Since shortly after I wrote about the looming disaster in the airline industry (see Airline Armageddon), I’ve been engaged in an interesting discussion via e-mail with a reader that I thought worth writing about publicly.[1]

In essence, the questions raised by Airline Armageddon were: Have I joined the Apocalypticons? If so, why? If not, how can I write about the airline business in such stark terms and not be in that camp?

The first question is the easiest to answer: No, I haven’t joined the Apocalypticons.[2] I still believe, right down to my DNA, that for all the challenges humanity faces–peak oil and global warming being right at the top of the list–we will rise to the occasion. It won’t be fun, it won’t be cheap, and it will entail significant human pain. But it won’t trigger the end of modern industrialized civilization or any other Apocalypticon fantasy.

The second question is now moot, which brings us to question number three and the heart of the matter, not to mention my motivation for writing this blog entry.

Boiled down to its essence, the answer is that the unique circumstances of the airline industry make it a very special case that’s not representative of our overall peak oil dilemma; in other word, their goose is highly likely cooked[3], while that of humanity or modern industrialized civilization isn’t.

To help explain those special circumstance, let me very briefly detour into microeconomics. Two key concepts of micro theory are the price mechanism and substitute goods. The price mechanism is nothing more than a fancy term for how prices act as a signal throughout the economy, letting buyers and sellers make decisions in a way that (presumably) best serves their own interests. The critical balancing act that economies perform in terms of allocating scarce resources is built atop the foundation of the price mechanism working within the context of a reasonably open and free market.

A substitute good, as the name implies, is something you can use in place of something else. Just think of all the brands and models of consumer items, like appliances, audio/video equipment, clothes, etc. we’re used to seeing for sale, many of which offering very little or no significant difference from their competitors.

Combine the price mechanism and substitute goods in a free market and you have the basis for a very powerful system that works surprisingly well on autopilot. For example, you go to a sporting goods store to buy a tennis racquet, and find that the one you had planned on getting has increased in price, so you buy a different model or brand. This increases demand for the one you bought relative to the one you had planned to buy, and helps balance the prices, and therefore the allocation of resources to make them.

As far as airlines go, they have a problem: They were already under stress from ferocious competition, and then fuel costs rose dramatically in the last few years. In the usual abstract economics classroom discussion, Company X finds that resource Y needed to make widgets rises in price, so they stop buying Y and switch to resource W. When enough companies follow X’s lead, the price of W rises and that of Y falls until the amount they contribute to the cost of making a widget is equal, and then everyone goes home happy. The catch is that airlines don’t have a resource W to turn to–there is no short-term substitute for petroleum-based jet fuel.

But wait, you say–isn’t that that sneaky little “short-term” qualifier the loophole in the gloom and doom? There may not be a good substitute for petroleum-based jet fuel now, but once the rise in fuel prices creates a large enough incentive we’ll invent one, right? Isn’t that the classic economics view of the world. Yes, it is, and in this case the real world choose not to play by the rules of that quaint mental model.

Aside from shrinking the entire industry considerably, until it’s just big enough to serve those fliers willing to pay enough for a ticket to cover current (and likely much higher, in the coming years) fuel costs, what are airlines to do? There are efforts to make jet fuel from biological material, essentially the airplane equivalent of ethanol for cars. Similarly, there’s considerable work going on to make jet fuel from coal. Neither of these alternatives seems promising.

To begin with, consider the scale of the problem. The US alone uses 1.6 million barrels of jet fuel every day[4], that’s 67.2 million gallons/day, or 24,528 million gallons/year.

The biofuels option seems highly unlikely to scale to a useful level. A large ethanol plant produces about 100 million gallons per year. Replacing even half of US jet fuel consumption would therefore require 122 biofuel plants of that size. With the high and growing backlash against biofuels made from food, and the likely competition for arable land even if you’re using willow tress or switchgrass or who knows what, it’s ever more difficult to concoct a scenario in which this option works in the real world. Add in water issues, and it gets even nastier: Drought conditions mean we’ll have ever tougher decisions regarding the use of fresh water, and using more of it to grow biomass for airplane fuel and then even more to convert that biomass into usable fuel will be very tough to justify.

Converting coal into jet fuel looks like it’s technically workable, and the US Air Force is involved in developing this technology. The problem is that turning coal into jet fuel creates a lot of CO2, which we all know we can’t just dump into the atmosphere. So we’re stuck either trying to sequester it permanently underground or consuming it in some way, such as feeding it to greenhouse plants or algae farms and ensuring that a very high percentage of it is consumed. (The planes will make more CO2 when they burn the fuel, so this sequestration or consumption step handles only the emissions from the CTL processing.)

Even if you assume that we can cook up a zero-CO2 way to turn coal into jet fuel, something I find highly doubtful, we will still face enormous pressure to minimize air travel, which is currently responsible for over 240 million metric tons of CO2/year in the US[5] and offers virtually zero hope for CO2 capture and sequestration. Plus, there’s the delay factor–how long will it take to build out the infrastructure needed to convert coal into jet fuel (with no CO2 emissions) at a rate that will help the airline industry? And can the airlines possible hold their breath that long?

My conclusion from all this detail: If you assume that cheap oil isn’t returning, then the nature of the airlines’ business and the other pressures arising from global warming unavoidably leads you to one conclusion: The airlines will have to shrink, a lot, to stay alive, which is why I keep referring to that sector having a future as a “boutique business”. This is quite a contrast to the car makers, where electrified vehicles will be a mainstream alternative very soon and much can be done to increase the miles traveled on each gallon of oil even for plain old gasoline and non-plug-in hybrid models. Airlines have neither an escape hatch nor low hanging fruit to save them.[6]

I’m bringing all this up for a simple reason: I think it’s critical that each of us, when we’re making decisions about our own consumption or which public policies and politicians to support, avoids the error of reaching bad conclusions based on a too-broad analysis or, even worse, simply relying on a gut instinct or misapplied rule of thumb. Very often we can only find accurate answers by delving into the details. Yes, that’s a lot more work than simply assuming that “gasoline prices are high because the oil companies are screwing us”, for example. And yes, that exposes us to being lied to with numbers by people with all manner of hidden agendas, most of which don’t share our best interests. But with the peak oil and global warming situations becoming more urgent by the day, it’s never been more important that we do our homework so we can individually and collectively make the right decisions.

[1] For those who like to play blogger parlor games and will be tempted to guess who my correspondent is, don’t bother. The person isn’t even a registered member of the site or the discussion board, let alone one of the regular contributors. Even though I don’t understand the need for it, I’m keeping the person’s identity a secret by request.

[2] For those new to the site, “Apocalypticons” is a term I coined some time back to refer to the doomers who make ridiculous predictions, typically based on absurd, linear projections of current trends (or simply pulled from a particular body orifice which shall remain unnamed), with no (or virtually no) allowance for the dynamic nature of economic and political systems, not to mention humanity in general. (The opposite end of the spectrum is Cornucopians, the equally clueless fools who think we can achieve infinite growth on a finite planet.) A classic example of Apocalypticon thinking is the claim that after the peak in worldwide oil production we won’t be able to maintain wind farms because the necessary trucks and cranes run on petroleum-based fuels. I’ll leave the refutation of that gem as an exercise for the reader.

[3] Throughout this entry I will assume for that the price of oil will not make a major and long-lived retreat.

[4] It’s actually 1.624 million barrels/day in 2006, as reported in the latest Annual Energy Review, Table 5.11.

[5] It’s actually 243.8 million metric tons in 2005, as reported in the latest Annual Energy Review, Table 12.3.

[6] It should go without saying, but let me be painfully clear about this: If I’m wrong in this assessment of the airlines, please tell me. In fact, I would love to be wrong. I would be delighted to have someone point out that there’s a way for airlines to keep flying (and keep all their employees on the job) without continuing to contribute to CO2 emissions and/or making the biofuels debacle far worse. I’ve looked, and I can’t find that solution.