Thursday, December 11, 2008

The Upside of High Oil Prices: Part 2, Long-term Effects

The U.S. and several other countries are in an economic recession which was caused in part by the extraordinary increase of crude oil prices from $16 in 1999 and several years afterward, to $147 in July, 2008. This 1,000% spike was followed by a precipitous fall of crude oil prices to about $55 in November 2008 and still falling.

High oil prices despite their obvious high cost disadvantages have several benefits and long term advantages. Some effects are realized almost immediately and others take several years to develop. This part covers the longer term effects, the majority of which are likely to be observed after five years of high crude oil prices.

: High oil costs take a toll on unit production, distribution and delivery cost. Therefore some local industries may be better off near large cities in the developed nations instead of relocating at a region or country with a low labor cost. This is good news for local economies at developed nations but it reduces employment opportunities at developing and underdeveloped countries. Some see the slowing down of globalization as a good thing (e.g., less exploitation of cheap labor, lesser loss of local jobs.)

NUCLEAR ENERGY: The scarcity or cost of fossil fuels makes the development of expensive nuclear energy a more cost-effective proposition. High electric bills for residences, businesses and industry may decrease the emotional opposition to nuclear power plants. France and Japan are leading examples of reliance on nuclear power with no or minimal safety concerns. At the first oil crisis in 1973, only 1% of Japan’s electricity was produced by nuclear energy. By the second oil crisis of 1979, 4% was from nuclear; in 2000 the ratio was up to 12% and the 2010 goal is 15%. As of 2005, Japan had 52 operating nuclear plants, 3 in construction and 8 in planning and design. France is even more ahead: Its 59 nuclear plants produce 88% of the country’s electric power. There are about 440 nuclear power plants on the globe. France, Japan and the U.S. combined produce over 55% of the nuclear power energy on the globe.

: A lot of low-priced agriculture products are less affordable when processing, transportation and distribution costs are high. This improves the chances of local agriculture for profitability and long term survival. On the other hand, the benefits for third world from exporting agricultural products are reduced.

UNAFFORDABLE LIFE IN THE SUBURBS: The high cost of energy makes the low density living in the suburbs and its corresponding demand for long trips less attractive and less affordable particularly for young couples with children and retired seniors. As a result, central city apartments become attractive and office and apartment development in central city follows the market demand. In the same vein, office and retail development in the suburbs softens the impact of long, expensive commutes.

: High energy prices are also a strong incentive to develop alternative fuels as well as processes to convert trash, biomass, used oils and other lubricants into combustible fuels or other forms of fuel that can be converted into electricity.

: The expensive production, transportation and distribution of goods makes the effort of recycling and remanufacture more worthwhile. Remanufacture is the developing industry of creating useful products out of wastes. Economies of size are important. For example, one or more used-aluminum processing factories can be profitable in the greater Los Angeles area, but none can break even in Honolulu. However, remanufacture of oils, refrigerants, other chemicals and plastic products can be profitable in small markets.

: The development of ultra light and low friction materials so that machinery does more work with less energy is an advancing field. Nanotechnology also contributes in this arena. High fossil fuel prices make research and development in such specialized sciences more urgent and better funded.

: Over time, the high cost of energy make people re-think of their decisions in home, work and school locations, local and long distance travel, and consumption of goods and services. They look for ways to downsize, optimize and economize. All these have a large aggregate reduction in resource consumption and pollution on Earth.

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