Gas Prices, China, India, and The Failure To Plan Strategically

Are you ticked off about high gasoline prices? It is quite possible that you have not seen anything yet:

- The St. Petersburg Times recently published some gasoline information from the Energy Information Administration (from 2009, the last year data is available):

• China consumed about 8.32 million barrels of oil a day in 2009.
• To feed this demand, it produced 3.99 million barrels a day and imported 4.23 million barrels a day.
• In 2011, 40% of the year over year demand growth for oil will be caused by China.
• This translates into an additional 600,000 barrels a day in Chinese oil consumption vs. the U.S., whose consumption will rise only 130,000 barrels. In other words, the growth in oil usage in China will be almost five times the growth in U.S. usage.
• At his rate, a rough estimate would say that within 20 years or so, Chinese demand for oil will be comparable to the United States demand.

In all likelihood this last point would never happen since the suppliers of oil would have trouble keeping up with the growing demand. When supply is constrained and demand keeps going up, the only lever left to change is price which could soar.

- China is not the only potential driver of sky high oil prices. The Indian car company, Tata, has big plans for its extremely low end, basic car, the Nano. Costing only $2,500, it is no where close to a luxury car. However, given the growing affluence of many Indians and the fact that auto ownership is only about 10 cars per 1,000 people (compared to the United States where auto ownership is about 750 cars per 1,000 people), the low penetration of ownership combined with wealth growth and the right price point all point to explosive growth in demand for oil in one of the world's most populated nations.

This should have the same effect as with China. Much higher demand, limited supplies means price pressure.

- Oil is not the only energy challenge. According to a Newsweek article from 2007, as reported by Fareed Zakara, and cited in "Love My Country, Loathe My Government":

• China and India will build 800 new coal burning plants by 2012.
• These new plants will burn nine hundred million tons of coal every year.
• This burning will dump an additional 2.5 billion of carbon dioxide into the atmosphere on an annual basis.
• According to the article, if all of the countries that signed the original Kyoto Global warming treaty lived up their commitments, which few if any did, the reduction from the treaty would reduce carbon dioxide production by only 483 tons, roughly on fifth of what China and India will dump into the atmosphere just from their incremental coal plants.

Since America gets a lot of its electricity from coal plants, if you dramatically increase demand elsewhere in the world, the likelihood of price increases in this country are very high.

Not good news. No matter how much we curtail demand here in the U.S., it is unlikely that the overall demand for energy or the environmental impact will be much reduced, given the powerful economic growth around the world. Unless something is done, $4.00 a gallon will seem like the good old days.

But nothing is being done:

• The President wants to get one million all electric cars on the nation's roads by 2015. But that would represent less than one percent of all cars being used.
• The President wants to end run Congress since he did not get his way on cap and trade, by using the EPA to regulate greenhouse gases. However, it makes no sense to damage the U.S. economy with onerous and expensive regulation when the real future energy and pollution hogs/culprits are India and China. Thus, not only would the EPA regulation increase energy costs for everyone but it would have no significant environment impact, given the growth in greenhouse gases elsewhere.
• Congress keeps increasing the average auto fuel economy targets but ensures that the targets do not take effect for years and years to come in order to not endanger their re-election chances.
• The President and others have this pipe dream of building out a high speed rail system for the country but that is all it is, a pipe dream. First, the vast majority of drivers in this country do not need high speed rail to get to work or play. Second, we have over 100 years invested in our auto infrastructure, it would take decades to replace it with any kind of rail system. Third, given the financial fiasco that is Amtrak, there is no reason to believe that a high speed rail system run by the Federal government would be anything but a financial loser.

We should be much further ahead, strategically, in this area. Lord knows we have had enough warning since the oil embargo shocks happened almost forty years ago. In that time, the political class has done nothing to prepare the country for this crises. Oil and coal are the major components of our energy mix and that energy mix has increasingly been dependent on foreign oil sources, sources that are now in higher demand from China and India. What makes us think that our politicians can do any better in the next forty years, we have had no indication that they know how to think strategically and as a result, we are that much more closer of coveting $4.00 a gallon of gas.

What is needed is a whole new paradigm of thinking in this area. We need breakthrough thinking, not the tiny incremental thinking our political class has delivered in this area, if at all. Rather than centralized energy sources, maybe we need to look at decentralized energy generation and storage. The Internet is a thing of beauty because it is so decentralized, maybe that is the model we should be looking at as opposed to massive, centralized coal power plants. Maybe we should be looking at local solar and wind, not massive solar or wind fields.

Maybe what we need is a massive emphasis, a Manhattan style focus, to find a way to make cars several times more efficient which would strategically utilize existing infrastructure. This would pre-empt the need for totally new infrastructure, e.g. high speed rail, that is unlikely to be cost efficient, utilized, and profitable.

Maybe what we need is a break through approach to burning coal since coal is not going away, given the demand for cheap electricity in China and India.

However, what we really need is to get the politicians and embedded industry lobbyists out of the equation. Their lack of success in this area precludes giving them many more chances.

Three steps in "Love My Country, Loathe My Government," Steps 23, 24, and 25 would be the processes needed to get started and would address the issues discussed above. We need to think entirely differently than we have ever as it relates to energy. Why? Because with the rise of China and India, the world is entirely different than it has ever been before. By not changing our approach and way of thinking, we are actually moving backwards vs. the rest of the world. However, our political class is entirely the same as it was in during the 1970s oil crises, ineffective, self serving, and unable to think strategically.




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