The Oil Drum

There was an interesting stock trading experiment done at UCLA - over 10 years ago, where the stocks traded were oil company stocks, and the oil reserves of each company, and the rates of production and depletion were all known by the participants. The participants were all Business school students. The result was that the company stocks were sold at an increasingly higher price until the final sudden collapse. And there wass absolutely no linkage between a company's stock price and its known reserves or depletion rates. Market psychology was driven purely by short term decisions, which in this case was "how do I make a profitatable trade." Very different from how economists say the market works.

This experiment took both the participants and the people conducting the experiment by surprise. But then came the Enron debacle -- a purely trading company -- and the results were very similar!

Well, from the conversation that's been going on in these two posts on the Econbrowser piece, it seems obvious even to an economic illiterate what's going on: the argument makes no sense because no one is going to wait 2 years for a higher return on their investment when they can get a reasonable return now. In 2 years some new investment will come along to keep them occupied, and in the meantime they've made some money.

Furthermore, Econbrowser says this: "Anybody who pumps a barrel out of a reservoir today to sell at $60 could make three times as much money if they just left it in the ground another two years before pumping it out."

Correct me if I'm wrong, but if everyone up and decided to leave all the oil in the ground for 2 years, then I'm guessing that the $200/barrel prediction goes right out the window. Again, then, the argument just doesn't make sense.

First of all let me thank Heading Out for the best and most relevant analogy I have heard regarding technology adaptation. The pregnancy comparsion does show that things take time and if you have't started on a five year project today, it won't be done in one year - no matter how great the price signals.

However, I think the point of the Econbrowser post - and one of the reasons it was such a great link for The Oil Drum to make - is not that economics can somehow answer every question or point to an exact truth. Rather, it provides a new set of data and a different framework to look at things.

I tend to side with Econbrowser over ianqui on the issue discussed above. An investor expects a roughly 10% return on the stock market. Sometimes, it's up, sometimes down, but over any given period of time over the last 70 years, 10% is about what it has produced. If that same investor thinks it is certain that oil prices will go up 30% in two years, they will buy oil futures as this is a level of return not typically available to them. This doesn't depend on complex theory or sophisticated markets. Refineres and other energy related businesses presumably have better access to information than average people and the fact that they have not bid future prices up much above spot, does give a pretty solid indication that they don't think prices will be that much higher.

Regarding the second point, I also think Econbrowser has a strong case again. If Saudi Arabia knows its oil is running out and prices will shoot up they are better off storing (hoarding) it until the time when the price is higher. This is true also for private companies and certainly for countries like Iran that are sitting on piles of cash and don't need to do our bidding. If I had a thousand barrels of oil in the ground under my house, and I thought prices would be much higher in one year, I would wait one year to pump and sell.

It is also worth noting that prices are far higher than they were just a year ago. No one seems to have trouble believing that this indicates an impending shortage. So you do seem to agree with at least a part of economics

I think the point that Rajiv and other make is valid. Markets aren't always rational and people have been wrong a lot. But I do think that future prices will reflect increased oil prices in advance of spot prices and will send economic signals that help to smooth adjustment.

This does not mean the adjustment will be smooth. As Heading Out implies, one year of warning doesn't isn't going to change everything when adjustments take many years and may not be doable in any case. Gold has been expensive for thousands of years and we haven't been able to just find more gold.

But that doesn't mean it makes sense to completely discard economics just because it provides one data point that doesn't show what you want it to show.

*

I think, Jack, that you missed a couple of my points,
a) if you have made an investment in getting to the oil of hundred's of millions of dollars you expect a return on your money as fast as possible. To expect otherwise, particularly as, in the Saudi case, you know you have lots more oil in the ground is, I believe, unrealistic and doesn't understand how hungry investors are for a return.
b) you again don't grasp the scale issue. We are not talking about a thousand barrels under your house, nut rather several million. If you are going to extract this at say 500 barrels a day and the reserve is going to last for say 8 years at that rate, would you care whether you started pumping tomorrow or next year, given that you can both have production this year and next. (What you lose is production 8 years from now and most folk won't look that far into the future).

Can anyone shed light on the effects of oil producer withholding production for when the price goes higher (as suggested), which in fact could cause the price to go higher faster (due to market shortage), which then may lead to economic disruptions, which then may lead to reduced demand, which then may lead to lower prices again so the whole cycle can restart. All the meanwhile, no solutions would have been found due to the economic disruption. Is this a realistic scenario of delayed production for higher profit taking?

Honestly, I still think this is more a case of discarding inconvenient facts than actually wrestling with the issues. When the analogy is wolves at doors and sandwich shops, they can be pretty general, but if it's economics you all of a sudden get a lot more demanding.

Regarding point a) Saudi Arabia, Iran and others have certainly held oil off world markets before. Iran in particular is cash rich, doesn't have to answer to short term investors and doesn't care much if American SUV owners are inconvenienced. I can't imagine that they are pumnp themselves into a weaker position.

You point b) seems to accept a peak 8 years out. In that case, perhaps you are right, but imagine the same case you present, but five years from now. The reserve owner has pumped for five years and has plenty of cash, but can see can see the good days are over. Their supply is running out an high prices are on the horizon. I don't think they are going to keep pumping at full speed. And if they do, someone will buy it and hold it off the market if their expectation is an imminent price increase.

I am not an economist and I don't mean to quibble with you on your own site, which I enjoy very much. I do think peak oil is a real phenomena and can be justified in economic terms. There is nothing in economics that is going to argue against peak oil if it is real. My impression is the Econbrowser was essentially offering an olive branch and attempting to bridge the gap between economists and peak oil advocates. I think that by patiently going over the data that people like Simmons and other have presented, discussing the time delay issues, weakness of envisioned replacements and other issues we all understand we have an opportunity to convince a lot of people. But by treating an offer to talk as an assault you are missing and opportunity to change minds.

Again, I like your site and don't mean to be argumentitive. If you want me to shut up, I will.

You guys are oversimplifying the issue. It's not a choice between full-out production today vs doing nothing for two years. If there really were strong evidence that the oil would be increasing rapidly in price in a couple of years, the sensible thing to do is to pump it moderately for now. You'd produce slower than you would if you didn't expect the price to rise, but you wouldn't stop entirely. You need some cash flow and there is also the chance that you are wrong and the high prices won't materialize. If and when the high prices do appear you increase the pumping and make a lot more money.

This basically supports Econbrowser's point that if oil producers truly believed that a price rise was imminent, it would change their behavior and reduce the amount of oil on the market today. That would itself lead to price rises in advance of the shortage, which is a good thing! It's more of the invisible hand doing its job.

Some people suggest that this is what is happening today, that the rise over the last two years is really a matter of anticipating future shortages and not due to present day shortfalls. This manifests in the trading markets as complaints about "speculators". These guys are always cast as the villains. They are said to drive up prices for no good reason, when there is plenty of oil and no serious shortages. The truth is that speculators are crucial for the market to work properly. They are the ones who look to the future and make today's prices reflect future conditions. The fact that current high prices are being blamed on speculators is evidence that in fact they are at least in part due to anticipated future shortages.

I'll agree with that.

I guess what I am trying to say, and not as well as I should, is that economics is not a scheme to discredit peak oil. It is just one way of explaining some of the things that happen in the world, although not to the exclusion of others. There is no inconsistency between peak oil and economics.

In all of this economics discussion I don't see any politics which suggests to me that many participants are in thrall to 'free' market theory. How about some discussion of the fact that the world's most powerful army is encamped in the midst of the most important oil-producing area and what this might mean for the delivery of oil to consumers or the fact that most of the important countries are run by autocrats who may have little interest in doing the right thing for the future of their country (i.e. the ridiculous investment in ultra-luxury hotels and other facilities by the UAE in order to diversify income as oil revenues decline) or the fact that with so many state-run oil companies there may be revenue issues that require as little disruption to oil production as possible or the fact that OPEC is a cartel or look at what Chavez is going to do with his regional oil 'market' proposal or the fact that one big private oil company has lied about its reserves and is not going to be punished by any government. Why not I wonder? If my head was a little clearer I could probably go on...
One more point...if the market worked so well and economists were worth their weight in dollars wouldn't they have done something to stop a world-wide housing bubble from developing? And...Colin Campbell gave a presentation to the House of Commons concerning oil depletion in 1997...what were the economists talking about then? New paradigms! The dot.com revolution! The Dow Jones is going to hit 30,000! Well, Colin Campbell is still saying much the same thing and what are the economists saying? I'll take my cue from the geologists for now thank you very much.

If memory serves me correctly, no one, including those in the know, could confirm peak production in the United States until after the fact. The state of perfect knowledge of future production doesn't exist.

That imperfect knowledge means that any bet on the futures market entails risk--a risk that would be evaluated in the light of a recent history of drops in oil price. Who wants to make such a large bet and be wrong by six months? Given the complexity and secrecy surrounding actual oil reserves and production, the futures markets may not give a signal until it is relatively late in the game, so to speak.

Jack/Halfin -

What debts do the OPEC countries have to service?

I think that "not pumping" would quickly put them all in default...they have minimal revenue alternatives.

Heres the bet 5 years ago you could buy dec 06 oil for 20 dollars a barrel hold an wait you dont have to time the event to within 6 months. Dec 11 is the latest delivery date on the board now for $57 a barrel not as good as $20 but still a good buy if you believe in P.O.

$60 a barrel is no mans land it isent high enough to damage demand and its consided 'expensive' by many economists. This winter its gunna be real interesting

Assuming that only a small fraction of available reserves can be extracted yearly, a discounted cash flow analysis shows that there's nothing to gain from holding off on production in most plausible scenarios of a price surge occurring in the near future.

Waiting before beginning extraction of a resource is profitable only if depletion is fast or you have a low discount rate, which means you accept a low return on investment.

For example, assume you have a resource that produces $1 worth of oil this year, and lasts forever depleting 5% every year. Assume that price triples n years from now. Your discount rate is 10%.
dcf1 = discounted cash flow starting extraction now
dcf2 = discounted cash flow starting extraction one year from now

n = 1
dcf1 = 18.690
dcf2 = 18.621
n = 2
dcf1 = 16.980
dcf2 = 16.821
n = 3
dcf1 = 15.518
dcf2 = 15.282
n = 4
dcf1 = 14.268
dcf2 = 13.966
n = 5
dcf1 = 13.199
dcf2 = 12.841
n = 6
dcf1 = 12.285
dcf2 = 11.879
n = 7
dcf1 = 11.504
dcf2 = 11.056

Withholding production is not profitable.

Assume 8% depletion, 8% discount rate, and
price tripling after n years:

n = 1
dcf1 = 17.531
dcf2 = 17.969
n = 2
dcf1 = 15.838
dcf2 = 16.129
n = 3
dcf1 = 14.406
dcf2 = 14.571
n = 4
dcf1 = 13.193
dcf2 = 13.253
n = 5
dcf1 = 12.167
dcf2 = 12.138
n = 6
dcf1 = 11.298
dcf2 = 11.193
n = 7
dcf1 = 10.562
dcf2 = 10.394

Withholding production is profitable if you expect the price surge to occur in four years.

ROFLMAO!!!

Even the economists cannot agree on these points!!!

Oh God, my sides are hurting....

ROFL!

OK, I am done with my fit.

OPEC has NOT PUMPED full out intentionally for decades.

Most OPEC countries are highly debt leveraged, and cannot avoid pumping at a reasonable level. Their goal has always been a stable price - that lets them plan and borrow money.

What is interesting to me is that the biggest swing pumper, Saudi Arabia, cannot pump any more today when it is needed to stabilize prices - sour crude doesn't count. Nobody is rigged to refine it.

Attributing "free market" economics to a producing cartel is a total fallacy and waste of time. The market is and has been controlled. We may now be entering a period of uncontrollable price fluctuations brought on by NO MORE CHEAP, EASY OIL. I am not saying peak, just peak cheap&easy. This means we are staring at a price step to a new base level.

We may level out at $60 or at $45 or at $75 - who knows? Once we do, OPEC will again be able to exert even tighter pricing controls as the rest of the world depletes rapidly. Again, free market is a misnomer and misapplication of economic theory. Each of the OPEC countries has other axes to grind than profit. Power figures into this, as does security (particularly from our military). Economics cannot and does not purport to explain much of this.

These "step-price-changes" are what we can expect until other resources are brought to bear on our dependence problem. Until we develop alternatives as a cushion to these step-price-changes, volatility will rule at each change and OPEC will rule between the steps. And as each one hits us, our economy will contract a little more. In turn, our energy usage will decline, and the demand will go down until adjustments are made, Then the forever expanding economic machine will kick back in and drive us to another step change in price.

I hope...

I promised myself I wouldn't get sucked into this conversation, but I can't help it. I'll keep this as concise as possible.

I'm an economist. I do not worship the free market, nor do I neglect its ability to allocate scarce resources and create incentives for people to invent new solutions.

I'm sick to death of people in the PO debate prejudging economists and talking us as if we're walking in lockstep, blindfolded, and drunk. We're just like any other profession: There are good ones, bad ones, lots in the middle, and lots of disagreement about individual issues. We're human. Deal with it.

In particular, please don't talk about how economists "all believe that the market will produce an endless amount of oil if the price goes up enuogh." NO ONE BELIEVES THAT. At least no one I would call a true economist. (Pop quiz: What's the definition of economics? It's the study of the allocation of scarce resources. Got that? SCARCE RESOURCES.)

Look at the big picture, people. If the world economy runs full-speed into the peak oil brick wall, crashes and burns, how good will that be for governments, corporations, and the wealthy and powerful individuals? Do you think that they might actually have an incentive to put the brakes on our oil usage pre-peak, by taking actions that would ease up prices? (And all prices have done so far is ease up. I won't consider oil prices "high" until they stay above $80US/barrel, and not "very high" until they're consistently above $120. But even then, once those prices are sustained for long enough the economy will evolve and lessen the impact, so the price of oil being "high" has a critical temporal context that's often overlooked.)

The comment by Halfin above about the role of speculators deserves a standing ovation. By definition, the supply and demand interaction, with reallocation signals communicated via price changes, is a very short-sighted mechanism. Speculators greatly extend the economy's planning horizon. Sometimes they're wildly wrong (either high or low), but often enough they're a much better indicator than blindly relying on short-term price fluctuations. Demonize them all you want, but they do indeed provide a very valuable service.

Don't ever ignore the evil troika of Timing, Psychology, and Politics when talking about economics. These factors can individually or in combination play havoc with markets. There are some references to this in this thread, which is good, but in general the PO discussions I've seen online are so focused on proving for the 873rd time that peak oil is real (well, duh!) that they all but ignore all the market factors. If you do ignore these factors you're willingly casting yourself as one of the blind men touching the elephant, and dooming yourself to reaching insanely wrong conclusions.

Our transition away from oil will be nasty, brutish, and anything but short. Some parts of our current world economy and industrialized western lifestyle either won't survive at all or will only make it in a drastically changed fashion. But we will make it.

Ronnie thought he'd won the race,
When Gorbi's pony dropped its pace,
But that was not the race at all,
It was to see who'd be first to fall,
True to promise of Krushtov relapse,
Gorbi's pony was first to "Collapse".

(Jared Diamond style that is)
(Yukos gold)
(Ya 'all pay heed now)
(Come and sit a spell)

All this brain busting talk about the collapsing human institution known as capitalism is a waste of time. I'm no Commie. But it should be clear to followers of the oil drum that the markets are not rational.

The markets do not "provide".
Instead the markets divide.
Each time a trade is made.
One of bid and asker comes out slightly ahead.
Over time the rich get richer and the poor get poorer.
The rich focus only on how to make their numbers in the next Quarter.

NO ONE is in the steering house watching as our global ship heads ever closer to the great falls.
That's what's going on!!

Stop squawking about price per barrel.
Run to the steering house
and get this ship onto a survivable course !!!

Please.
Please step back and listen to roar of the upcoming falls.
Don't be fooled by the Siren song of another dollar clenched in the Monkey's Paw.

AK600:

You aren't showing enough of your analysis to help me see where you have gone wrong, although I would guess you are counting more barrels in the pump now case.

With a given amount of production, any model is going to show that a price below the discount rate (in your model 10%) favors pumping later. That's not even economics, it's math.

I'm not claiming a simple model or DCF analysis proves anything, but to claim that hoarding is never profitable is like saying water runs up hill.

Spooky,

Most OPEC countries (maybe Nigeria and Venezuela excepted) are in a very favorable budget situation. They do not need to pump oil to service debts, although this was true several years ago. Recent price increases have left them rolling in money.

WTG Grinzo!!!!

I respect a man that defends his profession! And I got to admit, that with the communication difficulties amongst us all, economists have taken more than their fair share of heat. But hey - you can always leave the kitchen, right?

What I respect is that you didn't!

So, am I basically right in my scenario of step-changes in price? I know the details aren't predictable, but basics? Do you agree?

Because I really hope I am.....

P.S. Check out Kunstler's latest rap on how we have moved beyond Peak Brains

As always, he's cussin. But he's right.

http://www.kunstler.com/mags_diary14.html

A piece of my comment to AK600 above got lost. It should read:

Any price increase below the discount rate favors pumping now, any price increase above the discount rate favors pumping later. This is true for any amount of oil and whether the shift in production is small or large.

In any event the model is flawed.

Re: Speculators

Speculation is gambling on future prices. They do provide us with a weathervane about the future but their behavour lies outside mainstream corporate economic behavour.

It's all quarterly profits and the stock price depends on this. Those quarterly statements better be on the plus side and higher than the same quarter the year before. I'm a Big Oil Company (BOC) and I'm holding those reserves now valued at $60/barrel. I'm now going to tell my stockholders that for N years, they will make no money because I know that those assets will be valued at $200/barrel and there will be a big windfall at that time. I can hear the BOC executives say "trust me". But the $200/barrel is based on speculation. The stockholders will just say, "OK, we'll wait".

This is so absurd, I can't stop laughing....

HO is right and Rajiv got right to the point in the very first post here. The more serious problem is the myopic and reactionary nature of business culture. I wonder how many futures traders are thinking "we're at the peak...". I thnk it's more likely they are reading some pollyanna story by Daniel Yergin instead.

Dave,

When you stop laughing, you may find it useful to read to posts you are quibbling with.

Big Oil companies control a small minority of oil. The owners of the vast majority of reserves are middle eastern countries with no shareholders and an abundance of cash, which they are having trouble investing. I don't dispute your asserton that it would be hard for an Exxon to say, we are going to sit on our oil. This would undermine their claim that they are worth money because they can find more oil. But the behavior of big oil companies has little to do with the assertions you are arguing with.

Speculators hardly lie outside mainstream economic behavior. The currency exchange is the world's largest and most efficient market. Oil futures are also large and liquid. It is inconceivable that the majority of hedge fund capital, or a firms with a long term obligation to buy oil, would knowingly forgo profits or be willing to pay more inthe future if they felt prices were certain to increase at a high rate.

Again, none of this is complex economic theory. Very few people buy something in the hours before a half price sale.

No one is saying that economics explains every single detail, is a perfect predictor or isn't subject to distortions like the ones you note. The fact that the argument against it can't rise above this level is a pretty string boost for the theory.

Jack:
The DCF model was quite simple -- a "well" that produces $ (1-d/100)^i units of oil in the i:th year of extraction starting from year 0. d is the % depletion rate, for example d=5 . A unit of oil sells for one dollar for the first n years and then sells for 3 dollars. Sum that for i=0 to infinity and you get dcf1. dcf2 = (1-d/100) * (dcf1-1) .

As the second calculation shows, delaying production can be profitable under the model, but the rate of depletion is crucial, you have to have d/100 * dcf1 > 1.

Lou Grinzo: "but we will make it....". Interesting phrase. Who is "we"? How long does "will" cover? What does "make" involve ? What does "it" refer" to ? What is the definition of voluntarism? Your post was interesting though "but we will make it" was a bit of a leap of faith. I can't eat leaps of faith which is why I started growing vegetables...

step back, what's up with Kuntsler? He's done away with his blog, and gone back into his shell it appears. He was being ripped to shreds by the wolves who kept reminding readers that he (Kuntsler) was absolutely dead wrong about Y2K and absolutely dead wrong about Iraq, and that he's just a money-grubbing promoter of fear. I guess if he's wrong about oil and suburbia he wouldn't have much credibility left (the three strike rule). Happily, we'll still have two strikes left.

Philip -

Which is why we will make it. People like you that are smart enough to get practical are all around, but they are NOT the majority. For the majority, it will be terribly difficult, and they will have no real clue what has happened.

They will know the latest fashion trends and which hollywood luminaries are sleeping together...

In my view, we are looking at Peak Oil being the prime mover or limiter for a lot of things until I die. I am 47, and hope to make at least 90 like my grandfather did. It will be something that kids and young adults today will become all too familiar with, as various things become unaffordable or unavailable.

I think we will get into a worldwide depression before it is all over, and as we (first world) are the most financially vulnerable, we will suffer the most, relative to our current status. The rest of the world will be slipping back into agrarian existence fairly quickly - they are only recently urban in many places, and their standard of living is such that they cannot fall very far. Energy for power generation is an issue TODAY in many parts of the world at the $50-60/bbl level. They are hosed at $100/bbl unless they have their own oil and can defend their borders.

Those are MY guesses...others have theirs.

I do NOT believe in the magical technical bullet. Technology is slow to fruition, and never as envisioned. It nearly always has unintended consequences and repercussions (like resource depletion - including metals).

I do NOT believe any government or corporation is smart enough to pursue anything but the easiest solution, take the path of least change and resistance. And it is because governments and corporations ARE NOT capable of making these harder, longer term decisions that we will be forced to either change them by force of our numbers or keep repeating this same resource depletion scenario.

I am sure others agree/disagree on various grounds. What is your personal guess, Philip? You have as much a right to that as anyone else.

Penguin oil prices have not exploded since the last great penguin was boiled. The price of ivory has not climbed as elephants are decimated. Instead, brilliant men and women found replacements.

Enough equations now.

Reading your post, Jack, I think we're mostly in agreement. Also, I confined my post to "mainstream corporate economic behavour".

But my comment was not a criticism of posters here commenting from the point of view of economists. It was a criticism of the original article on which this thread and PG's thread was based from Econbrowser.

I'm aware that "Big Oil companies control a small minority of oil". So, who does the Econbrowser scenario apply to? Aramco?

Lou Grinzo writes:

"If the world economy runs full-speed into the peak oil brick wall, crashes and burns, how good will that be for governments, corporations, and the wealthy and powerful individuals? Do you think that they might actually have an incentive to put the brakes on our oil usage pre-peak, by taking actions that would ease up prices?"

You mean, like pushing hybrid vehicles and the next thing, the GO-HEV?

Both California and the US Federal government have, until recently, acted either to frustrate these vehicles coming to market (CARB could have promoted them in the 1990 ZEV mandate, and didn't) or quash programs just about ready to yield fruit (PNGV).

So no, I don't think anyone in power in the US government has a clue, and the consequence has not only been much more pollution in California, it's going to be much more economic pain.

I have an image of a scene 2 years from now:  a 4x4 pickup owner is selling his antique heirloom furniture so he can pay the loan on it and still have gas to get to work.  The buyer shows up in a Prius pulling a utility trailer with a bunch of battery boxes slung on the sides and some fat cables plugged in next to the hitch.

Jack said

Regarding point a) Saudi Arabia, Iran and others have certainly held oil off world markets before. Iran in particular is cash rich, doesn't have to answer to short term investors and doesn't care much if American SUV owners are inconvenienced. I can't imagine that they are pump themselves into a weaker position.

This is, I think, the heart of the matter. Is Saudi Arabia playing "hide the oil"? Do you think that Saudi Arabia (forget Iran for a moment) is in a position to stall and holdback on production, knowing that oil prices will soon skyrocket upwards? This would imply they've got the excess capacity or are delaying building it and are willing to piss off those American SUV owners, i.e. suffer the geopolitical consequences. Every time those Saudis make a pronoucement on what they can do or are going to do, it seems like the story changes. Also, just what is the relationship of George and Condy with the Faud family? And what about those bad Salafis, the Wahabis?

Jim Bob Ray,

Don't know Kunstler's past.
Even if he was wrong 1000 times before that does not of itself make him wrong this one time.

I live in the 'burbs.
Every night the big trucks roll past my house delivering to the local supermarkets.

If petro plummets (in supply that is), how will the trucks bring afforadble goodies to Wal Mart (or CostCo in my case)? How will I get to work?

If the shelves are empty at the local super-duper-markets, how will I feed and clothe my family? If I can't drive to work, how will I draw a paycheck? How will you?

I pray big time that Kunstler is wrong.
I pray that you are 101% right.
But what if he's right on just this one toss of the ball?
Do we call it strike 3 or grand slam?
What's your batting average by the way?

Some careful attention paid to aerodynamics could cut the highway fuel consumption of semi-trucks in half.  I think we're just not yet at the stage that it matters enough to us to do it.

Engineer-Poet:

I'm curious on the truck example. I understood fuel costs were about quarter of the operating costs of trucking firms. This story:

http://www.ohio.com/mld/beaconjournal/business/12040955.htm

says 20% to 40% of operating costs.

If they could halve their fuel costs as you suggest, that would massively increase their net margins (from a fairly negligble base). Truckers are now going out of business due to fuel costs:

http://www.volunteertv.com/Global/story.asp?S=3581850

It seems like trucks using half as much fuel would have sold well quite some time ago...

Stuart.

J comment is applicable

The rest of the world will be slipping back into agrarian existence fairly quickly - they are only recently urban in many places, and their standard of living is such that they cannot fall very far

I live in a developing nation and $60 hurts, but $120 will slow us to a stop.

Engineer-Poet has made a critical point. Just why has the US Government not stepped up to face the problem? Massive public transportation renewal, focus on starting a more localized food production infastructure for the nation.

It has been mentioned before, but I will repeat, Cuba is the living example we must refer to when thinking about an oil reduced future.

Perhaps OT, but speaking of allocation of scarce resources, I looked up trucking costs a while back to try to answer a demand-destruction-related question: which will give first, long-distance trucking or individual auto use?

Background info: trucking rates of about $2 per mile, out of which figure six miles per gallon with a 50,000 lb load (which suggests 50 cents per mile for fuel if diesel were to cost $3 per gallon).

Now look at a household taking home 100 lbs of groceries in a month. Figure an average shipment distance of 500 miles. Assume the cost of diesel were to rise by $2 per gallon. The marginal extra cost in diesel to ship these 100 lbs are: ($0.33 per mile marginal fuel cost increase) x (500 miles) x (fraction of truck used or 100 lbs / 50000 lbs). That comes to an extra 33 cents out of pocket for extra fuel charges for shipping, for a month's groceries so estimated. A simpler way to express this is in gallons of fuel: one-sixth of a gallon per month to support the direct trucking component.

If diesel and gasoline prices increase by the same $2 per gallon, compare now the extra household spending on gasoline at the pump. It is bound to be much more than an extra $0.33, assuming (no doubt) a household gasoline use much more than one-sixth of a gallon per month.

I have concluded that for all the concern sometimes expressed in comments here for the future of industries predicated on long-distance transportation, that part of the overall situation might be more robust. In the example given, there could be a considerably more pressure felt, eventually, by individual drivers at the pump, than at the grocery store (due to trucking-cost-increases applied per pound to grocieries).

Perhaps one place to look for growth (and for a method of conservation) is in online grocery shopping.

I might have mis-remembered; according to data I dug up last year the breakdown is 38.5% each air drag and rolling resistance and 23% equipment losses.  This paper claims that the drag coefficient of semi-trucks is typically about 0.6, while NASA's research indicates that this might be optimized to 0.25.  That's almost a 60% reduction in drag.  If better tires and equipment can halve the losses there (or if the Blade Runner [link deleted due to HaloCrap restrictions] scheme is used to allow trucks onto rail lines), semi-truck fuel consumption could indeed drop by half.

Optimizing drag to that degree means a much greater degree of aerodynamic matching of tractors and trailers, and aerodynamic devices on trailers which would extend their length.  So long as we allow states to impose truck length restrictions which include drag-reduction devices, we penalize fuel savings and indicate that we are not serious.