

Gravity Model of Trade -Commodity Flow Correlation with Distance (2)- Click to Enlarge.

Here is another graphical illustration which incorporates speed (which increases energy return on time) and energy intensity:

Energy costs vs speed Source: Jean-Paul Rodrigue Hofstra University

A PALEO-ECONOMIC PALATE CLEANSING SIDEBAR BEFORE WE MOVE TO TRANSPORTATION

A recent article in the Economist points out that comparative advantage also works at our most basic level of trade (male/female) and was of historical significance:

In existing pre-agricultural societies there is, famously, a division of food-acquiring labour between men, who hunt, and women, who gather. And in a paper just published in Current Anthropology, Steven Kuhn and Mary Stiner of the University of Arizona propose that this division of labour happened early in the species' history, and that it is what enabled modern humans to expand their population at the expense of Neanderthals.

TRANSPORTATION



Transportation as % of total energy use- Click to Enlarge

In the 1960s transportation accounted for about 23% of all energy expended in the USA- now the figure is approaching 28%. The yellow line (almost on top of the pink line) shows of the transportation, 99% of it is oil (there is some electrical, natural gas and coal usage)(3). We are really dependent on oil!

The following two graphs show the energy efficiencies of various modes of transportation first for people and then for goods. This first graph is from Richard Heinberg's book "The Oil Depletion Protocol" and is based on data from Britain (which Richard tells me is fairly universal):



MegaJoules per passenger- Click to Enlarge

As can be seen, the bicycle is the most energy efficient mode of transportation - even better than walking. The other insight from the graph is we gain quite a bit of efficiency from packing a lot in one vehicle. (This is a concept used often in China)

As far as transporting goods, there is a large disparity in energy efficiency per ton mile for different transport methods:



Energy Intensity per ton mile by freight mode. Source - EIA Click to Enlarge

The above graph is somewhat dated (1991), Though there have been efficiency improvements across the board, the general model of water/rail/truck/air in order of efficiency seems to still be intuitively correct, though some argue that rail is more efficient than water. It is actually quite a complicated issue as it depends what one is transporting and the sequence of steps. Alan Drake recently did a study showing rail transport to be 8.3 times as efficient as trucking.

One can visualize the energy efficiency/footprint of various transportation modes as something like this pyramid:



The Transportation Pyramid. Click to Enlarge

As transportation costs increase, communities and regions that are able to effect movement downwards on the pyramid towards its base will have comparative advantages, due to savings on energy costs, and availability of products.

ENERGY USE AND HUMAN WANTS AND NEEDS

Let's now shift gears just a bit. Psychologist Abraham Maslow theorized that humans meet basic needs in a hierarchical fashion. Once basic needs are met, we seek to satisfy higher needs such as self actualization and fulfillment. In the current era of cheap oil, at least for western society, a very small % of energy is spent on basic needs in proportion to the energy intensive 'desires' that drive western society:



Maslow's Hierarchy of Needs------------------Nate's Intuitive but Made Up Hierarchy of Energy Use. Click to Enlarge

This concept can be expanded upon. We sometimes take for granted the things that we really need, and make us happy - I am 90% as happy eating fried fish from a local lake as I am driving to Chicago to my favorite sushi restaurant (well at least 80%). Higher personal consumption efficiencies in an energy challenged world are lower on the pyramid.



The Consumption Pyramid - Click to Enlarge

We finally come full circle to the spark plug question. There is a great movement (at least in the peak oil circles, not yet in the peak credit circles) towards relocalization. But 'local' labels in many cases are misleading due to the insidious reliance on foreign parts at different moments in the supply chain.

One of my best and oldest friends is an entrepreneur from China. He owns a business in Connecticut that seeks out American companies that need nails, screws, and small metal parts at their factories - he then signs contracts for 5 million screws at 2.5 cents each - screws that in the US would cost 6 or 7 cents due to higher labor etc. He pockets half the difference. The point being that our basic goods might ostensibly be made here, but their component parts may not.

I have not seen a way to measure this so have come up with my own, "the Embedded Transportation Chain". First Order Origin represents where you buy something (in your town would be 100% local). Second Order Origin represents where the components and parts came from on the product you bought. And Third Order Origin represents where the raw materials came from for the parts to make the Second Order Origin parts. To determine how 'local' (in the sustainability and security sense) a product is, one would multiply Level 1 * Level 2 * Level 3. Of course, there is very little that is truly local, as a world of increasing international trade has increased 'Third Order Origin' percentages dramatically. (I don’t have accessible data on this-the amount of work would be closer to an academic paper – here I just wanted to lay out the idea). True to the field of economics, I have made these terms up. However, also consistent with economics, one can grasp the common sense implications. When looked at in this 3-tiered light, the phrase “Made in America”, takes on different meaning.



The Transportation Origin Chain- Click to Enlarge

I currently reside in Wisconsin. To eat local is cheese curds, fried fish and venison. All these things can be bought (or harvested) locally. But the cheese company gets milk transported from around the state, uses packaging made overseas from natural gas. Its employees drive to work using cars made in Japan and oil from Nigeria and eat food imported from New Zealand. Although the dairy farmers themselves use largely local inputs for feed and bedding, their milk buckets are made from steel processed in China, and the wood for the barn comes from a mill in Canada. It is not easy to decipher the ‘localness’ of a product, unless one walks out and picks a wild mushroom. Use your imagination however to consider WHAT IF oil doubles triples or more in price, what sort of domino effects might occur in the production supply lines. It is hard to predict what "Liebigs product of the month" might disappear from the store shelves - Charmin bath tissue one week and Stihl chain saw blades the next.

A quick example is footwear. 98% of all shoes in the United States are made somewhere else, many in China.

CONCLUSIONS

Increases in efficiency of goods production in a global context are considered a good thing, as they raise respective countries GDP, and allocate resources wherefore the total pie gets bigger. Once on this track however, participants continue to strive for more and more efficiency, more trade advantage and cheaper production. If taken to its natural extreme, every place on earth will specialize to the maximum profit of corporations. Implicit in this path is the forgoing of expertise and local resources that are lower down the pyramid of human necessities. If transport costs are 20% of a products value and oil doubles or triples, they become upwards of 50% of a products cost. Certain products then become uneconomic to ship. Some of those products are components of larger products which do not have local substitutes.

High quality and abundant oil has obfuscated the difference between wants and needs. At a Walmart or a Safeway, young people today see quilted bathroom tissue, pork chops, colorful shoes, dental floss, and avocados as a natural smorgasbord, without internalizing the complex energy/trade chain that put them there. This plethora of choices that globalization offers us could just not be possible in local or regionally based economies. In some senses, to revert the global network of specialization back towards less complex, more regional networks is kind of a chicken-or-the-egg dilemma. Unless we change the consumption drivers, there will be little incentive for the manufacturers of nascar lunch boxes to move downwards the production/transport and global/local pyramids.

When (and in my opinion its only a matter of when) oil becomes less available/affordable, centralized forms of energy command will not be efficient because different regional blocks and localities possess their own comparative energy and resource advantages and disadvantages. National umbrella energy policies treat all states the same. Corn ethanol roll out is a prime example - what might be great for communities in Iowa and Minnesota has different math for California and Vermont. We know that distance impacts energy efficiency and costs. We also know that different states (and countries) have different indigenous energy resources (Quebec has hydro – Arizona has sun, Montana has wind and coal, etc). It is likely there will be decentralization of energy production as regions move towards building blocks of basic needs in safer spatial scales. The magic of comparative advantage can still work in the second half of oil. But it ultimately will differentiate between basic needs and unnecessary desires - and take advantage of water and railway access.







THE BOTTOM LINE

1. We need oil for more than just driving. It is embedded in almost everything. Unless you're Amish, Aleutian, or have alot of friends, oil is life in the USA (at least currently).

2. Higher oil prices combined with lower (or no) credit availability will eventually make certain types of modern trade prohibitive. As such there is shortfall risk in modern supply chains that is not in current economic forecasts.

3. Those nations, regions, communities and families that produce lower on the left graph and consume lower on the right graph will have an advantage when transportation costs increase. Those communities using predominantly rail and water transport will have advantages over those more dependent on truck and air, everything else being equal.

4. As is occurring in some South American nations currently (Peru and Venezuela come to mind), a return to the import substitution model away from the so-called Washington consensus seems inevitable. However, remember the supply/demand wedges in the Hirsch/Bezdek report showing how rapidly production shortfalls could occur. Local, regional and national action needs to be taken soon because of the required long lead times.

5. In rich nations, in addition to conserving, it will be advantageous to begin to be happier with 'less' because the delta of 'desires' may change slower than that of 'things' available in the future, relative to other countries (e.g. Europe and Africa) that exhibit lower energy footprints. In other words, though the USA can easily get by with half as much energy-intensive stuff and conveniences, an abrupt change to this level will be much more mentally painful than a gradual one.

In conclusion, as a thought experiment, the next time you go to your nearest box store, look at the gazillion products on display. Try to imagine where they come from, where their parts come from, and how that supply chain might change when new oil production fails to match decline rates of older wells. While you are there, you might notice how many of the myriad products improve yours or your friends lives, and how many do not. This 'demand' side view of Peak Oil will be the subject of my next post.

Next post (if I successfully defer my addictions): "Evolution, Discount Rates and Addiction"

Nathan John Hagens

theoildrum.com

email thelastsasquatch@yahoo.com



Resources cited:

(1) Ecological Economics - Principles and Applications, Herman Daly and Joshua Farley (in my opinion, a textbook that should be used in every college in America)

(2) "Gravity for Beginners" Keith Head. http://pacific.commerce.ubc.ca/keith/gravity.pdf (.pdf warning)

(3) National Transportation Statistics 2006(pdf warning), US Department of Transportation