Energy costs, air fares, and our tourism-dependent economy

I couldn’t help but notice an AP story on airline fuel costs in today’s Star-Advertiser.

U.S. airlines burn an average of 22 gallons of fuel for every 1,000 miles each passenger flies. At $3.03 a gallon, airlines are currently spending $330 per passenger just on fuel for a 4,950-mile transcontinental round-trip.

This can’t be good news for Hawaii’s tourism-dependent economy, as airlines have responded by raising fares and cutting capacity, and discretionary spending (think “Hawaii vacations”) for most Americans falls in order to compensate for rising gasoline costs.

Hawaii will survive the current spike in energy costs.

But what happens when the cost of oil jumps to new highs in the $200/barrel range? It would seem that this is only a matter of time. And where will Hawaii be when that happens?

I asked Chuck Smith, an old friend who delves into social and financial issues on his very insightful and well-respected blog (Of Two Minds), if he had any thoughts on how a future oil crunch will impact Hawaii. Here’s his reply.

Hi Ian:

Interesting question, and a difficult one for the reason that the end price of jet fuel and gasoline moves not just with the cost of oil but with speculative demand and also refining costs. And the price of oil in dollars can rise or fall in terms of the dollar’s relative value vs. other currencies. So oil could rise for those of us using dollars while it remains stable when priced in other currencies. (Or it could fall for us if the dollar strengthens.) Gasoline topped out at about $4.60/gal when oil hit $147/barrel, but that ratio is not set in stone. Gas could easily hit $6 on the mainland if oil goes to $200/brl, and of course it would probably be higher in Hawaii.

Even with oil around $100-$120/brl the airlines are charging up to $500 fuel surcharges on flights to Europe. It doesn’t take much imagination to see $1,000 for west coast to Hawaii round-trip flights becoming “the new normal” if oil creeps higher.

There would be two follow-on effects for Hawaii of $200/barrel oil: the already outrageous cost of living would jump, further marginalizing many households, and the “discretionary spending” that fuels tourism would decline, at least for the 90% of U.S. households who don’t own substantial financial wealth.

To the degree that Hawaii’s economy has become increasingly dependent on imported food (no local dairies now, etc.) and tourism, then that would be a double-whammy. If oil goes to $200/barrel, what’s to keep it from going to $300/barrel? Once it goes into shortage, then I think rationing a la 1973 will be the only viable choice. I can easily imagine strict gasoline rationing and also a rationing of airline travel.

I know there is a lot of disinformation about Peak Oil and a lot of disbelievers, but anyone reading these articles with an open mind can see the trend is obvious: supply will decline as costs of extraction rise dramatically.

In the WSJ article, Chevron spends $234 million to fire up a well that supplies 1,500 barrels a day–a completely trivial quantity of oil on a global scale–and that doesn’t account for the ongoing costs of heating steam to 600 F and pumping it thousands of feet down the well. Do the math on how much capital it will take to extract meaningful quantities of heavy oil in a global economy dependent on 88 million barrels a day just to maintain the status quo and you get an idea of the fragility of current supply. For context, the U.S. consumes around 18-19 million barrels of oil a day.

I have been mulling the (long) Life of the Land report on Hawaii’s energy future (I can’t find the link at the moment) which concluded that ocean thermal energy is the best large-scale alternative. That has only been proven in small test projects but it has a lot of advantages if it could be scaled up. It is out of sight (unlike huge wind turbines) and is available to all islands, precluding insanely expensive fantasies about transferring electricity from Lanai (the new “energy ghetto” for the state, it seems) to Oahu via a $400-$600 million cable. (Nobody seems to recall that huge quantities of power are lost in transferring power over long lines, and nobody knows how much such a cable would actually cost.)

Everybody in today’s ideological climate wants “private capital” to supply the money for new energy, but “private capital” only wants a sure thing, so nobody will gamble $500 million on ocean thermal energy. Only the state has that ability, but with every state constituency trying to protect its share of the revenue stream then that seems “impossible.”

How about what happens when oil is rationed or unavailable in quantities sufficient to meet demand? Is that also “impossible”? How will the state government respond then? Many people seem to forget that government’s role is to step in when the risk is too great for private capital. DARPA (Defense Advanced Research Projects Agency) “invented” the Internet with its funding, for example. Once the technology is developed, then private capital happily rushes in to profit. But some government guidance and oversight remains necessary.

I know some readers resent any commentary from “mainland haoles” regardless of any other conditions, but as a former resident of Lanai I resent the notion that’s it’s OK to turn Lanai into an energy ghetto to serve Oahu, and I also resent the fantasy-based ideas of undersea cables moving power from this new energy ghetto to Oahu. Where are the similar cables at comparable depth and distance elsewhere in the world? How much did they cost when all was said and done? What is their reliability?

If anyone starts asking the hard questions, then the idea that the “solution” is energy ghettos on Molokai and Lanai fall apart as wishful thinking.

Rethinking Hawaii’s dependence on oil (and coal for electrical generation) requires rethinking the state’s role and “politics as usual” on a profound level. What happens if private capital isn’t able to “save” the state with science-fiction “solutions”?

Whenever people start talking about undersea cables and energy ghettos on the outer islands, I always suggest putting a solar panel on every roof on Oahu as a first step. The first rule of power generation is generate it close to consumers so you don’t throw away 40% of it in transmission.

When I post this kind of thinking on “progressive” blogs in Hawaii, they get deleted. That tells me the Status Quo is already wedded to fantasy “solutions” which don’t threaten the current political and financial power structure.

This is not a well-organized essay, but it’s a meditation of sorts on what $200/barrel might mean for Hawaii.

warm regards,

What do you think?

27 responses to “Energy costs, air fares, and our tourism-dependent economy

  1. Reddy Kilowatt Jr.

    “I too was perplexed by the comparison of the development of the Internet to the Big Wind project. “
    Sorry for confusion. Tried to compare the military role in internet to military effort to find a non-oil liquid replacement for jet fuel. I hope the latter succeeds like the former. Troops are dying and billions spent because we’re so thirsty for oil; jet fuel is one major use with a replacement technology that still seems far off. Some planes have flown on biofuel, but we have a long way to go.
    Onward. Who knew Mr. Curtis was such a kidder? Anyone who’s tried to read his endless filings or blog posts will get a charge (forgive bad pun) from his admonition not to “lecture.”
    Mr. Curtis has two main ideas for Hawaii’s energy future.
    1) Ocean thermal energy conversion. Enticing potential that seems technologically possible (on tiny scale so far) and would provide firm power.
    2) Distributed generation. Require residents and businesses to produce their own electricity to reduce business for “greedy” utilities and other companies that make electricity.
    But wait!! These ideas are in diametric contradiction to one another.
    1) OTEC, if it happens, is the epitome of large-scale, central station, corporate generation. Development will be risky (in the financial sense) requiring a deep-pocket corporation that will demand those big returns to venture into an untried business where environmental impacts, financial viability and even the permitting requirements are totally unknown.
    2) DG. How many people want to be in the electricity business? I try to conserve but don’t want to make my own electricity. I’d like a small garden, but don’t want to produce all my own food. The decentralized life espoused by Mr. Curtis is an ideal for very few.
    Families (especially folks working two or three jobs) want to lead their lives, not tend home battery packs. Renters and apartment dwellers can’t do DG even if they’ve got the substantial bucks. Landlords watch the bottom line, so few rental properties come with renewable energy.
    As for companies, most want to do their core business not electricity. They will spend for efficiency (good for bottom line) but in most cases (except big box stores, storage and warehouses, etc.) don’t do DG except for image/ PR purposes.
    Nowhere on earth is there a working, commercial, utility-scale OTEC plant. No modern technological community depends on customer DG for more than a tiny share of electricity. But let’s hope these are Hawaii’s energy future and do as little as possible while we wait. This is the thinking of self declared environmental “leadership” in Hawaii. Contradictory, unrealistic and narrow.
    By narrow I mean Mr. Curtis’ blind antipathy to the utility. HECO et. al. could do more and used to do a lot less. But Mr. Curtis’ opposition (which I will join Voltaire to protect his right to express) doesn’t make for convincing arguments or a reasonable path to action.
    He says: “The military has been more aggressive than the utility in pushing photovoltaic.”
    Duh, the military is a customer with thousands of houses (and tenants who follow orders), open roof tops/space and a top-down directive to cut energy bills. Military contractors do a great job of building energy efficient homes with solar water and PV.
    The comparison to the utility is meaningless. The utility worries about PV on a system not built for two-way flow of electrons, but kicking and muttering it is entering the 21st century, offering ways for different sized customers to sell power to the utility, thus encouraging DG. The state backs it with rebates and tax credits. The utility is a handy whipping boy, but there are lots of challenges to widespread PV.
    He says: “The utility has never looked at this solution (“customer-sited and utility scale PV (plus storage) as an alternative to Big Wind”). Without looking or analyzing, it is easy to discover one’s own version of the truth.”
    Mr. Curtis knows this how? I’ve seen solar compared to Big Wind by the state energy office, U.S. DOE observers. I’d guess the utility has done its comparison as well. No good can come from dissing solar to promote wind because, again, it’s not either/or. Need to do both to meaningfully cut oil use. Period.
    Responding to the fact of 30-40 undersea cables around the globe, he says: “The world has a lot of various types of renewable energy and energy infrastructure that we do not have. We have a number of things the world does not have. We have the Aloha Spirit. We are the endangered species capital of the world. There are benefits to being a non-homogeneous world. Just because someone else has something does not mean that we need it. O`ahu has 41 story buildings. Is that justification for putting them of all of the islands?”
    A high school freshman debater would recognize the Red Herring fallacy, extraneous comments to divert from the issue. Endangered species? Tall buildings? How did they come into this discussion? As to Aloha Spirit, love it. It may keep me warm at night but won’t chill my beer or give me light to read after dark.

  2. This discussion seems focused on the generation end of things. IMO, for us to really move forward with the use of renewable resources to replace our consumption of fossil fuels, primarily to generate electricity and power vehicles, we also need to work on the consumption end of things.

    Our current consumption model is largely demand-based. Someone at the power plant essentially ‘steps on the gas’ when we collectively demand more electric power, and eases off when demand does. This is relatively straightforward because we have energy stored in the fuel the power plants burn, whether diesel, coal, or trash. Even the limited hydroelectric plants have energy storage.

    But many of our renewables cannot produce electricity on demand, so we need to begin to move to an availability-based demand model (BTW, this is one reason solar waters heaters work so well–they have an intrinsic energy storage medium).

    We’re headed in that direction, with everyone carrying so many battery-powered devices these days. But a key to this is likely to be electric cars, and having them constantly plugged into the grid to store energy when electricity production exceeds demand, and to source it when demand exceeds production.

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