As oil peaks, role of virtuality and travel

Recently the oil industry has been in the news a lot. I've been thinking about oil in context of virtual reality. As we write in the chapter of Virtual Worlds and Videogames in our book, young people today are becoming ever more comfortable with living, playing and working in virtual worlds, from Habbo Hotel to Worlds of Warcraft. And like we've said on this blogsite, 10% of the total South Korean population plays videogames every day.

So far so good. Whats the connection with oil reserves? I would suggest (without claiming to be an expert in the field) that most oil industry experts tend to agree that in the near future - perhaps 5 - 10 - 15 or 20 years from now, the total world production of oil will peak. After that it will start to shrink. It is not that we will run out of oil in that amount of years (whatever is the time window for the given expert) but clearly, after the world production of oil has peaked, it will start to shrink. And yes, if we use it all up, some day long after that, oil will run out. It is the first of the fossil fuels to run out, according to most predictions there is much more natural gas and coal, than oil.

Anyway, the statistician in me understands that inflection point in the curve. When oil production peaks. That will be a most dramatic moment in our economic history, and it will happen in our lifetimes. When oil production peaks, it will have an enormous effect on all economic activity on the planet, but in particular on those activities that are most dependent on oil. Today by far the biggest share of oil's total worldwide use is for transportation. Gasoline for our cars, aviation fuel for our jets, diesel for our trucks, trains and ships; etc.

So within a decade or at most two, we will see the moment when the world will simply have less oil to consume in the next years, as it had had the previous years. The time of continuous growth will come to an absolute end, and we start the decline.

Economic theory will of course govern what happens. All the cars, they will not suddenly disappear. All of the trucks, busses, minivans, taxis etc of commercial transportation will not stop running. Airlines will want to continue flying, ships will want to continue "sailing". When there is less supply, but a steady (or perhaps still an increasing) demand - it means prices will start to SHOOT UP. Not a gradual increase like we've seen these past few years. No, as countries start to run out of oil, ever fewer countries can supply the world, and even many of those countries have ever less to offer - and the cost of extracting that oil will be ever more expensive - the prices will shoot up. If Americans today cry about 3 dollars for their gallon of gasoline, we'll then easily see 10 dollars and more.

Now, keep in mind, once that peak has been reached (and please remember, essentially all experts agree oil will reach its peak production within the next decade or two), the total worldwide oil production can ONLY go down. Ever less oil produced. Each year less than the previous year. So it will keep pushing prices ever higher, until the extremely high prices cut demand. Once prices are so high that consumers will no longer take a car to the shopping mall, or drive the car to work, or take vacations on cars, only with these kinds of limits, can prices perhaps stabilize.

So I'm thinking, who are hit first. Airline travel is extremely ineffective in terms of fuel consumption. Today we have a huge surge of low-cost airlines starting up everywhere. The discount airlines have helped bring in a massive growth in total air travel. People fly around America, Europe and Australia for vacations, to do shopping, sight-seeing, etc. Asia is about to see the same boom with discount airlines starting up in Singapore, India, etc. If they sell short-haul seats at average prices of perhaps 50-100 Euros/Dollars per trip, and fuel is a big fraction of their total costs, what happens when aviation fuel costs double. And double again. And double again. Soon those discount airlines are forced to bump up the costs of their seats into twice, three times what the prices are today. While they can still be less expensive than traditional "flag carrier" airlines, the really cheap seats will disappear. That part of the airline travel who want to go on 10 Euro tickets to the South of France and Spain (or in America to Florida and Mexico) will no longer have those tickets. The bottom end of the travelling population will be forced out of the planes. The whole business model of discount airlines will collapse. I am sure there are aviation experts who have modelled the "pain thresholds" of at what point an airline like Ryanair can no longer sustain its business, if their fuel costs grow out of hand.

It will absolutely definitely happen. It is an absolute certainty that oil will run out. And long before that, the total worldwide oil production will PEAK. After it peaks, there will be the same number (or more) of demand, but less supply. Prices will skyrocket. The first casualty (or among the first, for sure) is discount leisure travel on airplanes.

As discount airlines will go out of business, so too will economy class travel on the traditional airlines suddenly start to diminish. While we do want to fly to Paris or Vegas or Hong Kong, as tourist class airfares cost (in inflation-corrected terms) two or three or four times as much, we will simply travel there MUCH LESS OFTEN. As less tourists travel in economy classes, it means less seats to carry, meaning the airlines will shrink their frequency of flights, hurting the business travel.

In the short run - ie within 5 years after the peak of oil production - I dont' suggest air travel will end. But certainly all growth in air travel (using conventional airplanes) will stop and instead, total air travel will start to shrink.

Similarly cars. I think we will have a long need for commercial transportation. We will need to get our meat and milk and orange juice and whatever, in refridgerated trucks, delivered across our countries to our cities. Commercial transportation will continue, and the added fuel costs will be passed onto us the consumers, in higher prices of our meats, milk, orange juice and whatnot.

But passenger cars. Personal travel. Almost immediately after the peak of oil production, personal car travel becomes a luxury. Soon a luxury nobody can afford. Americans now complain about paying 70 dollars to fill their SUV's (Sports Utility Vehicles). How much more will they complain when it costs 140 dollars to fill the same car (they will then dump the SUV's and turn to extra-fuel-efficiant little Hyundais and the smallest Toyotas and Kias etc.). But what when gasoline prices keep on shooting up. Soon thereafter comes the time when the average household owns a car that is not used. it might be driven once per month for some really special occasion, but not more. And I don't mean to pick on the Americans on this, just that those numbers were recently on the news and I happen to remember those. The exact same trends will happen everywhere from Europe to Asia.

Our kids today will probably barely still just make it into the car ownership "class" and have a few years of car ownership. But certainly within their car ownership age, the time comes when they can no longer AFFORD to drive their cars. Because the peak of oil production will have passed. The cities cannot go without public transportation - people will have to commute. But commuter busses and trains and trams will operate on electricity, natural gas, and mixtures of gasoline and synthetic fuels. Even the most passionate drivers will have to park their cars (and motorcycles, Alan, ha-ha)

So then what? Now to my theme of virtuality. For the adults reading this posting, it might seem a bit odd, to get a "fix" on the desires to go driving, from a videogame. But all kids today have driven cars on a Playstation 2, with games from Formula One to Grand Theft Auto. So here we go. One part of that future is that the driving experiences will migrate ever more to the virtual cars.

As an avid fan of Formula One racing, I can also see that eventually car racing will have to cease. Or at least the "real" racing by real cars at real racing circuits. Of course if driving becomes so expensive that the average commuter can no longer afford to drive cars because of a scarcity of gasoline, then certainly Formula One, Nascar, A1, Indycars, Rallye, DTM, etc racing series have to end. There will be a natural backlash against them.

So what happens to racing? It will go virtual! We will still see that-time top drivers, like the Alonsos and Schumachers and Raikkonens racing each other, but in what will be "glorified" Playstation games, in virtual cars, against each other. And we will be watching.

You think thats way too weird? No it won't. Alan and I report on the Hong Kong example of the Superstable virtual horse racing games where Hong Kong residents follow virtual races by virtual horses that are broadcast, and bets are made etc. But no real horses race, the whole game is in virtual reality.

The same to the airline travel example. I think we'll start to see a new industry forming, which is virtual travel. When young generations have learned to like to travel, and travel "used to be cheap" - so they all have the travel bug, but suddely airline travel becomes too expensive, then we'll start to have people taking virtual tours of their intended tourist destinations. What kind of new industries will we see emerging in this space, on generations that have learned to travel and suddenly will be forced to switch from the real world globetrotting to virtual travel.

Meanwhile, what about those commuting car drivers? Why do they commute? To go to work of course. As car driving becomes prohibitively expensive, some will shift to public transportation, But public transportation will be incredibly crowded and uncomfortable. So increasingly the younger populations will accept jobs that can be done without commuting. Working from home. Give them a PC connection and on they are. Connected. Working. Suddenly all those downtown office blocks with hundreds of thousands of white collar office workers, the accountants, bankers, analysts, lawyers etc. Why go to an office, when that work can be done from home, and not go through the pain of commuting.

We already see the trends to less structured office working, with flexible hours, working from home, road warriors, etc. Once the oil peak hits, these trends will take over. Suddenly all major office space downtown will become a ghost town (oh, sell your shares in any office holding companies). The total commuting traffic to and from downtown will suddenly start to shrink, and rather fast. Yes, there will be some jobs that have to be done "in person" such as the hospitals etc. But how about universities? Many government offices. As governments move to e-government, also many citizens will act virtually and not visit bureaus and offices in person. Less need to have bureaucrats commuting to work every day.

That in turn will hit the various central city support workers, in particular the lunch-time dining establishments downtown. McDonalds and Pizza Hut and various delis and lunch spots will close or greatly reduce their business. With less staff needed. All that will also mean less daily walk-in traffic at the various shops and shopping malls near the major office areas and their subway stations, etc.

Its not that we will stop eating, only that all of that support economy that today lives on the masses that commute into each big city, will suddenly be cut into much less than half. When will this happen, within a few years after the peak in oil production.

Will the young people feel uncomfortable working with colleagues they have never met in person, "face to face"? Not at all. Its just an evolution to what they now are doing, playing in virtual worlds like Habbo Hotel that we have as one of our case studies in the book, and that we have covered a lot at this blogsite. But that rapidly rising cost of fuel, and transportation, will accelerate the trends to unconventional working, and certainly soon after the oil production peak (if not sooner) the majority of white collar workers will not go to an "office" to work.

Oh, of course, this opens really big doors to offshoring of white collar work. Big opportunities for offshoring employment centres like India, Ireland, Estonia etc.

I don't mean this blog to be a comprehensive listing, nor is it meant to even attempt to cover all the relevant items or be in any order of importance. It just reflects some thoughts I'm now processing, trying to match the inevitable future moment of the oil production peak, and how that translates into our topics here at this blogsite and in our book. Certainly the virtual worlds will find huge growth out of the declining production of oil.

A fascinating time coming. Oh, and if you ever wanted to travel to that destination "for real" - make sure you do it now in the next few years while air travel is still priced at reasonable levels, don't wait for the Peak to happen...

Comments

[Dimitar Vesselinov]

The Day of the Oslo Warning
http://www.eurotrib.com/story/2006/5/5/112629/0939

See also:
http://jameshowardkunstler.typepad.com/clusterfuck_nation/

[Brad Hutchings]

Got here from Guy Kawasaki's blog... I think you could use a primer on oil economics. Arnold Kling's Oil Econ 101 { http://www.tcsdaily.com/article.aspx?id=012003A } is a good place to start. Also, remember that as the price of oil increases and stays above certain ceilings, more expensive oil reserves become profitable to develop. Conversion of vehicles to CNG or nuclear/wind/solar powered electric become economical. The most important thing to understand about Americans is that 85% of us will drive and fly and continue to get around, regardless of cost. We will find a way. If it means developing fuel from the freshly decomposing bodies of teenage Elbonians (note: Elbonia is a fictional country from the Dilbert comic strip), line 'em up.

Finally, Ted Balaker { http://www.reason.org/balaker.shtml } is a leading expert on economics of telecommuting, outsourcing, etc. This isn't something for our kids to get comfortable with by playing WoW. It's permeating our lives now, and in a very positive way.

[Tomi T Ahonen]

Hi Dimitar and Brad

Welcome to our blogsite and thank you for the comments.

I sense that we're in agreement (definitely Dimitar with you, but I believe also with you Brad, judging by the links you provided?)

Brad - about the American love with the automobile. I hear you, and I am sure they will prolong that love-affair as long as possible (considering petroleum based fuels). Also I am equally confident in the American ingenuity to invent and perfect new technologies to power personal transportation, so that the automobile may live to be powered by other means (other than gasoline). Remember that in 1900 the predominant form of car power was not gasoline - the majority of the first cars were powered by steam. So that kind of transition has already happened once.

Also in the interim there will by various stop-gap measures. Yes, as the price of oil shoots up, many oilfields that are currently too expensive to explore, become economically viable. And also, we will see all kinds of synthetics added as additives - and perhaps some day even replacing fossil fuels.

But these expectations do not diminsh the fundamental point in my posting - that the actual peak for oil production will happen in our (worktime) lifetimes, ie before we retire. After the peak in oil production - meaning that after the point has occurred, after which every subsequent year there will be LESS oil produced than before - then no matter what the alternatives are in the near term - all oil and derivatives based fuel consumption will become incredibly expensive.

The point is that after the point of the peak, the traditional expectation of inflation - that prices are a little bit more expensive every year - will totally be overtaken by the sudden, explosive growth in oil prices. The alternatives will require shipment and storage systems - which do not exist today and thus have to be built and maintained - at a cost - plus even more importantly, the transportation will need to be CONVERTED to consume the new energy sources. If we add alcohol to petroleum - like they do in Brazil - it will require changes to the engine else the engines wear out (I don't know, they "rust" or something?) And so forth.

So my point being - that after the peak in oil production, the cost of oil and its derivatives will suddenly start to shoot up, at a much faster rate than inflation.

Part of the "demands" for petroleum fuels will be from sustaining life - ie transporting food etc - and these will take precedence over regular work activities (commuting) which in term will take precedence over leisure activities (travel) which in turn will take precedence over entertainment (car racing).

The last three of the above can be done in a very large degree with virtual environments, tools and experiences already today - and the youngest among us - the under 20 year olds, regularly already do so. So about the time when the oil peak hits, this young generation will be the biggest money-earners in society, being married, with kids, well-paying jobs, a lot of experiences and desires, and suddenly the oil peak hits. They will still want to enjoy the interests they had, and they will need to work - but many of the assumptions we have today will have changed.

And yes, I am also the eternal optimist - hoping that we'll discover ever-bountiful energy sources - perhaps there is some nuclear fuel in droppings of those rather intelligent pigs over at Elbonia, in Dilbert's cartoons, ha-ha...

Thank you for writing

Tomi Ahonen :-)

[Martin Geddes]

I had a few musings over at http://www.telepocalypse.net/archives/000564.html on trying to understand the couplings between travel and information goods, as I wasn't convinced by Andrew Odlyzko's argument that they were alwats complementary goods.

[Tomi T Ahonen]

Hi Martin

Thanks for stopping by. I came to your blogsite and read the long thought-provoking posting of yours (and the comments already there) and posted my reply there.

Here for our readers - first, Martin's is a great piece, please go read it. Secondly, its interesting to keep in mind, that while there is likely to be a negative correlation with increased costs of travel and reduced costs of telecoms (creating a cannibalization), there is also a counterbalancing effect of more communication due to proximity. So whenever we have more travel, we also get more communication.

Until these have been well researched, its impossible to predict which will be the dominant force (and there may be other forces also that come to play).

Thanks Martin for visiting and commenting !!

Tomi Ahonen :-)

[Supercar]

Thanks for sharing your thoughts

[supra shoes]

I'd be interested in hearing. The TOS seems rather clear that it is not unless expressly approved by Amazon. I guess if the library got it in writing then they would be ok.

[mulberry alexa bags]

I follow you VIA GFC and I love your blog!

[giubbotti belstaff jacket]

Very, very nicely done!

[ノースフェイス]

羅津、パイオニア、男性は3場所は通年不凍港であり、両方が北朝鮮政府の経済と貿易港によって承認されたままです。

[グッチ]

もともと店舗前の道路は数十年前に決まった都市計画に基づく拡幅計画の対象。同商店街では約１０メートルの道路幅を１６～１７メートルに広げるが、震災前に着工の見通しは立っていなかった。しかし市は昨年１２月になって「道路拡幅は災害に強いまちづくりに必要」と計画を進める意向を示し、住民説明会を始めた。