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October 03, 2007



Yes, past complexities come back to haunt us -- but our natural adaptability will create increasingly efficient economies of scale in the aftermath. Consider the home mortgage foul-up we're muddling through now: laxity of effort on the part of lenders, eager to scoop up as many borrowers as possible, failed to exercise due diligence on the bundles of mortgages they were financing; so the weak are shut down while the strong (i.e., efficient and competent) pick up the pieces with record profits. The same will happen in the energy market, with a lot of pain while we cross the inflection point -- and a far more stable and secure future once we perfect cheap, renewable sources of energy. (And yes, it may be 50 years off -- just in time for the renaissance in Africa to surge forward as the manufacturing base for the world while China evolves into a post-capitalist information economy).


This is not all that different from what we experienced in the early 1980's.

A steady price like this would be near optimal for reducing oil dependency in a cost effective manner. It is high enough to drive maintenance decisions, low enough to influence but not drive capital replacement cycles, and low enough to keep the political stupidity level to an acceptable cost.

There remains a lot that can be done in the maintenance area. The CFLs took off as their price dropped enough that the ROI on a CFL went below one year. At the moment the ROI for a CFL replacing an incandescent is about 6 months. The general public does not do detailed cost accounting, but does have a good general sense of the ROI of various such decisions. CFL sales are climbing rapidly, although their longer life means that sales should stabilize at about 10% of incandescent sales.

Influencing but not driving capital replacement cycles means that the general economic structure survives, but as capital equipment needs replacing, the cost of energy use becomes a significant decision influencer. This avoids dramatic distortion on both the buyer and manufacturer design side. So people will continue to keep cars about 15 years (perhaps changing owners), appliances 10-20 years (depending), etc. But the replacements will be selected including energy cost decisions.

The impact in the 1980's was a fairly steady 3-5%/year energy intensity improvement. Commercial and industrial sector improvements were much greater than the residental and transportation sectors. Commerce and industry knew that they were not going to get subsidies, and made rapid changes in decision making. Residential and transportation have much longer capital replacement cycles, and both remained subject to significant resistance to change because government subsidies of bad decisions remained a viable option.

The improvements dropped to about 1%/year when oil became cheap in the 1990's (in part because of the substantial reductions in energy usage). Technology improvements and untapped general energy improvements are still widely available, so a return to 3-5%/year improvement is quite reasonable.

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