The Best Peak Oil Investments, Part IX: The Methadone Economy

Tom Konrad CFA

No alternative fuel or combination of alternative fuels will allow our transportation system to operate the way it does today on oil.  As oil becomes increasingly scarce and expensive, the way we get our transportation needs met will have to change.  Understanding what the future of transportation may look like is key to making good investments in transportation.

If the measure of success for alternative fuels is the ability to continue to live in suburbs and commute in multi-ton boxes of metal on congested freeways for hours each day, then alternative fuels will fail.  No alternative fuel has the existing infrastructure, supply potential, energy density, and low environmental impact that we would need to replace oil without changing our unsustainable lifestyle.

Peak oil may mean the end of bigger and bigger cars driven farther and farther on more and more congested roads.  Peak oil may mean the end of suburban life as we know it.  Yet life as we don’t know it does need not be a vision out of Mad Max.  Peak oil will mean changes, some for the better, some for the worse. 

The surest change peak oil will bring is less driving, in fewer vehicles that are filled closer to capacity.  Those vehicles will use less oil (or alternative fuels) per person-mile.  We’ll also find ways to satisfy the desires and needs that we currently satisfy with travel without traveling.

Alternative Fuels

The first eight parts of this series looked into alternative fuels.  I concluded that no alternative fuel listed could replace oil as we use it today fast enough to replace dwindling oil supplies.  Conventional biofuels cannot be produced in enough quantity, and making hydrogen is an inefficient use of electricity or natural gas.  Electric vehicles are too expensive or have too little range.  There is not enough natural gas and there is too little fueling infrastructure to make natural gas vehicles practical on a large scale.  Gas-to-liquids makes sense for stranded natural gas, but there are too many other high value uses for natural gas to make a large dent in declining oil supplies.  Coal to liquids does too much environmental harm, and algae needs too much more technological development to achieve its promise in time.

The biggest problem with alternative fueled vehicles, however, is not the alternative fuels, the problem is the vehicles and how we use them. 

Oil was a one-time bonanza of a readily available, easily transportable, durable, energy-dense liquid.  With oil, humanity won a natural resources lottery ticket.  Like a lottery winner who blows cash that could have lasted a lifetime in a few months, we now need to realize that we’ve spent most of our winnings.  It’s unreasonable to expect that we’re going to win another such jackpot before we have to start watching our fuel budget again.  The main question is how soon and how deliberately we will make the necessary adjustment.  Will we act like the lottery winner who uses his last hundred thousand to tide him over while he looks for a job?  Will we keep partying to the bitter end, until one day we wake up, hung over in the gutter?  Will it be something in between?

The Methadone Economy

Switching to a drug analogy, most alternative fuels are the methadone to treat our petroleum/heroin addiction.  Methadone is given to heroin addicts in treatment because it mitigates withdrawal symptoms and can block the euphoric effects of heroin, morphine, and similar drugs, reducing the urge to use.

Alternative fuels can be sufficient to allow our society to function, but we’re not going to feel the highs we felt when the oil was flowing freely.  Alternative fuels cannot take us back to a “normal” pre-peak oil state because our use of petroleum over the last few decades as been far from “normal:” it has been one long, fossil-fueled high.  We will eventually kick the petroleum habit with the help of alternative fuels not because alternative fuels are better than petroleum and can bring us something that petroleum cannot, but because our supplier will be getting smaller shipments over time, while the number of fellow junkies knocking on his door will keep going up with big increases in petroleum demand from emerging economies.

There are several competing visions of a future powered by alternative fuels, ranging from wildly optimistic to gloom-and-doom, with variations depending on how effectively the prognosticator thinks we can replace fossil fuels with alternatives. 

A high-technology optimistic vision includes smoothly running efficient pods in mass transit systems powered by renewable energy.  High speed bullet trains network the land, making overland air travel unnecessary.  The low-technology optimistic vision involves a peaceful return to local economies where food is grown locally, and increasing local interdependence fosters strong local community ties, and people grow happier as they become more connected to the land and each other.  The low-technology pessimistic vision is a free-for-all scramble for dwindling resources like the vision out of Mad Max referenced above.

I’m long on optimism about technology, but short on optimism about our will to make the necessary sacrifices to implement that technology quickly or efficiently.  I’m betting on a pessimistic, high-technology future.  In this future, we manage to cobble together a hodge-podge of last-minute, jerry-rigged solutions to keep the economy functioning at a basic level, but not at all smoothly or evenly. In it, we lurch from a crisis caused by financial melt-down, to a crisis caused by peak-oil to one caused by climate change.  We’ll tackle each crisis with incredible ingenuity, staving off total chaos, but at the cost of mis-allocated resources and a deteriorating standard of living.  We hold out in the belief that after just this one more fix, the world will be back to normal and we can stop worrying.  But that day will never come. 

Forward thinking planners in some municipalities and communities will work on implementing true, long-term solutions.  But they will not have enough money or resources to do more than ameliorate the next crisis.  The large-scale, system wide solutions of better mass transit, algae biofuels, and continent-wide electricity transmission of the high-technology optimistic vision will be implemented too slowly, on too small a scale to achieve the economic stability the techno-optimists hope for.  But these half-built systems will still bring considerable benefit, and keep the succession of crises from being the complete disaster that would come with a complete lack of planning.

This is the Methadone Economy.  Alternative-fuel oil replacement therapy is necessary because oil supply will not keep pace with demand; we must replace oil or do without.  But alternative fuels are not oil, and
will require more effort devoted to energy production to produce the same effect.  The Methadone economy will function, but it won’t give us the highs we got from the cheap, concentrated, easily accessible energy of oil.

A future characterized by thoughtful, long-range planning seems unlikely to arise from the same political class and voting public that has not meaningfully prepared for anything but good times in decades.  The first IPCC report was released in 1990, and it made clear that human activities were substantially increasing levels of greenhouse gasses which would warm the planet.  Two decades later, greenhouse gas emissions are still rising.  We had the first warnings about peak oil in the 1970s oil crises, but only now are we starting to put serious political and economic capital into searching for solutions.  When the pre-2008 global debt bubble was on, NINJA (No Income No Job no Assets) loans were welcomed by politicians praising financial innovation and its ability to bring home ownership to people who could not previously afford it.

The Methadone Economy may sound gloomy, but I see it as the most optimistic vision possible given the political reality we see around us.  More pessimistic visions abound, but if you expect them, you’re probably better off investing in guns and physical gold than you are investing in the stock market.

Conclusion

I see three major investment themes in the Methadone Economy.

First, there is the knowledge that long-term solutions will be implemented, although not completely and at insufficient scale.  Investors in contractors who specialize in mass transit and high-speed rail should do well, as should the longer-term alternative fuel solutions discussed in earlier articles of this series.  Vehicle efficiency improvements will find rapidly growing markets as fuel becomes more expensive.

Second, band-aid solutions will thrive.  Bike lanes, electric scooters, buses, and any other transportation solution which can be implemented with only small changes to existing infrastructure.  Road pricing schemes and the software technology to help people coordinate ride sharing.  The clever use of a few resources will always win over grand schemes when there are few resources to spare.

Finally, the Methadone Economy is an economy where we cannot expect long term growth.  More likely, we will see periods of anemic (and occasionally robust) growth punctuated by periodic crisis-driven declines.  This will be mirrored in the stock market, and so investors in the above two solutions should do well to hedge their overall exposure to the market.  My Green Energy Investing for Experts series and Ten Green Energy Gambles for 2010 provide several hedging ideas.

The next few articles in this series will look at more specific investments in the long-term and band-aid solutions to peak oil mentioned above.

DISCLOSURE: None.

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