[Starvid]

In this extremely simplified thought experiment I will use my native country of Sweden as an example in trying to understand how high oil prices the economy can sustain. My numbers will be very fuzzy on the edges, and if you can do better calculations with better numbers I would be very happy about it. Also I would very much appreciate if you comment on any logical holes you find in my argument.

All right. Right now, with oil at almost $60 a barrel, gas at the pump cost $1.5 a litre in Sweden. Three quarters of this is tax. That means that if the tax is removed, oil prices must quadruple to stay $1.5 at the pump. That means something like $240 a barrel.
This of course means less tax revenue to the state, but the Swedish government is very wasteful and it would be very possible to raise other taxes, reduce government grants or remove structural inefficiences in the economy if necessary (though it would mean lots of wailing and gnashing of teeth).

Then we have the hybrid issue. Hybrids use approximately half as much gas as conventional cars do. That means that if you have a hybrid the oil price can double without it getting any more expensive (for you) at the pump. This put the oil price at $480 per barrel.
Of course buying everyone a hybrid in an instant will be impossible. But Swedes buy new cars every ten or fifteen years in any case. As the oil price increase more and more people will buy hybrids.

Though I in this text haven't managed to answer what oil price the economy can sustain, I have shown that an oil price of almost $500 a barrel will not have a very radical effect on Swedish society or economy.

Any thoughts on this? Any criticism?

edit: Maybe this is the wrong forum? If that is so, it would be nice of the mods to move this thread.

[boilingleadbath]

This may be the wrong perspective - the amount of oil available will change, causing the change in price, so no amount of ability to buy it will give you acces to it. By the same token of course, as the price increases, you may be able to buy it more than, say, America, so the loss of oil consumption occurs there, not in your country.

[Starvid]

Yes, of course you are right. As the price of a commodity increases, only the highest bidders will be able to get it (if not the market is unfairly disrupted, like all the tankers being stolen by a Carrier taskforce ).

According to my crude (pun intended ) calculations, Sweden (and likely the rest of Europe) affords bidding at least $500 a barrel.

[Clouseau2]

The price at the pump isn't what is worrisome. Most people can bike, carpool, take public transportation, buy more fuel efficient cars, drive less, etc. -- they will and they have (at least during WW2 people in the USA did).

The real problems come not from motorists paying more for gasoline, but from industrial and agricultural users of fuel and petrochemicals.

Although not everyone can, I can probably absorb a 5X increase in fuel costs and not have to alter my driving habits too much. Although I've cut my driving in about half since I learned about peak oil, but that wasn't because I had to.

But raise my electric bill, my heating bill, my food bill, every other bill I pay by 5X and suddenly I'm hurting big time if my salary doesn't go up 5X as well.

[stayathomedad]

yeah I can afford a price at the pump beyond $10 a gallon as my two cars get more than 35 miles to the gallon here in daily commuting....the issue will not be the money to buy the gas, but if the gas is there.

it is sort of like drowning, you can have a million dollars in your pocket trying to buy a gallon of air under water, but if that air is not there, not even fort knox will buy it...you will expire...

that is the issue here, it is not just 2, 3, 4, 5, or so currency units at the pump, the question will be: is there gas at the pump today?

[Mercani]

that is the issue here, it is not just 2, 3, 4, 5, or so currency units at the pump, the question will be: is there gas at the pump today?

Oil will not disappear suddenly. It will deplete slowly. If there is a price tag on something you can buy it if you pay ! If there is more demand than supply the price will simply go up until demand=supply.

I have shown that an oil price of almost $500 a barrel will not have a very radical effect on Swedish society or economy.

No, you haven't showed anything. What about airplanes and ships? What about plastics and all the stuff which requires oil to produce? Are they taxed at the same ratio as gasoline? I doubt they are. Besides, we don't have hybrid ships or trains yet !

Another effect of high gas price: If you pay more for gas, then you have to pay less for other things. That is not good for your economy. Does Sweden produce any oil?

[Starvid]

Airplanes and ships. I don't know how heavily taxed they are, but it wouldn't suprise me if they are rather heavily taxed. If there is anything the Swedish state is good at it is taxing everything.

And while air travel face a bleak future, ships can be nuclear powered. The obstacle is not technical but one of public opinion. If people prefer getting poorer because they are against nuclear shipping, they get what they deserve. Or to rephrase it, as shipped goods get more expensive nuclear shipping will get more popular.

Plastics and petrochemicals are a grave issue. They will get more expensive, but by how much? How much of the price of something plastic is directly derived from the price of oil, and how much is price of labor et cetera?

No hybrid ships or trains, no, but we have something even better! Electric trains and nuclear ships!

It is correct that if you pay more for gas you will have less money for other things. But if you reread my original argument you will se that oil at $500 a barrel will not result in the average Swede paying more for gas if taxes are slashed and hybrids are introduced. Hell, building hybrids might reduce unemployment and even improve ur economy!


But what about industry and agriculture? Well, agriculture also pays fuel taxes, and why not build hybrid tractors, hybrid trucks and hybrid combine-harvesters?

Fuel prices for acriculture needn't rise, but petrochemical prices will. But how much of the price of a loaf of bread or a steak does the price of petrochemicals represent? I don't know, but I figure it's not very much. I figure the greatest proportion of the cost of bread is the labor cost. European farmer labor is so expensive we must subsidy European farmerns with something like 50-100 billion euros a year through the European Common Agricultural Policy, CAP.

While petrochemicals will push food prices upwards, other trends will push it down. Lately food prices have fallen quite a lot in Sweden because of increased competition from German and Danish companies. Also, one might speculate that if the European food market would be liberalized we could import a lot of cheap food from the new member states and Ukraine.

If the CAP was removed real food prices would fall even more, since we pay a lot more for our food than the price tag in the store reveals, since we subsidy our food through tax. No food subsidies would mean less tax which would mean more money for people to buy other stuff with. At the same time it of course would mean lots of European farmers going out of business.

[Pops]

I know nothing of Sweden.

But unless 100% of your gas taxes are used for foreign aid OR Sweden imports zero oil; ALL of those gas taxes are staying in your country currently.

If neither of the above is true, when oil increases 500%, ALL or that money is going out of your economy. Regardless of how ‘wastefulâ€

[Wildwell]

In this extremely simplified thought experiment I will use my native country of Sweden as an example in trying to understand how high oil prices the economy can sustain. My numbers will be very fuzzy on the edges, and if you can do better calculations with better numbers I would be very happy about it. Also I would very much appreciate if you comment on any logical holes you find in my argument.

All right. Right now, with oil at almost $60 a barrel, gas at the pump cost $1.5 a litre in Sweden. Three quarters of this is tax. That means that if the tax is removed, oil prices must quadruple to stay $1.5 at the pump. That means something like $240 a barrel.
This of course means less tax revenue to the state, but the Swedish government is very wasteful and it would be very possible to raise other taxes, reduce government grants or remove structural inefficiences in the economy if necessary (though it would mean lots of wailing and gnashing of teeth).

Then we have the hybrid issue. Hybrids use approximately half as much gas as conventional cars do. That means that if you have a hybrid the oil price can double without it getting any more expensive (for you) at the pump. This put the oil price at $480 per barrel.
Of course buying everyone a hybrid in an instant will be impossible. But Swedes buy new cars every ten or fifteen years in any case. As the oil price increase more and more people will buy hybrids.

Though I in this text haven't managed to answer what oil price the economy can sustain, I have shown that an oil price of almost $500 a barrel will not have a very radical effect on Swedish society or economy.

Any thoughts on this? Any criticism?

edit: Maybe this is the wrong forum? If that is so, it would be nice of the mods to move this thread.

Well this is where the fun begins, because the very worst thing you can do is to reduce tax to mitigate the effects of oil use. Why? Take Britain, traffic is rising year-on-year, train and bus fares have risen 70% while the real cost of motoring hasn’t changed since the 1970s. Is there any wonder road use is rising? With that congestion increases = More energy use and more roads need to be provided = more energy use/oil for tarmac plus ongoing maintenance and above all you don’t reduce the overall demand for oil and the price keeps rising.

Eventually you would get the state where road users are not paying any of their costs and the entire system is funded from the general populace, which, as a proportion people on lower incomes will pay more and effectively be subsiding people wealthy enough to pay higher oil prices and can afford cars.

In Britain the amount raised from roads is £42 billion. Now, that figure sounds especially high and very often it is pointed out that much less is spent on roads. However, frequently the costs of capital borrowing, pollution, congestion, accidents, law enforcement and so on are omitted from these figures as well as spending from alternatives like buses and trains.

So on conclusion there is some potential for some reductions in those figures, but very little. Moreover, you would have to find the money for other services such as pensions and health funded by these taxes. Of course there is the potential for savings because of waste, but it must be remembered sacking civil servants is only cost effective when they can be absorbed into other areas of the economy. Having to pay them benefits would make the financial situation worse again.

Currently UK wise the chancellor has suspended fuel taxes rises two times for roads. Although bizarrely, the rises for fuel tax on rail still took place.

The IEA specifically advises against cuts in fuel tax to offset rises in oil prices.

http://www.iea.org/textbase/work/2005/o ... ground.pdf

Next we come to the thorny issue of prioritisation of fuel supplies. In an oil crisis everyone will be trying to buy fuel. What is more important? I’ve prepared a rough list:

1. Food and water production and supply/Military use/Emergency services
2. Medical supplies
3. Distribution of essential goods/movement of essential personnel
4. Manufacturing processes/Other public transport and goods movements
5. Private motoring
6. Non essential airlines

ATM the paradox is some of the biggest users of oil are at the bottom of that list. So you see the problem?

[Licho]

Unless you want to ruin country trade account balance and empty budget, fuel taxes must stay. Perhaps not for all (farmers can live without them), but rest must have taxes.
We need to decrease fuel consumption not to increase it, if you lower taxes, fuel consumption will continue to grow, your country wont have money for social programs and healthcare and your negative trade balance (importing tons of foreign oil at huge prices) would hurt currency and economy.
Just check Philipines, oil imports make up for 50% of all imports! This has negative effect on economy so country is trying to reduce consumption by 4-day work week and other measures..

Best way is to leave the taxes as they are or even increase them to enforce higher efficiency and faster transition..
It will slow economic growth now, but we could be better prepared for general lack of oil that might come after decade or two, when oil will have to be rationed ..

[MrBill]

It is a good question and some good answers, too. This is a thorny question that often comes up. A lot of changes take place at the margin.

Say you have three areas, Americas, Europe and Asia (kinda like '1984') and they trade with one another. Asia has a crisis, but the Americas says, no big deal, we don't export that much to Asia in any case, let us say 15% of our total exports. Okay, that is not a large drop. But, let us say, Europe imports from America, say 15% of services, but exports a lot to Asia, say 50% of capital goods.

If Asia has a recession and can only take half of the exports from Europe then Europes exports go down 50% of 50% or 25%. One can then assume that Europe has less money to buy from America, so America's total exports do not just shrink by the initial 15%, but also some or all of the 15% to Europe or <30% in total. Now that is going to start to hurt. Especially, if there is no other outlet or if you already have unemployment or excess capacity. Then Americas' economy has to contract.

That is very simplified and does not represent real trade patterns. However, if you apply it to Sweden and the price of oil, as some people already pointed out, it is not just the cost of petrol at the pump, but squeezing out discretionary spending, the cost to heat homes & offices, the fact that higher oil prices affect the cost of production and transport for everything else you consume, etc. They all compound on one another or in other words the secondary effects, stage two, of inflation feeding through to the broader economy. Or if there is no growth, then stagflation.

Think about this. Many of the recent gains made in purchasing power in the US have come from lower prices via the Wal-Mart-China Inc. effect. It automatically lowered prices on hundreds of items for consumers, so their wages went further; plus it forced competitors of Wal-Mart to change the way they do business to compete; and it forced China's competitors to also change the way they produced and transported goods to America. Now, with higher global energy prices, the structural changes will remain, but a part of the gain in purchasing power will have to be surrendered as energy prices increase the manaufacturing and transport costs of all those goods that are made.

[Barbara]

The first "hole" coming to my mind is that thing of making hybrids in a rush for 10 millions Swedish with oil at $240. Unless Swedish are so wealthy to afford a $ 70.000 hybrid, then there's no way.
You must understand that the equation oil=gasoline is completely wrong. Gasoline is the less useful thing you can make with oil... and the first thing you can do without.

(Anyway, give a hug to Sweden and let her going on living the way she did until now... it's the best place in the world to live. As long as you have heating, of course! )

PS May I suggest you a new thread? You can open it in "Planning for the future": explain in details how Swedish can make their cars last for ten or more years (I've noticed it in Sweden). They're richer than most of us, but almost anywhere here people think that a car is old in three-five years and will rust or break any moment. Thanks!

[EnergySpin]

Plastics and petrochemicals are a grave issue.

Starvid not really, for many reasons. In spite of what the public thinks, the plastic mountains we have to put up with only represent a tiny % of the oil feedstock. In addition, any method that gives you methane (e.g. municipal waste) or ethanol can gbe used as the first step towards synthesis of ethylene and other starting materials for plastics.


The rest of your post has some interesting points as well, but I am running out of time here