600%, from about $20 per barrel to nearly $140 per barrel. In 2008 the price increases spiked, but as the chart below indicates, the increase was underway well before the spike occurred:
That increase had a number of important effects. When the price of a gallon of gas broke $3 and stayed there in 2006, it brought an end to the state’s real estate bubble, as buyers were no longer able to afford both the cost of a commute and the cost of their mortgage. When the price of a gallon of gas neared $5 in California in the summer of 2008, it helped shove the state into the worst recession in 60 years.
That 2008 spike had another important effect: it convinced Californians that they needed much more passenger rail service. Voters in Los Angeles County, Santa Clara County, and Sonoma and Marin Counties approved sales tax increases for passenger trains, with over 2/3rds of the voters saying yes. And of course, 2008 was the year that voters approved the $10 billion high speed rail bond, Prop 1A.
Californians didn’t just vote for passenger trains as a result of the rising cost of oil: they have also been using them. Take a look at the Capitol Corridor’s ridership since 1999, which tracks the price of oil very well:
Significantly, the place on this chart that does NOT closely track the price of oil is in FY 08-09. The price of oil crashed temporarily, but since has recovered, trading on Monday March 29 at $82/bbl. What didn’t crash is Capitol Corridor ridership, which is below 07-08 numbers, but is still above 06-07 numbers, a truly remarkable feat considering that 08-09 witnessed the severe recession. In fact, while ridership is down by about another 5% in FY 09-10, over half of that is due to state worker furloughs. Once the economy recovers, many of those workers will return to full-time employment, and more riders will use the trains. And on the other two intercity rail services, the San Joaquins and the Pacific Surfliners, ridership is higher in February 2010 than in February 2009, indicating that public demand for intercity trains remains strong.
Of course, as the economy recovers, the price of oil is almost universally expected to rise along with it. Economic recovery means more demand for oil, which will drive the price higher, particularly as growth fuels major demand expansion in countries like India and China. Imagine every new Tata Nano as another straw into the pool that is the global oil supply.
It’s a pool that is not being replenished. Instead, as the US Department of Energy acknowledges, a decline in production is expected as early as next year:
Page 8 of the presentation document of the round-table, a graph shows that the DoE is expecting a decline of the total of all known sources of liquid fuels supplies after 2011.
The graph labels as “unidentified” the additional supply projects needed to fill in a gap that is expected to grow after 2011 between rising demand and decline of known sources of supply that the DoE supposes will start that year. The declining production foreseen by the DoE concerns the total of existing sources of liquid fuels plus the new production projects that are supposed to come on-stream before 2012.
The DoE predicts that the decline of identified sources of supply will be steady and sharp : – 2 percent a year, from 87 million barrels per day (Mbpd) in 2011 to just 80 Mbpd in 2015. At that time, the world demand for oil and other liquid fuels should have climbed up to 90 Mbpd, according to the presentation document.
While one might argue this will merely fuel more searching for and production of oil, the fact is that the easily found oil has already been pumped. New production consists of more difficult sources, such as the Alberta Tar Sands. The high cost of production requires high oil prices to be profitable.
Rising demand and decreasing supply means only one thing: rising oil prices. Soon enough we’ll see a run at $4 per gallon, and then $5. That could happen in 2010 or 2011, depending on the strength of the economic recovery.
As I’ve mentioned several times before, Deutsche Bank believes this will produce oil prices of $175/bbl by 2017, perhaps sooner. In practice that would put California pump prices at between $5 and $6 per gallon.
If California hasn’t already gotten started on building out an electrified passenger rail system to connect our cities, and provide service within them, we are screwed.
But we’ve not heard very much about that in 2009. When oil prices retreated from their 2008 peak, many older Californians assumed it was the return of normalcy. Having lived their lives with low oil prices, with the 1970s seemingly acting as an anomaly, they came to expect that low oil prices had returned for good, and that there was no need for what they viewed as the “inconvenience” of building things like fast, electric, grade-separated high speed trains. At the same time, state legislators made a series of crippling cuts to public transit agencies even though they had seen dramatic ridership increases in 2008, which were generally sustained through 2009.
When – and yes, it is a matter of when – oil prices begin to rise again, those who advocated cuts to mass transit service and those who argued high speed rail was unnecessary will be exposed as having been very, very wrong. Public willingness to tolerate their delaying tactics, already small, will evaporate entirely as NIMBYs will be clearly seen as standing in the way of affordable transportation solutions.
We should start viewing HSR opposition as a “bubble” phenomenon. Enabled by a temporary lull in the upward trend of oil prices, it can only be sustained as long as those prices do not rise further. Once that happens, the anti-HSR bubble will burst as rapidly and as completely as the real estate bubble burst starting four years ago.
Just as it would have been foolish to make fundamental economic or infrastructure decisions during the housing bubble, it would be equally foolish to make the same decisions during the anti-HSR bubble. California must plow full speed ahead with the HSR plans as approved by voters in November 2008, otherwise we will have a much more difficult time dealing with higher oil prices than we’re already going to have.