Thursday, August 7, 2008

Adaptation

“It is not the strongest of the species that survives, nor the most intelligent that survives.
It is the one that is the most adaptable to change.”
- Charles Darwin

Here in the United (Consumer) States, the shock of exponentially higher oil prices is rippling through the economy. The cost of simply getting around has nearly doubled in the past year. This not only affects your direct cost of putting gas in the tank, but virtually all of your indirect costs when you consider the cost of transporting the products you buy every day. Not to mention the almost innumerable products that are made from oil – e.g., plastic drink containers.

I was recently in Europe where consumers have been adapting to high energy prices for many years. Their houses are smaller (lower heating and cooling costs), their cars are smaller (lower operating costs), they ride bicycles (it’s a little shocking at first to see a guy in a business suit riding a bike), they have well-developed public transportation networks and they use them, they ride motor scooters, hot water is provided by on-demand gas heaters (no money wasted on heating a tank of water that may only be used 1 hour a day), dishwashers are uncommon and their clothes washers are low volume front loaders. If the laundry hanging from balconies and windows everywhere is any indication, clothes drying is commonly provided by Mother Nature.

Here’s a picture of gas prices in Milan, Italy (June 30, 2008):

That’s €1.55 (Euros) per Liter.

The exchange rate for U.S. dollars into Euros (at the time this picture was taken) was about US$1.58.

There are 3.8 Liters in one US gallon.

The price of one US gallon of gas in Milan: US$9.30.

How would you adapt to paying US$9.30 per gallon?

Walk more. Use public transportation. Drive less. Downsize your car. Ride a bike. Downsize your home. Replace your appliances. Europeans have been doing all of these for years. Here is a typical euro-sized car:

This is not to say that you have to adopt any of these changes, the US is still the land of the free and the home of the brave, and there aren’t any laws – except the economic laws of the marketplace – that compel energy consumption behavior changes (yet). It seems that $4 per gallon gasoline is the pain threshold that is causing at least temporary habit changes.

Reducing one’s energy consumption is an incremental process that should be reviewed in the context of one’s overall living cost. As an example, it may not pencil out to trade in a large SUV for a smaller car even though the smaller car travels two or three times as far on a gallon. Look at the total cost of such a trade – prices for used SUVs are falling faster than a Randy Johnson splitter - while the price of efficient smaller cars (particularly hybrids like the Toyota Prius) is rising as demand increases. Calculate your break-even on such a swap before proceeding. You will probably be surprised at how long the pay off takes. Another example is compact fluorescent light bulbs. Yes, they last longer and use less electricity than incandescent bulbs, but they also cost three times as much (not considering sales and sponsored giveaways which are currently popular). They also make every room look like a morgue. Incandescent bulbs will likely be legislated out of existence – remember what happened to full flush toilets. The last thing you want to do is throw out a working incandescent bulb. At least wait until it burns out before upgrading. LED lights - which are superior in every way - will replace fluorescent bulbs anyway, it’s just going to take a while before innovation brings the price down.

So if we don’t change our ways are we going to die? No. Newsflash: we’re going to die anyway…

Questions? kimm@sweetwaterinv.com

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