The Energy Futurist

Reframing the transportation debate

Reframing the transportation debate

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Energy futurist Chris Nelder argues that we should consider high speed rail and freight rail in the context of full lifecycle costs and total transportation reform.

Grand Central Station

Transportation infrastructure is one of the most urgent challenges we face today, but the debate about it misguidedly focuses too much on the present. This week I will attempt to reframe it in the context of the past and the future.

First, I must note that it’s surprisingly difficult to find accurate, comprehensive, and cost-adjusted figures on the sunk cost of our existing transportation regime, and the cost of its ongoing maintenance. A proper analysis would be an enormous task, properly undertaken by the Department of Transportation and the Department of Energy (and one might legitimately ask why haven’t they tried it). For this exercise I will just try to find some reasonably sound data points and make some reasonable estimates to establish some round, ballpark numbers, without citing a long list of sources (but I will make references available on request).

Let’s begin with what we’ve already spent, and are committed to spending.

The whole of the existing infrastructure of airports and highways has cost somewhere over $2 trillion to build, in aggregate, non-cost adjusted terms. The Interstate Highway System alone cost around $425 billion. In current dollars and resource prices, the replacement cost would be some multiple of that.

Because we’re dependent on it to keep everything moving, we’re also committed to spending at least $186 billion per year* just to maintain surface transportation at the existing level of service. Add in expected demand growth from rising populations, and some much-needed upgrades, the costs would certainly be over $200 billion per year. That’s an investment of over $5.4 trillion through 2035.

Gridlock -- sitting unproductively in traffic, going nowhere fast -- already costs us over $100 billion per year in wasted time. Air transportation delay costs are estimated between $30 and $40 billion a year.

We have similar sunk costs and structural commitments to oil. In simple, round terms (19 million barrels a day demand at the 2011 average price of $95 a barrel), the US spends around $660 billion a year on liquid fuels. In 2006, the cost of our military expenditures related to oil (like protecting the supply route from the Persian Gulf) was estimated at $133 billion a year. So we’re spending nearly $800 billion a year in hard money for fuel and military coverage. Add in squishier externalized costs, like environmental damage, carbon emissions and pollution-related health care costs related to oil, and you’re talking at least another $400 billion a year.

At an average price of nearly $30,000 and annual sales running at 9.6 million per year, we currently spend about $288 billion per year on new passenger vehicles. The value of the existing rolling stock of over 250 million cars and light trucks is hard to estimate, but if the average value of those vehicles were $10,000, then our sunk cost there would be $2.5 trillion. Add $150 per month for insurance, repairs and maintenance, and those vehicles are costing us another $450 billion per year.

Estimating the sunk cost of the commercial aircraft fleet is even harder, as it comprises a wide variety of sizes, types, and ages. I wasn’t able to find any studies on its current value, but did find that the U.S. cargo and passenger commercial aircraft fleet stood at 7,122 planes in 2009, and that a used 1987 Boeing 737 costs about $2 million. On that basis, a ballpark estimate of the value of the existing fleet would be around $14 billion.

U.S. aircraft maintenance, repair and overhaul (MRO) costs are harder still to establish (the only current data I could find would cost me $2,462 for a copy of the report), but I was able to find that the global market for commercial aircraft MRO in 2011 is an estimated $50 billion per year, and that the U.S. accounts for one-third of global air traffic, so for our purposes here let’s assume it’s $16.5 billion per year.

The sunk cost of the nation’s air transportation infrastructure, including some 600 commercial airports, is likewise hard to establish as it encompasses everything from large hubs to smaller air freight facilities, and decades of continuous building and rebuilding. For some rough measures: The new construction cost of a modern, medium-sized passenger airport is over $1 billion. The renovation of a single terminal at LAX from 2007 to 2010 was $737 million. The replacement value of the US commercial airport system was estimated at over $1 trillion in 1992; in 2011 adjusted dollars, the value would be around $1.6 trillion.

But those are just the moderately hard-to-estimate costs. They don’t include the value of the millions of acres of land on which the roads and airports are built; the associated infrastructure costs (like gasoline stations and refineries, oil and natural gas pipelines, and so on); the untold environmental and health damage caused by tires and brake pads turning into dust and escaping into the environment (a serious health risk in places like Los Angeles); and numerous other real costs. For this exercise, I won’t even try to estimate those.

In sum, the U.S. has already spent over $6 trillion in direct costs for transportation infrastructure, not including a good deal of associated infrastructure and land values, and not fully accounting for replacement costs in 2011 dollars. (If I had to guess, I’d peg the current present value of all of it at perhaps double that: $12 trillion.) The mere existence of that infrastructure, which is to say our complete dependence on it, means that we’re already committed to spending at least $1.6 trillion additional dollars per year in maintenance, new vehicles, and fuel (leaving out the associated costs, like military expenditures). Again, the real numbers, if we had them, would be substantially larger.

The real cost context

Now consider that all of this transportation infrastructure was built in an era of cheap and highly available fuel, and on the assumption that fuel would remain cheap and highly available. As airline industry analyst Michael Boyd commented at a 2008 conference I attended, our air transportation infrastructure was built on the expectation that oil would rarely cost more than $40 a barrel; no planes in use today were designed with the expectation of oil over $50; and the entire industry is obsolete with oil at $100 a barrel.

This sort of consideration is why, in a typical example of smart energy planning by the military, the U.S. Navy announced this week that it would begin taking a lifecycle view of energy costs when buying transport systems like ships and planes. Energy costs shot up at 13 times the rate of inflation between 2001 and 2009 for its fixed-wing aircraft, raising worries that the cost of fuel could seriously impair its fighting capability and force structure. Because it is an operational imperative for the military to function no matter what the price of oil is, they tend to take a rational and data-oriented approach to their forecasting, unlike the ideologically driven forecasting of politicians.

For the same reasons, our surface transportation regime, which blows a $500 billion hole in our pocket every year for imported oil, is utterly unsustainable in the coming era of declining fossil fuels and rising prices…as if we really wanted to maintain a system that’s already unworkable in terms of gridlock, delay, and health anyway. And that hole is only getting bigger as we move into a resource constrained future.

In this context, the current debate over energy subsidies seems entirely misbegotten. What’s the point in arguing over some $4 billion per year in oil industry subsidies (which I have long opposed) when we’re already on the hook for $1.6 trillion per year to remain with our current transportation regime? The debates over the cost of a single trip from Washington D.C. to Boston by rail instead of car, or over whether there is sufficient ridership to support a particular high speed rail line, or whether the public should have to shoulder the cost of building a new rail system, are downright picayune. They also erroneously compare a regime with at least $6 trillion in sunk costs against a system that hasn’t yet been built.

This context also demonstrates why the US High Speed Rail Association’s newly-updated $600 billion price tag for a system that would cover all our major metropolitan cities is decidedly cheap. The $40 billion or so we’ve spent on Amtrak is peanuts. Who wouldn’t think it makes sense to spend a bit more than one-third of our existing annual transportation commitment to permanently retire a substantial portion of our unsustainable air and road traffic?

Instead of incremental spending on an effectively dead transportation regime, we should be thinking about one that can survive the challenges ahead, and deliver more economic benefits than costs. We should be setting an ambitious target, like replacing all commercial passenger air flights with high speed rail for trips under 1,000 miles, replacing 90 percent of our city street traffic with light rail, and moving all long-haul freight traffic to rail. Even if the cost of all that rail infrastructure were in the range of $3 trillion, it would be a fantastic investment.

Against $6 trillion (minimum) in sunk costs and $1.6 trillion per year in maintenance, the $1.2 trillion per year estimate I offered in my article on infrastructure, plus building the high speed rail network at a generous estimate of $1 trillion, looks very reasonable. Put another way: Would you rather spend another $32 trillion over the next 20 years just to maintain our outmoded, unscalable, aged, unhealthy system, plus another $2.8 trillion in lost productivity due to delays and gridlock, only to wind up out of gas? Or would you rather spend $25 trillion to repair our existing infrastructure, transition transportation to rail, transition the power grid to renewables, upgrade the entire grid, and solve the carbon problem, to have free fuel forever?

Even if the cost of transition were twice the cost of maintaining the incumbent system, it would be a small price to pay to free the economy from fossil fuels. At $1.6 trillion a year in maintenance, it could pay for itself in 30 years.

A question of leadership

Before we even debate the future of transportation, let’s remember that nobody demanded a full accounting for our existing infrastructure before we built it. We just built it, over many decades, using cost-benefit analyses and justifications (like national security) that made sense at the time. We should adopt a similarly audacious stance now, rather than demanding every penny of the alternative to be anticipated and paid for before we even embark on the project.

We should also bear in mind that the fossil fuel and automobile industries together represent the largest lobby in America. As energy analyst Gregor Macdonald observed, “These two industries dwarf any other influence on US energy policy through their widespread distribution throughout 50 US states, and Congress.” They can outspend the rail and renewable alternatives 100 to 1 on media campaigns and legal bribery without even feeling a pinch. And they receive an enormous payoff for every dollar they spend on it in the form of limited regulations, favorable incentives, and most of all, in keeping us committed to their products.

The transportation choices we make now ultimately come down to leadership. Can we mount a sufficient lobby and recruit representation who will seize the opportunity to take us down a more sustainable path? Can we reorient our policy decisions around long-term scientific analysis and cost reduction rather than short-term jobs programs? Do we still have the right stuff as a nation to tackle a big, hairy, audacious objective like total transportation reform, or are we going to simply let our existing systems become rusted and obsolete in the face of declining fuels and rising costs, while watching our economy shrink as a consequence?

To be clear: I don’t think we’ll make the obviously better choice, because we’re so politically and physically wedded to the incumbents. Nor do I claim that this thought exercise is comprehensive by any means. There are many things I left out, like parking, or the costs and fuel demands embedded in the transition process. Some things might be double-counted where data sets overlap. I only considered direct costs, not moral costs like deaths per passenger-mile, or environmental destruction per kilowatt-hour. And these numbers are far from precise. But they should be clear enough to inform our policy choices, and contextualize the real costs of our action or inaction. The debate on transportation should not be about little Pigovian taxes, or a few billion a year in incentives here or there. It should be about where we want to end up.

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*Demonstrating the difficulty of finding good numbers, annual estimates for what we need to spend on surface transportation maintenance range from $130 billion (2006 National Cooperative Highway Research Program estimate) to $268 billion (“high” policy commission scenario) per year through 2035 in the 2009 National Surface Transportation Infrastructure Financing Commission report (all adjusted 2008 dollars). The American Society of Civil Engineers estimated transportation maintenance costs at $186 billion per year in its 2009 Report Card for America’s Infrastructure.

Photo: Grand Central Station (chrisschoenbohm/Flickr)

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Chris Nelder

Columnist (Energy)

Chris Nelder is an energy analyst and consultant who has written about energy and investing for more than a decade. He is the author of two books on energy and investing, Profit from the Peak and Investing in Renewable Energy, and has appeared on BBC TV, Fox Business, CNN national radio, Australian Broadcasting Corp., CBS radio and France 24. He is based in California. Follow him on Twitter. Disclosure