Vanishing Automobile update #56

Does "Peak Oil" Spell Death for the Suburbs?

30 September 2005


As promoted by New Urbanists such as James Howard Kunstler, the peak-oil theory holds that we are running out of oil and that apocalyptically high energy prices will totally disrupt the American way of life. Based on this theory, the New Urbanists advocate more government regulation of land use and lifestyles and diversion of more highway revenues to rail transit.

The peak-oil argument, however, critically depends on four strong assumptions:

  1. We are running out of oil
  2. There are no substitutes for oil
  3. Higher prices will lead people to drive less
  4. Less driving will force people to return to the cities

If any one of these assumptions is wrong, Kunstler's argument falls apart. This paper shows that all four assumptions are questionable.

  1. While extraction costs may moderately increase fuel prices, the world has sufficient known reserves to last for many decades.
  2. Substitutes include solar, nuclear, and coal, but the first "substitute" will be the use of more fuel-efficient cars.
  3. Americans will respond to sustained higher fuel costs more by cutting back on other transport costs, such as by keeping their cars a little longer or buying less luxurious cars, than by driving less.
  4. To the extent that people do drive less, they could actually accelerate the suburbanization and exurbanization trends that the New Urbanists oppose.

Government policies based on a presumption of peak oil are likely to do far more harm than good to our cities and our economy.


The world is running out of oil. Demand in China and other Asian nations is rapidly rising, yet total oil production will soon peak and then decline. As a result, today's high oil prices, driven by Katrina and Rita, are only a harbinger of even higher prices to come. Such high prices mean an end to life as we know it -- life in the suburbs with automobiles, Wal-Marts, and other modern conveniences.

Those, at least, are the claims of the peak-oil theorists. Some proponents of peak oil may actually be petroleum geologists who have some idea what they are talking about. But many are simply people who hate suburbs and automobiles and are gleeful at the thought that they will soon go away. "Forget Wal-Mart and another $286 billion to pave over good land. Finally!" one group happily reports.

Of course, if what they say is true, we should stop building any more low-density suburbs or highways and instead build New Urban communities and rail transit. The peak-oil theory thereby helps politicians justify intrusive land-use regulations and wasteful transportation projects.

Leading the charge is James Howard Kunstler, author of The Geography of Nowhere (which argued that suburbs were "trashy and preposterous"), Home from Nowhere (which advocated New Urbanism as a replacement for traditional suburbs), and now The Long Emergency." As summarized in Rolling Stone, Kunstler's latest book argues that oil prices are rising to catastrophic levels, and that we will only be saved by building "walkable, human-scale towns."

Kunstler is no petroleum geologist. As evidenced by his earlier books, he simply considers suburbs abominable. If peak oil means an end to the suburbs, then he is all for it. This attitude blinds him to a realistic assessment of his argument.

Broken down, Kunstler's conclusions depend on four very different hypotheses:

  1. We are rapidly running out of oil and fuel prices will soon become unaffordable for ordinary auto drivers.
  2. There are no substitutes for oil for powering automobiles.
  3. Higher prices will necessarily mean less driving.
  4. Less driving will favor New Urbanism over low-density suburbs.

If any one of these four hypotheses are wrong, then Kunstler's argument gets thrown completely out the window. All four must be true for there to be any support at all for government regulations or subsidies that favor New Urbanism over low-density suburbs or the diversion of highway funds to rail transit.

Let's look at each argument in detail.

1. Are We Running Out of Oil?

In 1920, the United States Geological Survey officially estimated that the U.S. had just 6.7 billion barrels of oil left, including undiscovered oil fields. Eighty-two years later, the U.S. had produced 180 billion barrels of oil (pre-1960 data from Historical Statistics of the U.S., series M138) and still had 22 billion barrels of proven reserves. The USGS's 1920 estimate was off by a mere 2900 percent.

People have long feared we are about to run out of oil, but their predictions have all proven false. Given that there is a fixed amount of oil in the world, someday we will doubtless see prices increase due to disappearing supplies. But that hasn't happened yet, and probably won't happen for at least thirty to a hundred years.

Virtually all fluctuations in gasoline prices to date have been due to political events and natural disasters, not to actual shortages of oil in the ground. Though Katrina/Rita have driven oil prices today to $65 a barrel, this is less, after adjusting for inflation, than prices in 1979 through 1981.

Some geologists estimate that, 150 years ago, the earth contained about 6 to 8 trillion barrels of oil. We've used 1 trillion barrels in that time. That leaves 5 to 7 trillion barrels that, if we could get it, would easily last another century. The problem is that most of this is not "cheap oil," and so is not included in listings of proven reserves, which amount to just over 1 trillion barrels. That trillion is estimated to last about thirty years.

The estimate of 1 trillion barrels of cheap oil is almost certainly conservative. The geologists who lead the peak-oil debate have a long track record of underestimating future oil production from known reserves. Plus there are still parts of the globe that have not yet been fully explored. Thus, the thirty-year time horizon for cheap oil is also conservative; while demand is increasing, known reserves of such cheap oil are also increasing.

After that, there is still plenty of oil in the ground.

Other parts of the world are supposed to have another trillion or so barrels of oil shales. Taken together, these "unconventional" oil reserves add up to more than 6.5 trillion barrels -- enough, if they can be extracted, to last more than forty years even in the unlikely event that everyone in the world increases their oil consumption to U.S. levels of about 24 barrels per person per year.

"More expensive to refine or extract" does not necessarily mean significantly higher prices at the pump. Typically, people go after the cheapest sources of a raw material first, then move on to the more expensive sources. But when they start on the more expensive sources, they usually quickly develop techniques of extracting and using the resource much more cheaply. As long as cheap Saudi Arabia oil is available, there is little incentive to find ways to cheaply refine heavy oil or extract oil from tar sands or shales. But when the incentive arrives, expect the costs of refining and extraction to drop.

For example, U.S. production of iron once centered on the Great Lakes region, where high-grade ores were mined from about 1870 through 1950. When those ores were running out, scientists developed a process of mining low-grade ores, known as taconite, which continued through 1995 or so. Despite having to rely on low-grade ores, U.S. steel production peaked in 1969, and 1969 pig iron prices were no greater than in 1900, 1910, or 1920, when top quality ores were still being mined (Historical Statistics of the U.S., series M218).

Since then, U.S. steel production has fallen by nearly a third, and someone could easily write a "long emergency" book about "peak iron." Yet after adjusting for inflation, the price of steel today is considerably lower than it was in 1969.

This is because raw materials make up only part of the costs of production. As resource prices rise, producers can respond by making other production costs more efficient. Similarly, while the costs of extracting oil may rise -- though to nowhere near the levels projected by Kunstler -- the cost of gasoline and other refined products may not appreciably increase at all.

In short, there is no clear proof that any shortage-induced price increases will happen soon. For the next 30 years, at least, oil prices will depend more on political events and natural disasters than on natural supplies or extraction costs. After that time, extraction costs may rise, but those costs may not lead to significantly higher fuel prices for many decades.

2. Are There No Substitutes for Oil?

While it seems intuitive that the world's oil supply is ultimately limited, it is not so obvious that there are no substitutes for oil. Yet Kunstler has to take this as a given, because if there are substitutes his entire argument falls apart. "No combination of alternative fuels will allow us to run American life the way we have been used to running it," he asserts.

It doesn't take a genius to think of several counter examples.

While I suspect hybrid cars will be the short-term response, I can't begin to guess what technology will ultimately replace oil, and neither can anyone else. We may not even find out within our lifetimes if oil turns out to be plentiful for the next century. It would be absurdly expensive for the government to promote one technology over others (as it currently is doing by subsidizing ethanol, among other things). Worse, government support could lock us in to the wrong technology, leading to long-term waste.

One thing is certain: a technology that will never replace petroleum-fueled autos is light-rail transit. Most people will just not give up the mobility provided by the automobile for a slow, clunky train that doesn't go where they want to go.

3. Will Higher Prices Necessarily Mean Less Driving?

At first glance, it may seem obvious that people will drive less of gasoline prices rise, but it is not. Let's take a look at the history of spending on driving and gas and oil.

According to the Bureau of Economic Analysis, Americans have spent about 9 percent of their personal incomes on automotive transportation since 1950 (compare line 69 (user-operated transportation) of table 2.5.5 with line 1 (personal income) or line 26 (disposable personal income) of table 2.1). The year-to-year variation has been quite small, from about 8.1 to 10.1 percent. This suggests that people have a consistent budget for travel based on a percentage of their incomes.

By comparison, the percentage of driving costs that go for gas and oil vary dramatically from year to year (compare line 75 with line 69 of the Bureau of Economic Analysis' table 2.5.5). In 1974, Americans spent a full third of their driving expenditures on gas and oil. By 1998, this had fallen below 19 percent. In 1974, of course, people were responding to high gas prices by buying smaller, more fuel-efficient cars. In 1998, people were responding to low gas prices by buying large SUVs.

In other words, people trade off fuel costs for other auto-related expenses. When fuel prices rise, people reduce other auto expenses in order to keep total costs (as a percentage of their incomes) constant. They may keep their cars a little longer, for example, or buy less luxurious cars. When fuel prices fall, people spend more on bigger or more luxurious cars.

People also seem to have two different budgets for travel: a dollar budget and a time budget. When incomes are low relative to the cost of driving, the dollar budget is the main limiting factor. When incomes are high enough, the time budget becomes the limiting factor. When your time budget is limiting, you are much less sensitive to changes in fuel costs.

Most Americans have already reached the limit of their time budgets. That means their main response to increased fuel prices will be to spend less on other aspects of driving. Of course, some Americans still have incomes low enough that their dollar budgets will be limiting, so higher prices will cause them to drive less. The higher fuel prices that Kunstler eagerly anticipates will have the greatest impacts on such low-income people.

We can get some idea of the effects of high prices by looking at Europe, where high taxes have long made gas prices two to three times those in America. European incomes are lower than those in America, so even without higher gas taxes you would expect them to drive less. As it is, they drive about two-thirds as much per capita as Americans, and their growth in driving is faster. High prices don't seem to slow this growth down.

In short, higher prices will mainly affect driving among low-income families. Moderate- and high-income families will respond by making other changes in their transportation expenses, most likely by keeping their cars a little longer and, when they do buy new cars, buying more fuel-efficient or less luxurious cars.

4. Will Less Driving Favor New Urbanism Over Low-Density Suburbs?

Before Americans had cars, they lived in denser "traditional" neighborhoods and many lived in mixed-use areas. New Urbanists such as Kunstler reason that, when cars disappear, people will cheerfully return to such neighborhoods. But is that the only possible outcome?

Before considering this question, it is worth asking: Is that even a desirable outcome? Kunstler, for one, has no doubt that this would be "a glorious way to live."

"Imagine it's 1881," says Kunstler. "You leave the office on Wabash in the heart of vibrant Chicago, hop on a train in a handsome, dignified station full of well-behaved people, and in thirty minutes you're whisked away to magnificent house surrounded by deep, cool porches, nestled in a lovely, tranquil, rural setting with not a single trace of industrial hubbub."

That sure sounds glorious. Of course, Kunstler isn't much of a historian, or he would know that only a tiny fraction of American urbanites lived this way in 1881. Most of them lived in high-density housing, better known as "tenements" or "slums." Their lives were a lot less glorious than Kunstler describes, characterized by sweatshop jobs, poor sanitation, and high crime.

As planning historian Peter Hall notes, "Twentieth-century city planning, as an intellectual and professional movement, essentially represents a reaction to the evils of the nineteenth-century city." Whereas the goal of twenty-first-century planning seems to be to return us to those evils.

Of course, Kunstler imagines that everyone could live in his traditional neighborhoods. Without the mobility provided by the automobile -- the same mobility that led the descendents of the people living in nineteenth-century slums to increase their incomes and escape the tenements -- this is unlikely.

But let's say Kunstler's dream is possible. Is it likely? Or could Americans respond to high gas prices in other ways?

One possibility is that more people will telecommute and move even further away from urban centers than today's suburbs. As Ted Balaker of the Reason Foundation observes, telecommuting is growing faster than commuting by transit. Although the Census Bureau doesn't measure exurbanization, some studies have concluded that the number of exurbanites (people with urban incomes living in rural areas) is growing far faster than the number of New Urban residents.

Another possibility is that more jobs than ever will move to the suburbs where people live and higher fuel prices will lead many of those people to live in suburbs close to their jobs. Such a "jobs-housing balance" is actually part of the smart growth platform, but it doesn't mean an end to low-density suburbs or an increase in New Urban residences. Moreover, it effectively destroys the utility of rail or other high-capacity transit because there will be few or no job centers with enough jobs to attract that many transit commuters.

Even less pleasing to smart-growth advocates is a third possibility: more people and jobs move out of the cities and suburbs to the exurbs. One study notes that many manufacturing facilities are already moving to the countryside ( ), where factories and their employees can both avoid high taxes, regulation, and congestion.

All of these trends could actually be accelerated by higher fuel prices. Why sit in traffic burning expensive gasoline when you can work at home some days and drive twenty or thirty miles to work on uncongested rural roads on other days? Meanwhile, one retail analyst predicts that, far from putting Wal-Mart out of business, higher fuel prices will "create further opportunities for one-stop-shop retailers like supercenters and warehouse club stores to win more day-to-day shoppers." In other words, people will continue to drive to stores, but they will make fewer trips by going to bigger stores rather than the small shops that the New Urbanists favor.

Fuel costs influence two stages of the retail transaction: first, the cost of getting the customers to the stores, and second, the cost of getting the goods to the stores. Wal-Mart has become dominant because it minimizes the second cost, and higher fuel prices may actually help it. Higher-priced fuel will hit retailers located in congested urban areas the hardest, as their trucks are forced to burn fuel in stop-and-go traffic. Stores such as Wal-Mart and Costco that tend to be located in rural areas and on urban fringes can keep these costs down, thus allowing customers who have to drive to their stores to enjoy a net savings.


Proponents of the peak-oil theory use apocalyptic visions of an energy-poor future to advocate government subsidies and regulations aimed at ending the American dream of a home with a yard and freedom to move when and where people choose. Yet their visions critically depend on four assumptions that, when closely examined, do not stand up.

The peak-oil theory presumes that oil production is about to peak and prices will dramatically rise thereafter. Yet this is contradicted by the huge amount of oil available that they don't count because it will cost more to extract than most of the oil we have used to date. When those oil reserves are needed, extraction costs are bound to decline, keeping oil prices at moderate levels.

The peak-oil theory further presumes that there are no substitutes for oil, at least for moving automobiles. Yet numerous substitutes are possible, including nuclear power for generating hydrogen, coal gassification, and solar.

The peak-oil theory, as applied by the New Urbanists, presumes that Americans will respond to higher fuel prices by driving less. Instead, most Americans are likely to buy more fuel-efficient cars or reduce other travel expenses by keeping cars a little longer or buying less luxurious cars.

Finally, the New Urbanist peak-oil theory presumes that, if they are forced to drive less, Americans will want to move back to the cities and shop in their mixed-use boutiques rather than in supercenters or other suburban stores. In fact, Americans could very well respond in the opposite direction, moving out of the cities and suburbs entirely and shopping mainly at giant one-stop-shopping centers.

Far from devastating our economy, changes in energy supply will lead Americans to become more fuel efficient and explore new energy technologies. No matter what technology they select, they are not likely to drive significantly less than they do today. To the extent that higher fuel prices change their travel habits at all, those changes may actually accelerate the suburbanization and exurbanization trends that New Urbanists such as James Kunstler hate. If anything devastates our economy, it will be the intrusive government regulations and expensive rail transit systems that some New Urbanists want to impose on our urban areas.

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