The decline and fall of the Oil Age is upon us. Its faint outlines are becoming clear as the reality of sustained high oil prices sets in and new technologies appear at an increasingly rapid rate. The new generation of electric vehicles is particularly promising and may lead to a massive transformation in coming decades in how we move people and goods.

Gas prices in the U.S. are at an all-time high for this time of year, and well above the previous high set in 2007. Why are prices so high? Well, mostly because oil prices are so high. And why are oil prices so high? The short answer is that there is a growing structural imbalance between supply and demand. To keep prices low we need more oil than is being produced. As Chevron acknowledged years ago in its shrewd but correct ad campaign: “the era of cheap oil is over.”

I’ve written many times previously about the threat of “peak oil” — the notion that we are at or near a peak in global oil supplies and may now be heading down the back side of the supply curve. I’m not going to rehash this discussion here. Rather, I’m going to focus on the good news with respect to non-petroleum transportation trends.

In the U.S., about 2/3 of our oil consumption is for transportation and the rest is used in making plastics and other industrial uses. The share used in transportation has steadily risen since the dawn of motorized transportation, rising from about 4 million barrels per day in 1950 to about 13 million today. We use about 19 million barrels per day for all uses, compared to about 89 million barrels for the entire world. Per day. We are indeed living in the Oil Age.

But not for much longer.

An exciting new shift is afoot, from using petroleum to move people and goods to using electricity. This future is still faint in detail, but clear enough to allow useful speculation about its eventual shape.

Electric cars are not new. In fact, the very first cars were electric. During the latter half of the 19th Century, most cars were electric. It was only as advances in gasoline engines appeared that the convenience and power of gasoline overtook electric vehicles. That trend seems set to reverse direction again in the coming decades.

Before I delve further into the world of electric vehicles I’m going to discuss improvements in energy efficiency (better technology) and conservation (behavior change). Some of this information is the same as that which I highlighted in my essay, “The Good News: Why Climate Change Doesn’t Matter Anymore.” That piece focused on the renewable energy sector, however, so this essay extends my earlier arguments to the sector that uses the most petroleum: transportation.

There are three very promising trends supporting my argument that the end of the Oil Age is upon us: 1) substantial improvements in energy intensity (less energy required per unit of output); 2) price-induced conservation; 3) the growth in electric vehicle availability and some encouraging trends in early adoption.

We’re becoming more efficient over time

The most promising trend in the transportation sector is the steady improvement in energy intensity, which is defined as units of energy required for each unit of GDP. It’s a relative measure. The Energy Information Administration projects that global energy intensity will improve by almost 100 percent by 2035 – an average improvement of 1.8% per year, with the developing world leading the way in large part because the developed world is already far more efficient in energy use.

This trend means that we will, as a globe, be able to produce goods and services with half as much energy by 2035. This trend will become real primarily through improvements in transportation, though we can’t ignore other sources of energy demand such as industrial consumption and (non-petroleum) electrical consumption.

The U.S. has been a great example in recent years of how improved energy intensity can make a real difference in emissions. U.S. greenhouse gas emissions actually fell 7.5 percent from 2008 to 2009 due in part to improved energy intensity. The recession was also a substantial factor, but only accounted for about 1/3 of the improvements, according to the EIA (Fig. 1 and 2). The other 2/3 came from improvements in energy intensity and carbon intensity (more renewables and natural gas, less coal).

Figure 1. US greenhouse gas emissions (source: EIA).





Figure 2. Sources of US greenhouse gas emissions reductions in 2009 (source: EIA).

The trend reversed again in 2010, with the biggest annual jump, a 4% increase, since 1988 as the US economy bounced back from recession. The biggest factor in this jump was a rebound in manufacturing, which grew about 6% in terms of energy demand, and coal consumption, which also increased by 6%. However, the good news here is that much of the energy intensity improvements witnessed in 2009 have persisted in other sectors, including in transportation.

Energy intensity is a relative measure, not an absolute measure. So even if we improve energy intensity dramatically, current global economic growth projections result in oil use and accompanying greenhouse gas emissions growing substantially by 2035, all else being equal. EIA projects that global petroleum consumption will rise from about 90 million barrels per day to 112 by 2035.

Conservation is more than a “personal virtue”

This is where the next two trends can help a great deal. “Price-induced conservation” refers to the fact that as energy prices go up we often see remarkable changes in how much energy is used because people and businesses change their behavior to adjust to the high prices (conservation refers to behavior change, whereas efficiency refers to technology improvements).

A good example of price-induced conservation is reduction in U.S. gasoline consumption as prices approach or exceed $4/gallon. Since 2007, U.S. net gasoline consumption has declined, due to both the recession and price-induced conservation (which are closely related trends, of course, see Figure 3). A 2004 meta-analysis of studies on gasoline consumption elasticity found that a sustained 10 percent increase in gas prices leads to a 2.5-6 percent decline in consumption. Price does matter.

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U.S. gas prices have increased far more than ten percent in recent years and exceeded the seasonal record this spring and fall. Oil prices remain very high, at about $100 a barrel (the record was $147 in July of 2008). It is very likely that prices will continue to rise in coming years due to the ongoing structural imbalance between supply and demand, which is partly masked by the ongoing global economic problems. As the global economy continues to recover, prices will rise further, and conservation will increase.

Figure 3. Gasoline consumption vs. prices in the US (source: EIA data).

It is impossible to predict, of course, exactly where prices will be in coming years and decades. And ditto with price-induced conservation. But the fact that prices have stayed so high even during global recession is strongly suggestive that those who believe we have reached some kind of global peak in oil production are right. Time will tell. My feeling is that we’ll see a sustained and accelerating reduction in oil consumption because of ever-increasing prices in coming years (with periodic price dips caused by recession, as we saw from mid-2008 to 2010).

Electric vehicles lead the way?

Now, how about electric vehicles? This is the most speculative of the three trends I’ve identified because we are so early in the adoption of this new/old technology. As mentioned, electric cars were predominant in the 18th Century. There are now six electric or plug-in hybrid vehicles available in the U.S., and far more models available around the world. The only mass market models in the U.S. are the Tesla Roadster (an expensive sports car), the Nissan Leaf and the Chevy Volt (a plug-in hybrid), but a number of new models are expected in 2012.

Sales of the Roadster are relatively low (about 1,800), which is understandable when we consider the $100,000+ price tag. The Leaf and Volt are brand new in 2011 and sales so far have been good but not stellar. Chevy projected 10,000 sales in 2011 and has actually achieved about 8,000 so far. Customers love their Volts, however, with Consumer Reports finding that the Volt earned the highest ratings in 2011 for all new cars.

The Leaf is doing better than the Volt in terms of sales, with over 15,000 sold worldwide (about 9,000 in the U.S.) by October of 2011. If 20,000 are sold by the end of 2011, the end of the first year of sales, the Leaf will have eclipsed by about a factor of six the sales of the Toyota Prius when it first went on sale in 1997 and sold only about 3,000 units that year. The Prius has now sold more than three million units worldwide, 14 years after its debut. The Leaf appears to be well on its way to surpassing this record, which bodes very well for consumers and the environment. (Some feel that the first year sales figures represent a lot of pent-up demand from consumers who have waited years for a viable electric vehicle, but time will tell whether these figures are artificially high or indicative of sustainable market demand.)

At least ten more electric vehicles and three more plug-in hybrids are slated for sale in the U.S. by 2014, according to the EPA’s fueleconomy.gov website.

There isn’t yet a “killer app” electric car because vehicle prices are still too high. The Leaf costs about $33,000 before tax credits and about $26,000 after. The Volt is even more pricey, at about $40,000 before tax incentives and $33,000 after. The Leaf and Volt are, according to most testimonials, great cars. But they’re still too expensive to become even as pervasive as the Toyota Prius anytime soon, which is by far the most popular hybrid vehicle.

The good news here is that battery prices, which comprise as much as a third of the cost of these vehicles, are dropping fast and a glut is predicted by 2015. This may be bad for some battery manufacturers but it is unequivocally good for consumers and the environment because a glut will lead to far lower prices. The federal government projected in 2010 that prices would drop by 70% by 2015 and we appear to be headed in that direction.

It’s way too early to attempt an accurate extrapolation of current electric vehicle sales two or more decades into the future. Electric cars are still very much in the low foothills of sales and forecasts are all over the place. Nevertheless many companies still try to forecast sales. Morgan Stanley’s most recent projection of global EV sales is a dramatic downgrade from previous estimates (Figure 4). Even at the reduced projection levels, however, the figures are quite encouraging when compared with hybrid vehicle sales, which are now, 14 years after the Prius became available, still at only about 2.5% of total U.S. sales. Morgan Stanley projects this level being reached by about 2018, twice as fast as that achieved by hybrid car sales.

Research company IDC Insights feels far more optimistic than Morgan Stanley, concluding recently that global sales of EVs are likely to reach 120,000 in North American in 2012, up from 20,000 or so in 2011!

After a few more years, we’ll have a much better indication of the real potential for these ground-breaking new cars to reduce petroleum consumption substantially. The drop in battery prices could easily reverse the more pessimistic sales projections again as EV vehicles prices fall to the point, perhaps, where they are as cheap or cheaper than equivalent gasoline vehicles.

Figure 4. Morgan Stanley projection of EV global sales.

More efficient cars

We shouldn’t let the glamor of electric cars overshadow entirely the contributions of more efficient cars such as smaller cars, hybrids and “mild hybrids.” Buick’s new LaCrosse, a mild hybrid, gets better gas mileage than the Honda Fit or Mazda2, at 36 miles per gallon on the highway! Hybridcars.com reports that 108 models of hybrid cars (about half of the total) and electric vehicles are expected by 2015, with a doubling of available models in 2011 alone. This rate of innovation and market interest is itself very encouraging.

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Toyota’s big boss reported at last year’s Detroit Motor Show that he sees the Prius becoming its best-selling car by the end of the decade, surpassing the Camry. Toyota is rolling out three new Prius models in 2012, including a station wagon, a smaller commuter vehicle and a plug-in version. (For the record, I drive a 2010 Prius and I love it, though I’m looking forward to a plug-in hybrid soon).

Morgan Stanley recently concluded that electric vehicles “aren’t ready for primetime” and highlighted how traditional technologies are witnessing great improvements: “2011 has witnessed a breathtaking level of technological innovation for the internal combustion engine that is ready or near-ready for market. We have been surprised by how quickly and aggressively the OEMs have moved to incorporate fuel-savings content into the model line-up.”

The Obama White House, along with high gas prices, has been a major spur for these trends. Obama has proposed a historic improvement to fuel efficiency standards with the recently-announced goal of 54.5 mpg for regular vehicles by 2025 — almost a doubling of today’s 27.8 mpg mandate. This program, if successful, will be the single largest conservation program in history.

There are some hefty loopholes in the 2025 mandate, but even so, experts expect that the 2025 mandate will result in an average 42 mpg for new cars. A deal was struck with automakers during multi-year negotiations on this proposed mandate but it’s still far from assured that the proposed regulations will pass as is. Earlier proposed regulations under the Bush administration were riddled with loopholes, so fuel efficiency advocates will have to stay vigilant against late-stage shenanigans in this case. Vehicle manufacturers must achieve these new standards with a mix of improvements in traditional technologies and new technologies like electric vehicles.

California is, as usual, pushing the envelope even further, announcing recently a goal of having almost 100% of all new vehicles be electric vehicles or other types of zero emissions vehicles (fuel cell vehicles, for example) by 2040. California’s main agency with respect to vehicle regulation is the Air Resources Board, described recently (and accurately) by one expert as “a global environmental regulator of the auto industry.” As California goes, so goes the United States, because of our 40 million people and the size of our vehicle market.

A less concrete but perhaps even more encouraging trend, nonetheless, is the increasing prevalence of the recognition that we must electrify transportation to reduce greenhouse gas emissions and improve energy independence. A recent article appeared in the highly respected journal Science on the transformation required to achieve California’s ambitious goal of an 80% reduction in greenhouse gases by 2050. The authors concluded that electrification of transportation would be crucial. Most serious plans looking toward a low-carbon future conclude the same, as I did when I wrote a carbon neutral plan for Santa Barbara County in 2007 — the Community Environmental Council’s A New Energy Direction.

The big unknown

The obvious “x factor” in this discussion is the future price of oil. The last super price spike, from 2005-2008, saw less fuel-efficient car sales plummet. In 2008, US-manufactured car sales, which are less efficient than their European and Japanese counterparts, fell from 16 million in 2007 to 10 million in 2008. That’s a profound difference prompted in large part by oil prices reaching $147 a barrel and gasoline prices exceeding $4 a gallon.

If we experience another super price spike in 2012 or in later years, or multiple super price spikes followed by recessions and plummeting gas prices in a cyclical manner (as seems likely), we can expect EV and other more fuel-efficient car sales to climb far higher than even the most optimistic projections.

Super price spikes in oil are not “good news” in any traditional sense, but the pain that follows may actually lead to a far better future, far sooner, if it does jump start the non-petroleum vehicle market in a serious way.

After I wrote the first draft of this article I learned that GreenTech Media has just produced a report, written by Travis Bradford, entitled “The EV Revolution Has Begun!” Bradford stated in an interview, strongly supporting my points here: “I didn’t call it ‘The EV Revolution Has Begun’ for nothing. This change is permanent and profound, though it will take awhile for full realization.”

The end of the Oil Age is, then, underway now and is precipitated both by the increasing scarcity of cheap oil and dramatic improvements in technology. This dialectic will unfold unpredictably in the coming years but odds are that the decline and fall of the Oil Age will arrive far sooner than traditional pundits project.