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09 April 2011

Pumpdrunk and Loving It

The AA “12 Step Program” Approach to Overcoming America’s Oil Addiction


We are in the grip of a powerful, complex addiction.  Whether oil prices are $29 a barrel as in 1983 or $129 as in July 2008*, the cyclical highs and lows that we have become accustomed to over the past forty years literally make us pumpdrunk.  Pumpdrunk is the only way to explain how we willingly rearrange our personal finances at the peril of oil's price swings but have not done much of anything in the long-term to rid ourselves of the addiction.  Like true addicts, our actions are focused exclusively on the next score. 
"Where's the cheapest filling station this week? Let me text my friends.  Can't wait for that new 2012 Jive SUV to come out -- it looks awesome, like an aerodynamic rectangular box with wheels, and they improved the fuel economy to 21 MPG!"   -- Words of an addict. Words spoken by all of us. 
It's not just imported oil.  Whether imported or domestic, every barrel of oil is priced in a similar market, where supply and demand are carefully balanced.  We can't fault the production industry alone for what happens in the oil markets.  But that is exactly where we first assign blame.  A drunk does not look inward for answers.  After the binge, the negative outcomes are always someone else's fault.  When gas prices leap up, you'll hear the same thing everywhere in the U.S.  Outright contempt for entire oil producing countries, their people, their governments and the U.S. companies that broker the oil. 

Fellow addicts, please understand that in a capitalist society, markets are where things like oil go to trade.  Even the people who brought us the Beanie Babies craze of the 1990s understood that it is financially advantageous to constrain supply.  Beanie Baby economics is taught to 6th graders.  The market will sort out what people are willing to pay so at the end of the day we have only each other to blame for high prices. 

For such a rugged and dirty fuel the oil markets are really quite fragile.  Weather disruptions, political turmoil or even just the threat of political instability in oil-producing areas of the world cause prices to shoot up.  

Beyond the gasoline fumes that are making us loopy, oil is in practically everything that we value and trade.  The plastics, cosmetics, chemicals and myriad stuff we make from oil makes us feel rich and free. The stuff we power with oil shapes our settlement patterns, keeps the lights on and makes for a much faster, smaller, more interconnected world.

Unfortunately, this life on oil begins like one night of reckless drinking that soon cascades into a lifetime of out-of-control decisions.
In the moment, everything is beautiful, carefree and the $1 slice of pizza tastes amazing.  -- Actual quote from an oil addict, overheard last night in New York City
The next morning, your choice of booze or oil consumption hangover is accompanied by the throbbing realization that it was all an illusion. By pumping oil from deep within the earth and trading it, we are not really controlling the resource, it's controlling us.  Our addictive behavior reveals the truth about just how captive we really are to oil's whims. On our best days as oil consumers, we become poorer both as individuals and as a nation. Each gallon pumped is a dollar exported overseas in return for black sludge that pollutes our environment and dilutes our sanity. As we think more about the effects of oil, it all becomes clear. Even the pizza was a lie. It was probably cold, limp and greasy. We don't recall.

Addicts don't care about who they hurt or what the consequences are.

The price we pay for each gallon of liquid freedom, as high as it is, fails to include countless uninternalized costs that we end up paying in places that are not obvious at the moment the gas pump is in hand.  The indirect costs of oil accrue through taxes, health costs, environmental cleanup budgets, defense spending, lost purchasing power, and even human lives.  From the financial cost perspective, we all have a fixed amount of discretionary income.  A dollar spent on gas is a dollar not spent on some other product with benefits to the domestic economy.  A 1998 report (see PDF) estimates that the combined external costs of gasoline add between $5.60 and $15.14 to the retail price of each gallon we pump.  Take those numbers as ballpark figures.  Following this eye-opening study we've initiated new oily wars in the middle east that are likely to drive costs even higher.  Numbers like this are a shot in the dark at best because the largest external cost of all, climate change, is not included in the analysis.  

A narrower study of defense department spending on gasoline for combat vehicles in Afghanistan revealed that the Pentagon pays an average of $400 for a gallon of fuel by the time it arrives in the remote locations where U.S. troops operate.  This is a perfect illustration of how powerful cost externalities are.  Thanks to the military's disciplined cost-tracking through all phases of their fuel production and transport chain, you can see how the price of a gallon is all relative to the externalities accounted for within the price. 

As pumpdrunk fuel addicts, the price we pay compared with the true cost of oil does not matter to us.  As long as the pump turns on, we're satisfied.

Addicts show no sign of stopping.

In a hundred years since the Ford Model T rolled off the line, we have developed neither better ways to power our vehicles nor commercially viable substitutes for the products that oil makes possible.  It's not for lack of options.  For example, there are commercially viable alternatives for styrofoam created from mushrooms that could replace the oil-intensive material currently occupying 25% of our landfill space.  Fuel economy standards for vehicles set by the government have failed to go anywhere since the oil shocks of the mid 1970s.  Oil prices volatility has persisted since then but consumers are left to absorb the ill effects.  MPG efficiency topped out in the 1980s for political reasons (a.k.a corruption) and we pay the price every day.


Source: PEW Charitable Trusts (get PDF)
 We are simply pumpdrunk out of our minds. Nothing else but total inebriation explains how we can pay the financial price of the oil market's ups and downs on a daily basis but still fail -- on a timescale of decades -- to take control of this critical portion of our energy mix.

Approaching oil addiction as we would alcohol addiction

The reality of America's oil addiction has more in common with traditional notions of substance abuse than we realize.  Oil and its related products are such an ingrained part of life that it is actually self-destructive to question how we've failed so miserably to enact meaningful solutions.  As a result, we continue to hit the bottle harder and harder to dull the pain. Traditional approaches that look only at the economics of oil supply and demand or the technological feasibility of alternatives largely ignore the fact that our oil addiction is rooted in emotional issues that run deeper than the pocketbook.
Graphic adapted from the Alcoholics Anonymous illustrated guide to the 12 Step program (PDF here). 
Our discussion reorients the problem of oil addiction using the perspective of the first five AA steps.  If this proves more effective than America's current strategy, which amounts to the "coffee and a cold shower" approach, we'll know that we are getting somewhere.
AA Step 1 - We admit we are powerless over our addiction - that our lives have become unmanageable

When oil prices are up, the economy cries out in pain. Oil is such an important input to every facet of the domestic economy that small fluctuations in price create large ripples. In the finance world, it is widely accepted that