Matt Wald has a story in this morning’s New York Times that illustrates what increasingly seems like the core issue associated with the energy transformation now underway. Wald writes about a rapid rise in demand for Amtrak train tickets, which is turning out to be more cost-effective ways to get around. Market forces may have kicked into high gear with remarkable suddenness. But the things we need to do to respond involve a massive shift in the societal infrastructure that is currently based on cheap energy:
Today Amtrak has 632 usable rail cars, and dozens more are worn out or damaged but could be reconditioned and put into service at a cost of several hundred thousand dollars each.
And it needs to buy new rail cars soon. Its Amfleet cars, the ones recognizable to riders as the old Metroliners, are more than 30 years old. And the Acela trains, which have been operating about eight years, have about a million miles on them.
Writing specifications for bids, picking a vendor and waiting for delivery takes years, even if the money is in hand.
There are more complications. Say that the current gasoline price is not stable. Saudi Arabia pumps more oil. Offshore drilling comes back. And someone figures out how to get more miles per gallon of gasoline.
Now consider that Amtrack has bought hundreds of new train cars but they are not yet delivered.
With the decrease in the price of gasoline, ridership on trains drops and Amtrack is stuck with lots of new, unneeded railroad cars.
So, not only do we have to respond to changes in demand we also have to know whether those changes are stable changes or just blips.
Amtrack, of course, will be blamed either way. If the changes are real and Amtrack appears to respond slowly, customers will complain. If Amtrack is caught with unneeded rolling stock, customers will complain.
An article from today’s LA Times about an infrastructure (bus) company that gave up due to low ridership.
I think the issue you raise has a lot to do with the price of oil right now. “The market” is behaving as if it is not at all confident that the price of oil will stay high. Lots of alternatives (coal-to-liquids being my favorite example) make economic sense right now. But “the market” needs confidence that the price will stay there over the 5 to 10 year horizon needed to build a coal-to-liquids plant.
Actually, doesn’t the market have to stay ‘predictable’ not constant over a much longer time period. Once a coal to liquids plant is built, the company that built it is in the most debt. They have spent all the money to build it and have gotten no income back.
The company that builds the plant has to project costs and income for 40 years, building of the plant plus running it at enough of a profit to make back the costs of building it and to reward the investors for putting up the money for building the plant. As far as I know, nuclear plants, natural gas production plants, and coal burning electricity production plants all consider 30 to 40 year time horizons.
With the current unstable talk about energy production, especially the wildly fluctuating regulatory environment, it appears to be difficult to predict 40 year cash flows for a new plant of any kind. If breakeven (recovering direct costs and interest on direct costs) for the plant occurs 25 years out, you would have to build in a large apparent profit from the plant just to ensure that you do not lose money.
In the time horizon of many politicians, twenty five years out is fifty generations. In the time horizon of Wall Street, twenty five years out is 100 quarters.
The more that I write in this comment, the clearer it is that stable solutions to infrastructure questions are tricky to obtain.
Another way to look at infrastructure is that the college students who will follow a future Obama in complaining about decrepit energy production plants will not be born for 15 to 20 years. These students could be my great-grand kids.
Thanks for getting me to think about this topic a little more clearly.
“Oil: New Drilling Wouldn’t Cut Prices” from Business Week
Here is more of the infrastructure argument. Basically, changes in infrastructure are slow.