Sunday, August 10, 2008

Gas Prices and HSR

NOTE: We've moved! Visit us at the California High Speed Rail Blog.

As expected, gas prices have begun falling. I will admit I did not think this would start until after Labor Day, as the fall is usually when the declines occur. But it began in July, and now we have some folks in the comments crowing that this means the crisis is over and HSR is no longer necessary.

If only.

Gas prices are on a long-term trend upward. As with any "trend" in economics there is typically a great deal of fluctuation along the way, with price spikes and price collapses. But as this chart from Chris Vernon at The Oil Drum shows, the trendline is quite clear:



30% year over year increases since 2002. As energy analyst and friend of California High Speed Rail Jérôme Guillet explains, the fundamentals still point to a long-term increase in oil:

One point that needs to be made again is that demand destruction in the US (or even in Europe, where it is hapoening too) is not enough on its own to bring prices down, because it needs to be larger than the supply growth in the rest of the world to limit the requirement for further demand destruction and price rises, given that production is still largely stagnant. And the problem is that demand is not growing just in China and India, thanks to rapid growth, it is also growing massively in oil producing countries themselves (Saudi Arabia, Iran, Russia, Venezuela), which often subsidize gas and which can afford it given that they have a natural hedge against (the subsidy gets bigger when oil prices are higher, ie when their own income is bigger, and the income growth is larger than the subsidy growth for those that export any volumes).


The phenomenon of peak oil is what's at work here, and it helps explain what's going on. As the supply of oil peaks, it becomes more difficult to boost production to satisfy growing demand. The price of oil will rise unless supply matches it - which as peak oil demonstrates, it can't - or demand will be destroyed. Demand destruction is good, but only if it happens through the provision of sustainable alternatives. Without alternatives to driving or flying, demand destruction is merely destructive, throwing economies into severe recession as people must reduce their oil consumption but cannot turn to anything else to make up for it.

What happened recently is that for various reasons in early 2008 - concerns about war with Iran, the declining dollar, and perhaps some speculation, the price of oil rose above the trendline. Now we're seeing some of those pressures ease and the price is starting to fall, especially due to evidence of demand destruction in the US. Problem is, if people start upping their gas consumption, prices will resume their upward march. The only solution is long-term demand destruction.

But it's STILL above $4 in most of California. And that's still far too high for most people to afford. It's been my belief that $3/gal was the true tipping point - when that price was reached and sustained for the first time in California, in 2006, the housing bubble began to collapse. And the downturn began in the places most dependent on cheap oil - exurbs like Modesto, Moreno Valley, Stockton, etc.

Jérôme goes on to explain what is really needed to deal with high gas prices:

In fact, I'll say again that our energy policies should focus on one thing first and foremost: demand reduction. Any reduction in demand that we manage in excess of what market forces would (precisely) force us to do will get prices down, and will save us a lot of money - and the smartest demand destruction is the permanent kind, that brings savings every month and every year rather than one-offs like giving up a trip.

We have to reduce our demand. Let's do it in an organized way rather than a panicked, haphazard, inconsistent way. And that's where government can help, by providing longer term pespective, informing citizens, pushing infrastructure in the relevant direction, and bringing up standards that apply to all equally and guide individual behavior in the right (Energy Smart) direction.

Price mechanisms work, but they are brutal, hurt the poor the most, and cause unnecessary disruption to economic activity, and pain to many. And they are fickle, as the current volatility (which, as I explained above, is likely to remain) causes rapidly changing signals which prevent decisions from being taken.


High speed rail is one of those long-term solutions that will provide "good" demand destruction - the provision of alternatives to oil that enable economies to grow and people to move around. We don't support HSR because gas prices spiked in 2008, we support it because gas prices are on a permanent, long-term increase, despite whatever intermediate fluctuations occur - and the only solution to this that saves us money and sustains a prosperous economy is non-oil mass transit like high speed rail.

In the summer of 2004 gas prices soared to the record level of $2.50 in Seattle, where I was living at the time. By January 2005 it had dropped to $1.95. But that didn't change the long-term upward trend, and so in summer 2008, in both Seattle and California, gas prices hit $4.50. We may see $3.50 or even $2.99 by the November election, but the next increase always wipes out that savings. Next summer may well see us break the $5 barrier (diesel already did so this year). Three steps forward and one step back is still forward movement.

So to those who point to $4.15 gas and say "neener neener," the joke is unfortunately going to be on you when we hit $5 in 2009. I don't know about you all, but I'd rather we got to work building high speed rail so that we have an alternative to oil sooner, not later. We've already wasted three decades. We have no more time left to lose.

33 comments:

Pantograph Trolleypole said...

I'm wondering what is going to happen tomorrow when traders come to the Market with the Georgia war still going on and 1% of the world's oil at risk there.

Brandon M. Farley said...

HSR efforts have been in the making for 11 years and propositions to make it a reality have been postponed twice.

IMO, no marketing or communication effort should rely too heavily on any one of the plethora of arguments supporting HSR for concern that someone some place, or something, could happen to undercut that argument and put doubt into voters’ minds.

That would be the case with gas prices today... in the minds of voters the prices we're beginning to see today appear pretty manageable.

Yesterday in Sacramento I saw prices for regular unleaded at $3.83. That seemed cheap to me.

Aaron said...

Sure, gas prices fall at the end of every summer. I'm surprised it's happening now - I agree that the Russia-Georgia war is eventually going to hit energy prices, though it'll probably hit natural gas harder.

But that's just it - they fall at the end of every summer, but next summer odds are the spike will be higher, and the summer after that even higher...

Robert Cruickshank said...

Did $3.83 seem cheap to you in 2006? In 2002?

Gas prices are a reason for HSR, though I agree with you that we shouldn't rely on just one reason. Current prices are assuredly NOT manageable - I still believe that $3 was the real economic breaking point, whereas $4 is what causes behavioral changes - but the key points that need to be remembered when talking about gas prices are:

1. They WILL continue to rise as a long-term trend, and sharp increases or declines do not change that fact

and

2. The ONLY way to manage this without destroying the economy is to build alternatives to oil-based transportation. HSR is a perfect example of this.

harry g. said...

HSR should be project that is going to solve a transportation problem.

In this case, moving people from LA to SF is what it is supposed to be all about.

Well the airlines and highways in this country have already infrastructure to handle this problem.

This project is looking to solve a problem that doesn't exits.

What this project is all about is really nothing more than a public works project, like the WPA was in the thirties.

The advocates, and Bob is certainly one of the most outspoken of them, don't want to admit the real reason for the project.

This is a dream project for those that want government to subsidize development. It is a developers dream. Look at all the groups urging the voters to vote for the project.

So California is supposed to put itself further into debt, so that developers and land speculators can make fortunes.

Being green is nothing more than a side show here. I sure hope out voters will understand what is going on here.

BruceMcF said...

harry g., why precisely is that bad news? For long decades, public subsidies for sprawl development and Auto-Uber-Alles transport were driven in a large part by property developer drive for capital gains at the public expense.

Their opposition has killed many proposals to provide for a more effective transport solutions that provide a greater diversity of transport choice to people.

If there are now property developer interests supporting a more effective transport system, that is good news.

Of course, their support does not imply that its a useful system ... but neither does their support imply that its not. Rather, evaluate it independently, which will show it to be a good system, and then their support for a good system is good news.

a.f. said...

harry g said:
"Well the airlines and highways in this country have already infrastructure to handle this problem.

This project is looking to solve a problem that doesn't exits."

The problem may not exist or be all that pressing in the year 2008, but how about 2028? 2048? 2068? How many additional millions of people must there be in California before you will acknowledge that a problem "exists"?

Expanding California's major airports is a non-starter and will go nowhere fast. And if you think putting more highways in makes the least amount of sense or would be cheaper, do more research. The infrastructure we "already have to handle this problem" won't be enough forever. It's called planning for the future.

It is ridiculous that the only practical ways to travel around this state are by car or plane. Go to real industrial world nations (in Europe, Japan) to see how they travel.

Robert Cruickshank said...

There's an article in the SLO Tribune today, a reprint of an AP article with some local stuff added, explaining that the airlines are in full-scale crisis mode. Carriers are cutting costs and flights everywhere they can. Oakland is canceling a terminal project. San Jose is deeply concerned about its nearly-finished terminal project. And SLO just lost its flights, as will Fresno, even though theirs were running 90% full. Even at 90% full the airlines were losing money.



Why? High fuel costs. And not because of the spike earlier this year, but because of the basic upward tend I identified in this diary.

So harry g., I cannot agree with your assumption that airlines and highways are effectively handling the load. If you look 10 years out - the construction time frame for HSR - you can see that the need for a non-oil alternative is great.

Also, great to see you commenting here, BruceMcF.

bikerider said...

If there are now property developer interests supporting a more effective transport system, that is good news. Of course, their support does not imply that its a useful system ... but neither does their support imply that its not.

If this were a zero-sum game, indeed this would be "good news". Unfortunately, we know from past history that there will be huge cost overruns, and the money to pay for that has to come from somewhere. And just like VTA light-rail, BART-SJ, BART-SFO, MTA red-line, etc, etc. we can look forward to massive diversion of funds from other, more cost-effective transit (NOT highway) projects to pay for the cost overruns. The end result is lower overall transit ridership.

Robert Cruickshank said...

How are we going to be witnessing lower overall transit ridership when the fundamentals I explained in this post show that ridership will continue to grow?

Your assumption that every mass transit project breaks the budget is not supported by the evidence. Seattle's light rail line, opening next year, is on-budget. So too is the Metro Gold Line extension.

Rafael said...

@ harry g. -

you say

"What this [HSR] project is all about is really nothing more than a public works project [...]",

implying that all public works projects are inherently bad ideas.

You also say

"HSR should be project that is going to solve a transportation problem.

In this case, moving people from LA to SF is what it is supposed to be all about.

Well the airlines and highways in this country have already infrastructure to handle this problem."

So, the state's airport runways and highways were not public works projects? You're contradicting yourself.

Also, no-one ever said the HSR project was only about moving people between SF and LA. There's a lot of California in-between and, a subset of HSR trains will stop there. In addition to the endpoints of the route, high speed trains will serve inland communities whose medium-distance mobility needs are in fact poorly served by both airlines and cars.

Finally, transportation is a critical sector of the economy that is closely tied to oil for a very simple reason: in practice, both piston and jet engines are entirely dependent on it.

Therefore, now that the price of oil is structurally high and rising, it would be extremely irresponsible to treat mobility and primary energy supply as wholly separate entities.

For cars and aircraft, every alternative fuel comes with a severe penalty on range, performance and/or cost. Typically, this entails extensive modifications not just to fuel production and distribution but also to on-board storage and the conversion to kinetic energy.

Indirectly, electric trains can run on natural gas, coal, nuclear fission, even plain old sunshine. The grid operator will be able to transparently switch between these at a later date in response to demand and/or legislation, without any modification at all to the rail infrastrucuture. Only the electricity generation and grid control strategy have to be adapted.

Valuable fringe benefits include improved air quality, reduced GHG emissions and improved productivity - thanks to uninterrupted cell phone and broadband internet coverage. You can't work on your Powerpoint slides while you're driving nor while you're waiting in line to check-in, be scanned, board or pick up your bags.

harry g. said...

af. wrote:
"
It is ridiculous that the only practical ways to travel around this state are by car or plane. Go to real industrial world nations (in Europe, Japan) to see how they travel."

Now you put the US below those nations. Well my friend, you go and live there; I'm quite happy with the quality of live here and certainly don't care to endorse the economies or life styles of those "real industrial world nations"

someguy said...

Grow up Harry G. Are you in like 5th grade?

"If you love HSR so much why don't you marry it"

Ha HA!

Francis said...

Harry G -

You lack effective arguments so you jump on the only comment that criticizes American infrastructure, then you call into question his patriotism. You also call him 'my friend'. Can I call you McCain?

As an American raised in Europe and America I know that having a HSR would makes us even an even better place to live. Why should we not adopt a great piece of technology that serves a public good?

Being close minded and short sighted is going to hurt the American economy far more than adopting successful transportation systems.

Anonymous said...

@robert

Boy am I glad I am not using you to predict oil prices -- today's news 8/11/08

NEW YORK (AP) -- Oil prices finished at a new three-month low Monday after briefly dropping below $113 a barrel mark, as the dollar extended its rebound and more signs emerged that China's energy demand could be leveling off.

Robert Cruickshank said...

Way to miss the point of the diary, anon.

Anonymous said...

Over at

www.derailhsr.com

they have posted that the State Assembly did not meet today
and thus did not pass AB-3034

Robert Cruickshank said...

That's right, anon. I'm currently trying to get more details. Pretty weak of them to not meet today.

Brandon M. Farley said...

Perhaps members of the Senate Assembly read my post from the other day? Or had similar concerns?

------
"I am concerned Schwarzenegger will use AB 3034 as an example and not sign it...

... citing that the legislature is not acting with urgency on the State budget and ...

... instead is sending the wrong message to California citizens and state employees (yes, them) that the State has a 'spending' problem with Prop 1 and the timing of AB 3034 as case-in-point example.

The meaning to the population is "why is the legislature acting on THIS, a spending bill and new program, when they should be focused on the budget?"

Each of the arguments to de-link the two will be lost on the average Joe Voter.

I don't know if this will happen, but the possibility seems to have merit.

And, I think the politcal consequence to Arnold if he does sign a bill coming before a budget is passed, especially this, is too great for him ignore.

In fact, he may have set up this conflict from the beginning, by stating his claim to not sign any bills coming before him until a budget is passed, anticpated AB 3034 as a possibility.

August 10, 2008 2:02 PM"

someguy said...

Anon @ 4:28pm

In the context of Robert's argument that we must plan and build infrastructure with the next several generations in mind your comments are patently idiotic!

"Hold the phone everyone oil just slipped a little, crisis averted! See, all we had to do was nothing and the problem went away all by itself. That must mean that it will never be a problem ever again...right?"

With a sense for the long view like that, you sir should be a politician!

Rob Dawg said...

The phenomenon of peak oil is what's at work here, and it helps explain what's going on.

No, and I can prove it. Answer honestly; if peak oil were proven false would you abandon CAHSR? No? Neither would I for that matter.

This is the problem with conclusion driven advocacy. Yes, CAHSR is a very good idea. Yes California will need to invest massive amounts, BFD. That isn't the point.

Is Prop 1 the best possible mechanism amended or not? Of course not. Prop 1 has serious flaws. Trying to paint it otherwise is no way to get votes.

There is a danger in HSR no matter what the its opponents will attempt to exploit.

Robert Cruickshank said...

Not quite sure what you're saying, rob. There are many reasons why HSR is a good idea, and those reasons outweigh the imperfections in Prop 1. I don't see ANYTHING that qualifies as a "danger" - even if there are some cost overruns it'll be cheaper than all the alternatives.

The beauty of HSR is that it addresses many needs and issues. I focused on just one of them in this post. As you all know, this blog has given a lot of time to many different reasons for HSR. We surely aren't relying on any one thing or the other.

Finally, one media outlet is reporting AB 3034 *did* pass the Assembly today, although that's at odds with what I've seen on the Assembly's own site. Sometimes I wish they hadn't moved the state capitol out of Monterey...

Tony D. said...

Robert,
It looks as if High-Speed rail will go to the November ballot as is...Prop.1. And that's fine with me. AB3034 would have been nice, but it's not a totally necessity. Why on Earth do people, especially those in San Diego and Central Valley north of Merced, think that they WON'T get high-speed rail? They will, not just initially. How many times must we tell them that Rome wasn't built in a day. Anyhow, here's something funny out of the North County Times (Southern California): "The measure (Prop.1) hasn't been polling well as it is. According to a recent field poll, just 56% of likely voters planned to vote for it." HUHH?!! Hopefully there are smart voters in the aformentioned regions that realize they won't get HSR unless they approve Prop.1 as currently worded. LA-SF, the rest will follow.

Robert Cruickshank said...

The polls for Prop 1 are quite good. There's consistent support between 54%-58% and in the absence of organized and funded opposition I don't see why that would drop by a whole lot between now and November.

I have no problem with Prop 1 as-is. It's just sad that once again Sacramento lacks leadership on HSR.

Brandon M. Farley said...

I concur with Tony D. And as a San Diegan... I have repeatidly commented that I am personally okay with San Diego not being in the first phase.

Robert Cruickshank said...

And as a Montereyan, whose lovely beach community isn't going to get a stop ever, I'm personally OK with that too. ;)

someguy said...

Here, here!

As a Menlo Parkian, I support Prop 1 even though it will, according to some; destroy my community, and possibly end civilization as we know it.

Robert Cruickshank said...

someguy, glad to hear it. I am sure you're not alone. Menlo Park will remain a wonderful, livable community with HSR.

It'll also be cleaner and safer, since the diesel pollution will be gone and the tracks separated from the grade where people can and sometimes are hit by passing trains.

Anonymous said...

Robert writes:

"I have no problem with Prop 1 as-is. It's just sad that once again Sacramento lacks leadership on HSR."

Nothing wrong with Prop 1? Just the 35 page Lowenthaw report that rips it apart that's all.

Sierra club was registered as being opposed to Prop 1. Are they going to change sides now?

Put you head in the sand guys.

I'm not sure AB-3034 is really dead, but if it is, passage of the project just got immensely more difficult.

bikerider said...

How are we going to be witnessing lower overall transit ridership when the fundamentals I explained in this post show that ridership will continue to grow?

The decreased transit ridership is well documented. See for example http://groups.yahoo.com/group/BATN/message/37040

Your assumption that every mass transit project breaks the budget is not supported by the evidence. Seattle's light rail line, opening next year, is on-budget. So too is the Metro Gold Line extension.

If you are going to cherry-pick LRT examples, you couldn't possibly do worse than these two. Even the drank-the-kool-aid LRT fans at lightrailnow.org acknowledge the cost-overruns with Seattle's project.

If you knew the historical background of the Gold Line projects, then you know that any cost "overrun" is a political impossibility for that line. After the red-line fiasco, metro-rail planners were finally honest about the true cost of the Gold Line project, so enormous reserve was built into the projected cost. But this was hardly a good thing: the 13-mile Phase I -- built along an existing rail line -- cost $60m per mile ($890m total). To put that amount in perspective, CapMetro, a very similar project in Austin, cost $60m TOTAL for 32 miles (despite interferance from FRA over vehicle choice).

Anonymous said...

I'm a Sacramentan. I'm fine with Sac not being in the first phase. What I'm not fine with is Pacheco Pass. Sac to the bay area via Merced and Gilroy. Great! Oh, but I can get to LA in 2.5 hours? That would be useful if I went to LA more than once every 2 years.

the 13-mile Phase I -- built along an existing rail line -- cost $60m per mile ($890m total).

This sounds like a bargain by Bay Area standards!

Jarrett Mullen said...

Not to get too far off topic, but bikerider's comparison of the Gold Line to CapMetro is unfair. CapMetro is not electrified, and most of the right of way is single track for low frequency commuter rail service.

The Gold Line on the other hand is electrified, double track, and required significant grade separations because the line traverses many congested streets while operating very frequently.

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