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Thoughts on Demand Destruction: Where Is It?
Posted by jeffvail on April 28, 2008 - 10:00am
Where's the Demand Destruction?
With this uncertainty surrounding the concept of “demand destruction,” it’s time to take a deeper look at the mechanics behind how demand destruction occurs. Specifically, this essay will limit its focus to two components of demand destruction in gasoline: the time-lag between high prices and reduced demand, and the need to price alternatives to each gallon of gasoline we consume. Does a lack of demand destruction when oil is well over $110/barrel mean that prices must go even higher to destroy demand? How much higher? Or is it enough that prices hold at this level for long enough to cause people to gradually make long-term purchases with this price in mind, and thereby destroy demand? How long? Finally, how much of current US demand destruction (to whatever degree it exists—even if only as a decrease in growth of demand) is due to current economic conditions, and how much can be attributed directly to the price of oil?
Time-Lag in Demand Destruction: Major Purchases Drive Energy Consumption
One way that demand destruction occurs is that, when making major energy-consuming purchases such as a car or a house, people choose more energy efficient alternatives when the price of energy is higher. These choices happen over time—everyone won’t (and couldn’t) rush out tomorrow to buy a more fuel efficient car, even if gas suddenly hit $10/gallon. How long is the time lag in these choices? Moody’s says that the average time between car purchases in the US is 4.33 years. Even if we could figure out a magic number at which every consumer will pick a new car based on improved fuel efficiency, it would take at least 4 years to affect this transition. In reality, however, no one knows what percent of people would change to a more efficient car, and how much more efficient that new car would be, based on a given price of gas. The latest data does show that sales of SUVs and pickups were down 27% and 14% respectively, compared with a general automotive sales decline of only 8% for the first quarter of '08. This suggests that current oil prices are already significantly impacting consumer car choice when they decide to purchase a new car, but that this transition will take a long time--remember, the 4 year figure to change to a higher fuel-economy automotive fleet is only valid if every new car purchase is more fuel efficient. These numbers suggest that we're moving toward greater efficiency, but not in a great hurry. The decline in overall sales also suggests that an increasing number of people are financially stuck with their present vehicle, even if it gets poor gas mileage.
What about houses? Americans move houses on average every 5 years. Well, at least they did when they were upwardly mobile in a growing economy and sub-prime credit was easy to come by. It is yet to be seen how the current economic situation will change this figure, but it seems likely that our rate of moving will slow. In theory, when we move homes, we could choose more energy-efficient homes (better insulated, better solar design), or, more germane to a discussion of gasoline demand, we could choose homes that require less driving to commute to work, shopping, etc. However, the massive sunk-cost in suburbia must be taken into account. While these homes may go down in value because of the commuting difference, they will likely remain largely occupied because, while the cost of commuting may skyrocket, the cost of ownership in the suburbs may decline to even this out. If a family currently consumes 50 gallons of gasoline per month in suburbia, and could cut this to 20 gallons per month by moving to a more central location, then at $10/gallon this would save them $300/month. If ownership costs (or rent) in the suburban location declined by more than $300/month, then (ignoring many other factors) it is more financially viable to remain in the suburbs. Additionally, when Americans make the average, once-in-5-year move, they don’t all move to a newly constructed house. The average American home is about 30 years old, and despite the promise of “New Urbanism” or downtown condo living to reduce gas consumption via commuting, the turnover of America’s housing infrastructure will take time.
ROI: Pricing Alternatives to Marginal Gasoline Consumption
Demand destruction happens in other ways than buying a more efficient car or moving to a house closer to work. It is also possible to reduce demand by choosing a less convenient, less pleasurable, or a slower option over another that consumes more gasoline. Take carpooling, for example. The passenger-miles-per-gallon of any car immediately doubles when a single commuter adds another commuter as a passenger. Four adults in a Honda Civic hybrid would average about 200 passenger-miles-per-gallon. Even four adults in a Hummer would get respectable mileage per passenger! If this is so simple, then why don’t we all do this? Because carpooling costs time, both in the time required daily to pick-up and drop off the additional passenger, time required to set-up the carpool system, and time in the form of inconvenience of people unexpectedly needing to work late, not being ready for pick-up on time, etc. How do we value this? There are no statistics that I’m aware of that track % of people who commute with one or more commuting passenger, or that track something similar, nor do I have any statistics for average “inconvenience time” per additional carpool passenger. However, at some gasoline price level, it makes sense for any given person to arrange to carpool instead of commute by themselves. At $4/gallon, however, my impression is that most Americans will still value the time saved more than cutting their gasoline bill in half. The calculations for riding the bus, light rail, walking, riding a bike, etc. are essentially the same—how do you balance the money saved on gas with value of added inconvenience and additional time? For some people the decision clearly makes sense, it may even be more convenient and save time—but those are the people most likely to already carpool, ride the bus, etc. New demand destruction doesn’t occur until the price of gasoline changes the calculus, where it didn’t make sense for a given individual at $3/gallon, but it now does makes sense at $X/gallon. How high would gas prices have to be for it to “make sense” for 50% of suburban commuters to carpool or ride the bus?
Economic Cycles and Demand Destruction
Ultimately, the kind of calculus suggested above is inextricably linked to the health of the broader economy. Rich consumers with large and growing disposable incomes are likely to value their time and potential inconveniences at a much higher rate than those struggling to buy groceries (notably, those with high disposable income are also the most able to pay now to upgrade to more efficient homes or cars, but least incentivised to do so). Another point to consider in evaluating demand destruction is the cause of economic problems. If economic problems are caused by high energy prices, then it seems accurate to consider demand destruction attributable to these economic problems as demand destruction caused by high energy prices. However, to the extent that economic problems are the result of an economic cycle, and not due to high energy prices, then the energy demand destruction that results does not seem accurately attributable to high energy prices. Our current economic troubles seem to be a function of both issues, but in my opinion more a short-term cyclical issue (inaccurate pricing of credit risk and the resultant correction, as I argued a few weeks ago). At least some of the decrease in US oil demand can be attributed to economic cycles, and not to high oil prices, but we probably cannot separate these causes and isolate the portion of demand destruction caused by economic cycles. Can we even say whether or not demand would actually continue increasing at $120/barrel IF there was no “Credit Crunch”? Does a statistic like GDP/barrel of oil consumed allow us to see through this fog? It might if we had a very accurate measure of inflation, but in my opinion the CPI certainly doesn’t qualify. For that reason, comparing the 2006 GDP/barrel consumed vs. the 2007 GDP/barrel consumed is also problematic. Furthermore, it does not necessarily follow that, in a cycle-driven recession, GDP will shift to more energy efficient paths.
Conclusion
With gasoline well over $3/gallon, and oil well over $110/barrel, there does not seem to be any significant demand destruction in the US. Reasonable people can argue that demand is up about 1% or down about 1% since this time last year, but I am defining this entire range as “not significant.” What is the boundary of “significant” demand destruction? By significant, I mean significant impact on the supply-demand equilibrium for oil. Per-capita gasoline consumption, while important from a standard-of-living perspective, at most impacts elasticity of demand, and does not fundamentally change the supply-demand equilibrium (growing populations don't impact geology), so I am focusing on absolute demand for this analysis. If a low-end estimate of the decline rate for oil production post-peak (or net oil exports at present) is 5% per year, then I think that is the boundary for “significant” demand destruction. Demand destruction of 1% per year on an ongoing basis, compared with oil production decline of 5% per year, won’t have a significant impact on the supply-demand equilibrium. Conversely, a year-on-year demand destruction of 5% compared with an oil production decline of 5% does have a significant impact on the supply-demand equilibrium because it negates the impact of the production decline rate—this is effectively what Richard Heinberg suggests in his Oil Depletion Protocol.
If this analysis tells us anything, it is that there is no easy way to calculate exactly what price point will cause demand destruction of X%. I remember when many proclaimed that $3/gallon gasoline would cause huge demand destruction. Now many of these same people proclaim that demand destruction will explode at $4/gallon or $5/gallon gasoline. Europeans, though admittedly in a very different situation, don’t seem to be driving significantly less at $8/gallon. In the end, we simply cannot know how demand destruction will unfold, and I think that is highly significant for calculating the economic impacts of rising oil prices—we have no empirical basis to either prove or disprove propositions as opposite as 1) present prices, if maintained indefinitely, will cause sufficient demand destruction to keep prices from rising significantly higher, or 2) prices will be able to at least triple before demand destruction begins to keep pace with supply declines. I know that there are nearly endless opinions on this point, but the significance of this analysis is that we cannot prove either point of view to be right or wrong.
It’s also important to highlight that this essay only considers demand destruction within the United States, while the global oil market is inherently global. What will it take (both psychologically and economically) to see 5% demand destruction per year in the US? What are the prospects for global demand destruction of 5% per year? Even if we aren’t currently witnessing a decline in global production of 5%, evidence suggests that net exports are declining at least that fast…
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The latest EIA figures actually show a 0.57% increase in US gasoline demand year on year over the last week.
Something I have pointed out before is that even if the total transportation BTU demand had remained constant, volumetric demand would increase because the gasoline pool now contains fewer BTUs because of ethanol. So a very small amount of demand destruction could occur, and yet be masked.
However, in general I agree with your overall premise. And I think the reason for this is that people still think this is a temporary situation.
Europeans, though admittedly in a very different situation, don’t seem to be driving significantly less at $8/gallon.
Of course they knew that the situation wasn't temporary, since their prices were much higher to begin with due to taxes. So Europeans planned accordingly, and as a result have half the per capita energy usage of Americans.
Lending support to the comment I made in the first paragraph is this story that Leanan just posted in Drumbeat:
Loss of fuel economy from ethanol-blended gasoline hits motorists in the wallet
So even if there was a 0.4% decrease in overall BTU usage, the total volume used would still increase.
I know by the math, 10% Ethanol does not sacrifice many BTU's, however, many people I talk to say they are losing 2-4 mpg since the 10% Ethanol came to market. Personally, my Subaru Outback went from 25mpg now to 22-23 and I've been slowing my highway speeds from a common 75 to keeping it under 70. That is a significant loss in efficiency from the 10% ethanol.
I live in the London suburbs, and fuel prices are currently as follows for an Imperial gallon:-
Unleaded petrol- $10.04 (average), $10.36 (max.)
Super unleaded- $10.62 (average), $11.08 (max.)
Diesel- $10.86 (average), $11.81 (max.)
My local filling station has told me that so far there has been no
fall off in demand (this was prior to the Grangemouth refinery strike
being widely known by the general public).
For those unfortunate enough to be using US gallons:-)
1 US gallon = 3.7854 litres, so at GBP 1.20 per litre for diesel,
GBP 1.20 x 2 x 3.7854 = approx USD 9 per US gallon.
unleaded petrol is GBP 1.10 a litre.
In the UK car sales rose 2.5% last year and are expected to drop very slightly this year according to the Society of Motor Manufacturers and Traders (SMMT). So based on the UK there is still a long way to go before much demand destruction.
The government has started moving in the right direction by grading the annual car tax to hit gas guzzlers the hardest. Cars emitting more than 226 g/km pay GBP 400 and those under 100g/km nothing but there are only two diesels that make the grade.
IMHO the sale of new cars emitting more than 226 g/km should be banned from 3 months forward. The the ex-chairman of Shell, Sir Mark Moody-Stuart has also recently said the EU should ban the sale of cars that do under 35 miles to the gallon. The theory is that even wealthy people cannot get round this.
Some local authorities have also started charging more for parking permits for gas guzzlers.
Regulation is always tricky. The U.S. CAFE standards was raised on cars, but not trucks partly helped to inspire the SUV sales boom. And which is worse a minivan getting 20mpg with 6 people in it, or a hybrid with a single person in it getting 45mpg?
I don't know what will make the biggest difference, but can't imagine any regulation can beat weathy people's desire to consume - it might as well redirect their wealth to something even worse for the environment.
I've long been on the high "sin tax" approach, even as I acknowledge it is regressive, hurting those least able to change, and having little on effect on those well enough to pay "any price".
The only other alternative I know is rationing. Combining rationing and ebay could make for an interesting market! The poor can have their share if they need it, or make a few bucks for finding a way to live without a car, or driving less.
I don't know much about rationing, but would imagine coupons would have expiration dates to prevent hoarding, and limit "inflation" of value, but expirations could still excourage fuel hoarding itself, ESPECIALLY if the ration levels are decreasing. A fun game, however played.
More effective would be a tiered excise ... at a set rate for vehicles with higher fuel inefficiency (l/km, g/m) than the current fleet average, twice the set rate for vehicles with twice the fuel inefficiency or more, no excise for vehicles from the fleet average to half the fleet average inefficiency, and a subsidy at the set rate for vehicles at half the fuel inefficiency or less.
And surplus on collections over the cost of the subsidy going to buy more energy efficient running stock for public transport.
Robert -"So Europeans planned accordingly, and as a result have half the per capita energy usage of Americans."
Europeans "planned" to live in countries 50 times smaller than the US. Good "planning!"
Geographical Europe is larger than the USA. Most of our countries are similar in size to your states.
I think the key difference is more historical than it is due to population or area. The age of settlement of Europe, and the foundational infrastructure (locations of towns, distribution of farms, patterns of land ownership, etc.) creates a much more evenly distributed population than in America. Additionally, much of US built environment developed AFTER the development of the car, especially in the western US. The result is that our post-WWII population boom was able (and in some ways coerced) to locate in suburbs built many miles from work on what was formerly cheap, minimally productive ranch land or desert. Europe experienced nothing like this (at least nowhere near on the scale that it happened in the US). The result is that US built environment is much more dependent on daily human-miles of transport than in Europe...
Not only "able" and "coerced", but also subsidized ...
... utility hook-ups for property developments charged on a per-hook-up basis without consideration of the network cost of sprawl is a cross-subsidy ...
... requiring extensions of utility network capacity for electricity, water, sewerage to be born by the existing rate base while subsidizing green field projects to "attract industry" is a cross-subsidy ...
... indeed, the roll-over of capital gains on development on a dollar basis without any matching acreage requirement encourages developers that have made a big score to look for an opportunity for a greenfield development that is large enough to shelter the capital gains.
That's without even considering cross-subsidies of support services for the auto transport system.
I think the key difference is more historical
GM was convicted for restraint of trade for buying streetcar lines in order to shut them down.
Over a half century of public policy and public subsidies has supported sprawl and suburban/exurban expansion. Roads and highways, federal and state money for new schools, post-WW II VA loans could only be used for new housing and not on existing homes in established neighborhoods, etc.
Suburbia is *NOT* the result of "natural" economic forces, but of a lifetime of public policy support and subsidies.
Best Hopes for Redirected Public Policy Support and Subsidies,
Alan
If I remember right don't Chevron own some battery technology that they refuse to let anyone use for cars?
Either way, that kind of action is small potatoes compared to the effect of the systematic, ongoing, substantial subsidy for sprawl development.
In the film "Who Killed the Electric Car" they explained how the nice elderly couple who invented the great battery idea for GM was sold by GM to Chevron after they killed the EV1 in California.
Google "cobasys patent".
Cobasys has succesfully sued the major battery-makers of the world. Chevron-Texaco owns half of Cobasys, Energy Conversion Devices owns the other half. They have a very basic patent on NiMH-tech that expires in five years or so. Settlements with major battery-makers expires before that I think.
Do the EIA figures include the military and if so what percentage do they use? I can't imagine it is their first priority to reduce use and guess if their percentage is high then it will confuse the overall figures.
Carpooling:
Undoubtely someone will come along on this thread soon and state that "Americans will never carpool". Cow Cookies! I remember carpooling myself for a while during the 1970s, and of our carpool being just one of very many in the large office building where I worked, and throughout downtown. Not everyone carpooled, but a lot of people did then. They might carpool again IF the cost of gasoline goes high enough.
One barrier to higher participation in carpools: How does the carpooler get home if they get sick, or their kid gets sick, or there is some sort of personal emergency? The City of Asheville has a good solution to this problem with their Emergency Ride Home program. We need municipalities everywhere to rapidly adopt this idea.
One thing that was a big hassle back in the 1970s was getting prospective carpoolers together. It wasn't so much of a problem for very large employers with many thousands of people at the same location. For people working in smaller work groups, though, it was a real problem. Now, we've got specialized website dedicated to facilitating carpooling by matching people together. It should be much easier for people to make the transition to carpooling with such services being available.
CNN had a story on carpooling this morning. Interest is picking up, due to gas prices.
I think that this represents a huge opportunity for new new web-based services that will match drivers and passengers, allow people to rate other members, etc. One of the larger hurdles to increased car-pooling is finding someone who meets your geographic and time requirements...
Interesting idea. There are online sites that let people match up for ride-sharing, but they are mostly used by college students for occasional trips home.
A site where you can rate your fellow passengers could be a money-maker. I know I would be more willing to carpool if I knew in advance that my fellow riders didn't have any unpleasant habits. (Wears too much perfume, packs smelly liverwurst sandwiches, blasts music I don't like and gripes when I switch it to sports radio, argues forever over who has to pay the extra penny when the gas bill won't divide evenly, etc.)
I was a tax CPA, (long since retired), but in the 70's Congress passed a law to encourage car pooling. A company could buy a Van, have a designated employee driver, and that driver would pick up other employees and shuttle them back and forth to work. The company paid all of the cost, the passengers had no cost (nor imputed income) and (I believe) the designated driver could use the van for incidental mileage without tax consequences. At any rate, it was a good deal for companies and employees (and saved fuel).
If that law has expired, it sure needs to be resurrected. And, if it is still in effect, employees need to lobby their company to look into it.
For car pooling to be further adopted the legal liabilities of the DRIVER must be addressed by, in the U.S., the various 50 state legislatures. After all, there will still be accidents. Will drivers with more to lose to litigation be willing to participate as drivers in a car pool? I think they will be less inclined.
Wishful thinking, at best. I would contend that the current economic downturn is almost solely attributable to high energy prices. Credit & housing price issues, etc., are results, not causes, of the deepening recession. Furthermore, this downturn is neither short-term or cyclical. It is the outcome of the world running out of cheaply obtainable petroleum.
Do we see "demand destruction" in the junkie community when the price of heroin rises? People have to get to work and run errands. Their quality of life takes a severe hit when they can't visit family & friends. As fuel prices rise, other discretionary spending may decline, impacting retail sales & the rest of the consumer economy, but people will still drive at all costs. To be stranded means the end of income, productivity and spending. No one should be surprised that hyperinflationary fuel prices create only minimal demand destruction in a society whose infrastructure is wholly designed around cars.
"Do we see "demand destruction" in the junkie community when the price of heroin rises?" Precisely. I watch for evidence of a desire to reduce gasoline consumption on the highway. When I see folks going less than 5 to 10 mph over the speed limit I will admit that gas prices are having an effect. So far, I do not see any evidence at all.
Hi CB,
If I may speak to this point. My partner and I made it back from our road trip to Toronto earlier this morning, covering off some 3,500 km in a little over three days. We took his car even though it's significantly more thirsty than my own (5.7L V8 versus 3.5L V6) for the sole reason that we required the additional cargo room. I wasn't expecting great results, but one thing that did surprise me was just how much speed and driving style influence fuel economy. During the times when I was behind the wheel, I averaged a reported 8.6 litres per 100 km (27.1 mpg), largely by keeping my speed close to the posted limit and by anticipating changes in traffic flow so as to avoid excessive braking (under light load conditions, the engine's multiple displacement system shuts down 4 of the 8 cylinders which, in theory, cuts fuel consumption by about 10 per cent; however, these savings require one to keep speed in check and to avoid heavy acceleration). My partner, who is particularly fond of the getty-up-and-go pedal and who is just as content to hit the brakes as he is to look three car lengths ahead, averaged 10.8 litres per 100 km (21.6 mpg) -- a 25 per cent fuel penalty. A difference of 2.2 litres per 100 km in this case works out to be 77 litres and at average of $1.30 per litre, that's a $100.00 savings.
Cheers,
Paul
I assume that your partner has been informed of this delta ?
Best Hopes for Domestic Tranquility,
Alan
Hi Alan,
I assume that your partner has been informed of this delta ?
Don't worry, I'm constantly providing helpful feedback with regards to his driving behaviour but, oddly enough, it's not always received in the spirit in which it is given. Go figure, eh? ;-)
BTW, this Dodge Magnum R/T replaces the Chrysler LHS I gave him for his birthday (the one he subsequently totalled in a rear-end collision).
Best hopes for less aggressive drivers who don't speed and tailgate.
Cheers,
Paul
Edit: I'm partial to station wagons and I happen to like this one a lot. Ours is identical to the one shown here: http://www.dodge.com/en/2008/magnum/
NPR ran a story not long ago about the housing price slump claiming that the prices of housing in developments that required long car commutes was falling faster than prices in more urban settings/housing along commuter rail lines/housing close to public transportation.
Another comment is that high gas prices may cause demand destruction in other areas before it causes demand destruction in driving. Instead of driving less, people may start consuming less in other areas to free more money for buying gas. Instead of driving to the mall to shop, buyers are driving to the Wal-Mart to shop. Instead of driving to Whole Foods to buy groceries, they're driving to Sam's Club. That kind of thing.
What ever happened to the promise of telecommuting? I know of an AT&T worker who does it sucessfully, but all else I know have neither been encouraged - nor offered - by their employer to try it.
Telecommuting is uber common. People telecommute from India & China to the rest of the world every day. The name has changed, tho. Now telecommuting is called "out-sourcing."
Also:
What I have discovered is that many companies are reluctant to allow their onshore workers to telecommute but by nature of the distance are forced to allow their offshore workers to telecommute.
I have now worked at four different blue chip companies who use outsourced workers in India but who do not permit telecommuting.
At one company I asked to be able to telecommute and the response was "we have no work that can be done via telecommuting". I said, "what about the Indians?".
They said, "It is our position that we have no work that can be done via telecommuting".
My personal guess is that outsourced Indian workers are so cheap that they don't care too too much about productivity whereas with on-shore workers they are afraid they may slack off and have no way of being able to tell. Or maybe the managers are afraid they would have nothing to do if they weren't "managing".
At Global Crossing (at telecommunications company), telecommuting was a bitter issue. In the end, the telecommuters lost. Managers want control more than they want productivity or happy employees, or anything, for that matter.
The irony is that outsourcing increases the amount of air travel.
Probably because if you can telecommute, somebody in India or the Philippines or China can do your job for a fraction of the cost.
Yes, I content their is a large populace that could do their work at home. As long as our communications infrastructure keeps up the pace.
Because narcisistic sociopathic control freaks want "face time" with their employees?
Or just maybe because a survey by America Online and Salary.com in 2005 concluded that employees engaged on the Internet were frittering away $760 billion a year of their employers’ money and they think even more time will be wasted?
Oops, I better get back to work:-)
I'd suggest that demand destruction will follow a path which is aptly described by the name - destruction.
Most people consider driving as a necessity and not a negotiable factor. They will cut other areas of expense first, followed by going into debt, before they are forced, in a catastrophic fashion, to reduce consumption.
Therefore the key factor is the degree of 'buffer' they have between current expenditure and a level at which something 'breaks'. An individual that has $50 of buffer would expect at least this level of cost rise before substantial usage change would occur.
Demand destruction isn't gradual on an individual basis - its something of a series of cliff edges as chunks of demand are eliminated and where some of these eliminations have consequent effects (eg driving to work).
Obviously there is a continuum of buffer values in any country, as there are varying levels of price rise rate (taking into account taxation, exchange rates, etc.) Thus you can imagine assessing this buffer value on a country by country basis; stacking them up after after taking into account typical usage, taxation etc. to arrive at a cumulative graph of what price rises have what effect, and on which groups.
Its also important to realise that there are systemic effects where the catastrophic failure of one individual to afford personal transport has a knock on effect on the rest of societies ability to cope.
Sum that together and we have to expect that the effect of demand destruction will not be a uniform affair. Countries will be hit in order of their resilience to such change. To an extent we have seen that already with developing countries being hit as cheap oil falls out of the system.
When I attempted to do a rough and ready ordering of countries to such effects I found that the US was a relatively early hit - with minimal levels of tax buffer, a population that was in debt up to its neck, and an underclass being paid a fraction of the average. European countries, although having a lower average GDP, tended to have less of these issues and thus had some leeway in the timing of demand destruction. The rich everywhere had significant buffers, but were often dependent on the continued viability of businesses or stock market investments.
As in most areas, early adaptation at a country level to reduced dependence of societal systems on oil was the optimum action to take - before fast declines made mass action unaffordable.
Demand destruction for oil does not happen.
What happens is unemployment.
When you are unemployed you cannot afford the car payment never mind $4 per gallon.
I contend that Americans won't cut back until unemployment starts rising.
"What happens is unemployment."
Yes, this is basic, but it very seldom gets mentioned because of its self-evident nature. As people have their discretionary income reduced by rising transport fuel and energy costs, less will be spent on the services that are 70+% of the US economy. The loss of jobs will slowly accelerate until some crisis level is reached. This will also hurt state and local governments' abilities to provide services as tax revenues will also decrease markedly, which is already happening now. The spiral will enlarge to swallow businesses that supplied the services no longer being bought. Take fastfood for example, as its purveyors see demand for their products evaporate, they will order less from their suppliers and consolidate, etc. Going short Pepsico, etc., is a good investment strategy, although it's perverse/social-darwinistic to make money off of companies going out-of-business.
Demand is also inelastic in the short term. If you have a gas-guzzling car, it's value may have dropped significantly, therefore it will take time to save enough money to sell it. (sounds odd, no?) A lot of it also has to do with housing. If you don't live on a bus route or near any shopping you have no choice but to drive. The solution for that is to move. But, that takes time. It also takes money that people don't have. So, you suck it up, cut back on something else, and gas up the vehicle.
Demand destruction is happening, it's just in other goods, not gasoline. Just wait until the Christmas numbers for 2008 come in. Talk about Bah Humbug. . . .
People don't just demand oil and its products - they demand a very wide variety of stuff. Some of that stuff has a lower marginal utility and thus a more elastic demand curve than does oil (and its products). Much of that stuff is what we would call "discretionary purchases". It is these that get eliminated first when the price of oil and oil products rises. THERE is where to look to find your demand destruction. It is only when there are no more items which might compete against oil for consumer dollars, when there is nothing left with a lower marginal utility than oil, that you start to see substantial elasticity and destruction of demand with continued oil price rises. We're not there yet (collectively, although a few individuals might be just about there now), but give it time, it won't be long.
Charles Komanoff and Daniel Rosenblum, in an interesting essay on carbon taxes (see http://www.shalomctr.org/node/1243) suggest that the long-run price elasticity of fossil fuels in general is in the range of 40%; i.e., a rise in price of 10% should lead to a drop in demand in the range of 4%. Based on recent data, as discussed, there could be an existing trend in this range that wouldn't be apparent because of the noise in these data. And, of course, even if a price elasticity in the range of 40% is realistic in the current situation, it may change in a non-linear fashion as time goes on.
Thanks for the link, Globo.
I have often wondered about this issue of demand destruction, but very few people seem to have a quantitative handle on it, even in a very approximate way.
I'm glad that Jeff Vail has raised this issue in the key post as well -- great job!
I have anecdotal impressions. Here in Minneapolis, MN, USA there do seem to be more bikers -- even more winter bike riders -- every year. Transit is poor, but the new light rail has attracted many riders. At least a few of them are new to transit, with some even moving to condos, apartments, or homes right on the transit line.
Our perceptions are changing with regard to our impacts on the planet. Granted, there is a powerful backlash with people following the dangerous memes that we do not negatively impact the environment, that we (USA) keep the world safe for democracy when we invade and occupy oil-laden places, and the like. But there does seem to be a significant shift going on which may impact consumption patterns.
My own expectation is that we will not respond in ways to make for a graceful powerdown -- too little, too late. I suspect that civilization may deteriorate into chaos in the face of the environmental tsunami we have invited and also not prepared for. But one does what one can, thereby perhaps avoiding nihilistic despair and making an opening for a little bit of hope and delight in the present.
The price of gas and demand destruction seems to be somewhat mysterious. The larger picture has even more variables and more uncertainty.
As you note, the price elasticity of oil or gasoline may not be linear after a certyain point.
I think that those who claim that US gasoline demand destruction will "explode" at $4 to $5 per gallon are deluding themselves.
The price comparisons with Europe are interesting, but the reference point for pricing should really be India, which is showing no signs of demand destruction at prices well above $5 per gallon.
The idea that the US economy cannot "bear" a gasoline price that is lower than just about every country on the planet other than a handful of major oil producing countries that heavily discount/subsidise domestic prices is laughable. American consumers will moan and groan about "higher" prices - as do consumers just about everywhere else - but there's no sign of this actually translating into lower gasoline usage. Diesel prices have escalated at an even more rapid clip than gasoline prices - but there's no sign of any demand destruction there, and US aggregate diesel consumption is growing very rapidly.
The "demand destruction" that is caused by higher percentages of disposable income being spent on diesel/gasoline will be displaced elsewhere - ie in frothy/excess/frivolous consumption that is easily reduced or eliminated.
US gas prices? Still waaaay cheaper than India.
Don't mention petrol prices in poor Turkey: they charge around US$ 12 per gallon...
A personal encounter with demand destruction.
I was dosed on various cold medicines and hadn't had anything to eat yesterday, after my wife infected me with some kind of lethal cold strain, and I was on my way to get some chicken soup last night when I pulled up to an intersection, to turn left at the light, where there was a car with its flashers going.
As I was about to pull around, a woman emerged from the car, whom we used to call a dwarf, or the more PC term is Little Person, but anyway this lady said that she was out of gas and asked if I could run her down to the local gas station. Because of cold medications and lack of food, I wasn't sure if I was hallucinating or not conversing with someone who could have come straight our of the Wizard of Oz, but I said sure.
Anyway, I took them down to the gas station and bought them a gallon of gas and took them back to their car. She was recently divorced, and she said rising food and energy prices were just killing her budget. I recommended that she go to George Ure's website (Urban Survival) and buy his PDF publication on how to live on $10,000 per year. (I suppose it may be $15,000 per year by now).
As Robert noted up the thread, the problem is that people--courtesy of ExxonMobil, Saudi Aramco, Daniel Yergin, et al--are operating under the assumption that high energy prices are temporary, and they are postponing making difficult choices about downsizing.
$10 Gasolne (?) Headline From Drudge:
http://www.nysun.com/news/business/gas-price-may-soon-cost-sawbuck
Another anecdote. I pulled into a local lumberyard to get a credit on some building material and pick up some 2x4s and cinderblocks. I had to have the returns inspected before I could get a refund. Two of the yard hands came out to look at the returns, but the first thing they looked at was my Subaru wagon.
First guy: "What kind of mileage do you get with that?"
Me: "Well, when I'm not pulling the trailer, I get about 30 on the highway."
Second guy: "Those cars run for about 300,000 miles don't they."
Me: "Yeah, we have 189,000 on it and it runs like new."
First guy: "I have a pickup, and the gas costs are killing me."
(First guy notices the jerry cans I have in the trailer.)
First guy: "Those are gas cans, huh?"
Me: "Yeah, they're military surplus. I found a catalog place that sells them for $14 each."
First guy: "Next time you're in, could you bring one of those catalogs with you?"
Yo WT, glad I as not around when you were driving under the influence!
How to live on $15,000, tell that to the billion+ on $1 a day. Couple of weeks ago in Egypt people were begging food leftovers from my table in a tourist hotel.
I absolutely agree that the messages from Exxon etc. are giving the wrong signal. IMHO the government needs to give very clear simple messages, e.g. a ban on all cars emitting more than 226g/km with steadily reducing targets over the next 10 years. This would send a clear signal to people to move to more efficient cars even for Rich Bastard:-) Unfortunately since this involves bad news very few politicians have the balls for this - so more credit to Roscoe.
Just seen in the Financial Times
Opec’s president on Monday warned that oil prices could hit $200 a barrel and there would be little the cartel could do to help.
Later in the same article
Adam Sieminski, analyst at Deutsche Bank, pegs price expectations at $90-$100 a barrel, with an average of $102.50 for 2009. But points out: “Oil supply growth in non-Opec countries is struggling at a time when Opec has been cautious with its production policies.”
So Opec say $200 but the man from Deutsche bank says $90-$100, what a great mixed message!
Purely anecdotal, but in the last big bull oil market we saw West Texas intermediate rise from $3.56 per barrel in 1973 to $39.50 in 1980. World consumption peaked at 67 million BOPD in 1979 and fell to a low of 58 million BOPD in 1983 before it began rising again.
An 11-fold increase in oil price and an eventual 13.5% decrease in cosumption.
And that was when Chindia was tiny.
Disclaimer: I'm not an economist - this is my common sense analysis of the situation:
Demand destruction (or decline in demand for oil if you like) is going to be a non-linear process, likely with sudden phase-change-like behavior. Why? Think about it a little more globally. Everyone in the world puts in bids for our constrained supply of oil. The people who cannot pay the asking price drop out of the bidding. At the moment, which countries can't afford to pay $120 per barrel? The poor ones, namely the people who use almost no energy anyway. I mean, we're talking about per capita energy usage that is a factor of 10 or greater less than people in the first world. Their decline into abject energy poverty is barely a blip on the screen. (I'll keep my rants about the morality of that as limited as I can...)
As we move up the ladder we get to the first world, say, the US. And this is an interesting case, because I think the social democracies like Sweden will behave very differently to the US, but let's take the US because it is the dominant energy consumer of the planet. The US is a like a little scaled down version of the rest of the world. There are poor people and rich people. The poor people will quickly drop out the bidding for gas, but they're poor and they don't use much energy anyway. There's simply no comparison between living in a small apartment in the city and using public transport versus living in a 3000+ sqft
mansionhouse and commuting 30 miles each way to work in an SUV every day. We're talking orders of magnitude again. Again, demand destruction is negligible.But finally, one day, the middle class is going to figure out that they're paying too much for gas and then everything will grind to a halt very quickly and suddenly. Don't ask me how one figures out when that day comes. We can only keep guessing.
The lack of demand destruction or inelasticity of demand for gas is all pain and no gain. When the gas prices first started soaring, I was thinking this was great so that we can now see people driving less and switching to smaller cars. Obviously, this behavior has been minimal despite anecdotal stories in the MSM.
So, I welcomed the personal pain of higher oil prices if we could ease our overall impact on the planet and stretch out the availability of a critical resource. Now, I am not at all convinced that extremely higher prices will have much of an impact. Therefore, we are getting no reduced impact on the planet and I personally have experiencing a reduced real income. Doesn't seem like much of a tradeoff. Sure, I drive a Prius but will still experience less disposable income.
And, let's just say the U.S., which is unlikely, did something that would significantly reduce our demand. Rationing seems like the only viable solution in the face of absurdly low inelasticity. This would do very little for the planet and the slack would just be taken up by places like India and China.
There is no hope. So let's just sit back and observe the s**t hitting the fan.
But you know what really gets me? The concept of supply and demand is so ingrained into most people, that they can't even see that the rules don't really work that way when the supply is constrained. On the flip side, people still think that we're going to solve global warming with a carbon tax. It's just about as delusional as thinking that, when oil prices go up, demand should decrease nicely in response.
Too many people have been conned into believing that we can "commoditize" anything, including food, water, air, energy, education etc... and then we're surprised when consumption and production don't behave the same way as they do for little plastic toys from China. Doh.
Supply and demand works perfectly fine thankyouverymuch.
What has happened is that people fail to understand how the equations work, and that supply cannot always increase to the level of want (or sometimes even need). Innumeracy and wishful thinking FTL.
What happens when supply cannot keep up with want is that the price increases until enough people are priced out of the market that you reach demand=supply.
It isn't so hopeless as you paint it.
By adopting a lower energy profile early, your standard of living will not be impacted nearly as badly as those who fail to adapt as quickly.
You have an effectively lower income, but people without your foresight will be hit much harder leaving you relatively better off.
This gives you a much more comfortable seat to watch the waste products hitting the rotary air impeller from.
Amen.
We're on a no-win rollercoaster ride, and it won't end pleasantly. The amount of ignorance about what is going on vis-à-vis gasoline (energy), our absolute need of cars to keep the local economy moving, and the eventual financial collision of need versus availability is unbelievable. Around my parts, people still blame high gasoline prices on gouging; they also "know" that prices will eventually drop like they did in the 70's (I was there, too), and are still buying giant SUVs and pickups. Oh, also in our area, house prices are still going up.
You've inched closer to the fulcrum, but to be brutally honest, you're still on the wrong side of the see-saw. Increasing mpg 40% is hardly a change at all in the big view. Now bicylcing & fueling up on local food ... there's a big change.
It seems common sense that the poorest will be the first to have to cut back. In central London there has been a congestion tax, i.e. a tax of GBP 8 = USD 16 per day to enter central London since February 2003. For a wealthy person this is great since their limos can speed through clearer roads.
IMHO a clear message needs to be given that fuel prices will continue to increase over several years. Maybe it could be seen as patriotic to cut back and stop sending dollars or troops overseas to "protect" the oil.
"But finally, one day, the middle class is going to figure out that they're paying too much for gas and then everything will grind to a halt very quickly and suddenly. Don't ask me how one figures out when that day comes. We can only keep guessing."
So, do you assume we will all sit in our houses and wait for the bank to reclaim it because we haven't driven to work, and therefore haven't made our payments, all because we decided we'd rather live in the street than pay more for gasoline?
No, around here gasoline is prime -- NO ONE IS GOING TO GIVE UP GASOLINE USAGE UNTIL SOMEONE ACTUALLY TAKES THE GAS AWAY FROM THEM! Price doesn't matter, for now and for many more dollars in the future. The only change you might see in the near future is a movement to smaller cars -- and then only reluctantly (no one I know can afford a new car). I still see tons (pun, pun) of brand new giant SUVs and pickups around here. The only way usage can end "quickly and suddenly" would be a total collapse of the economy. That may come, but it won't be the price of gasoline that stops people from buying gasoline.
Not at all. Where did I say that? I assume at some point when a household budget is in the red, and credit cards are maxed out, that families will start searching for ways to cut back and balance the books. First they do easy things like turn the thermostat down, cook at home more and eat out less, give up some of their travel plans for the holidays etc etc. And at some point, people will start to cut back on driving, use smaller cars, public transport and so on and so forth. There has to come a point when the price of gasoline stops people buying gasoline. My point is that that time comes when people can't afford it anymore. If the monthy cost of food exceeds your monthly income, what do you do? Most people eat less. That's my point.
i misunderstood your point also, i thought you meant folks in the burbs would begin selling their homes and moving closer to work/transportation when petro soars.
What work are you going to drive to once the unemployment that will cause demand destruction starts to take hold?
My guess on getting folks out of thier monkmobiles is that it will happen only when there are shortages and rationing.
Yes, obvious isn't it.
If fuel is in plentiful supply and the price is high, everything affected by the rise in the fuel cost will rise in price too.
Of course that should include wages, profits and taxes.
That will mean a corresponding increase in inflation.
But...............
When a lack of supply sets in. Various other behaviours will become apparent.
Fuel becoming hard to get means first, a serious cut back in discretionary driving.
A move to taxi's, buses and trains. As long as they can access supply.
Small business will begin to shut down.
A shortage of fuel for delivery and services.
Hoarding and black markets appear.
Tourism will begin to collapse.
Unemployment will begin an inexorable and steady rise.
Deflation will set in.
So at the moment we should not fear the rising cost of fuel demand will always be there, the circle of price rises and wages should maintain some equilibrium.
The scarcity of fuel holds much, much greater dangers.
>Deflation will set in.
This is highly unlikely. There are many reasons why, that are well explained on itulip.com. But basically:
- The Fed will print more dollars and risk inflation/hyperinflation rather than allowing deflation
- The cost of raw materials continues to escalate
- The dollar continues to shrink in value relative to other currencies
So, we may be in for very hard economic times, but more likely akin to the hyperinflation of the Weimar republic, rather than the deflation in the US during the GD.
Morgan
Could you explain how printing money can forestall deflation in a situation of business collapse and unemployment. Maybe you have a precedent.
If the economy began to collapse due to the housing/financial bubble alone, then printing money could assist. But...........
Fuel/energy shortages is what I expect to provoke the main and chronic economic downturn.
I suspect the economy will begin deflating soon after constant queues at filling stations begin, who knows though, as I said I'm just surmising.
Printing money is no good if the workers able to earn and business able to pay, can't.
Unless of course you think the economy can proceed on welfare.
itulip.com does not conceive (could be on purpose, best self delude when there is no alternative) a collapsing economy.
Their business depends on a perceived growing economy and if that requires hyperinflation, then that is what they will forecast.
It's very unlikely any democratic government, corporation, large or small business or salary earner will admit to a likely or pending economic collapse when their livelihood depends on the opposite.
I think you have misunderstood the argument.
You don't have to have deflation for the economy to collapse - inflation at very high rates will do the job nicely.
For a precedent, look up the Weimar republic on Wiki.
Whether you have deflation or inflation depends on how much currency you print, but does not alter the underlying problem.
Where was the energy shortage in Germany?
Germany came out of the inflation period because they were able to access the energy required.
They would have been able to pick themselves up from a depression as well.
Their hyperinflation was not due to energy shortages.
A million dollars for a loaf of bread, is meaningless if the million dollars can't be earned.
I'll repeat.
As I said inflation and even hyperinflation could/should be the result of the high cost of energy, for so long as energy remains in reasonable supply.
Inflation cannot continue if business can't provide work and money for consumerism to make the merry-go-round.
It would take a government to print money and provide work via public and capital works.
That can't continue for any length of time if the energy fails to arrive in sufficient supply.
The economic situation we face is unique.
Like assholes everyone has an opinion.
My opinion is inflation followed by deflation.
I was answering the claim that deflation would be "highly unlikely" because the website "itulip" said so.
If it seemed like you had actually delved into some of the thinking at iTulip, then we'd have a basis for discussion. However, you obviously didn't spend any time there. They do not "depend on the economy growing", and you're deluded if you think that's what iTulip is about.
Regarding inflation versus deflation: for deflation to happen, the dollar has to get STRONGER relative to goods such as oil, food, houses, etc.
Now think about it. The US Gov't is sending every family a check for $1,000 or more. Is there any way that printing money and sending people checks will make the dollar worth more relative to a precious commodity like oil? No.
If oil and energy drives the economy, and if those commodities are becoming more scarce, that means they will increase in price relative to paper currency. The energy shortage scenario you predict only supports my argument. If gas costs $20 per gallon, then food is going to cost 2-3X more than it does now, and so will anything else dependent on that energy to produce or transport (e.g. appliances, electronics, solar panels, etc).
I'm not saying that some items like houses can't drop in value. Certainly, large mansions located in sprawl are likely to decline in price - but that won't translate into cheaper oil or food. And, even home price depreciation can happen by inflation. If the dollar inflates away half its value over the next 10 years, then your house is worth half of what it was in real terms (i.e. how much food you could buy if you sold it).
There have been many inflations and hyperinflations in the last century. There have been only two significant deflations. One of them, in the US, was partly due to the tie to the gold standard. That's why private gold was called in and private gold ownership made illegal, so the gov't could make more dollars (early 30's). Since then, we have gone away from the gold standard. There is NOTHING anchoring your dollars now.
Think of it this way. If you were the sole world oil producer, and someone wanted to pay you for your extremely precious resource in paper money that they printed at will, what would you do? Would you just accept their printed money without question, at the risk that they will just print more to pay you next time? Probably not, if you're smart.
Well, that's exactly what is happening now. Too many dollars, not enough oil. I see nothing on the horizon that will change that situation. It will only get more and more extreme.
No DD, just more consumption. It's like how fashionable it was to have TB in France over a hundred years ago.
Hooray Chevron:
http://www.lickmygreenballs.com/chevrontoxico-ruining-amazon-communities
Compared to the other costs of driving a car, gasoline just isn't that big of a hit. With gas at $2.25/gal (the 2006 average), a typical American car costs $0.522/mile to drive. That car gets 20.2 MPG, leading to the cost of gas being ($2.25/gal)/(20.2 mi/gal)= $0.111/mile of that. At today's average price or $3.60/gal (a 60% increase in gas prices) it costs $0.589/mile to drive, a whopping 12.8% increase in cost over 2 years. Of course you haven't seen a huge drop in auto use, there hasn't been a huge increase in price!
You are showing the change in total average cost, which includes fixed costs. The more germane comparison may be variable costs or those costs which vary depending upon miles traveled. In addition, the gas price is the most obvious variable cost since people are paying at the pump on a regular basis.
In any event, however, even the large increases in variable costs doesn't seem to be making much difference.
This is true, but these are averages.
i.e. if you're depreciating a new car over (3? 4? 5?) years, fully insuring it, etc, then these are your costs, and likely they are even higher.
If you've bought the cheapest car you can find to get to your job, and have little or no insurance, then the transport cost increase is very much higher than your 12.8%.
i.e. the middle class feels the squeeze, but it's pretty marginal. The working class?
Will people lose their jobs because they can't afford gas?
More likely they will eat less. Or lose their apartments and sleep in their cars.
You do have a point. In fact, for a poor (or frugal) person who drives a $2000 car and only caries the legal minimum insurance then gas prices have a big impact and you're likely to switch to transit or carpool or do just about anything you can to reduce your car costs. On the flip side, there are a substantial number of people for whom the reduction in traffic from having some the poor off the road will just mean that they can drive their Escalade (which is over $1/mile to operate) faster so some of the fuel savings will be lost. That's the thing about averages, they may not represent your reality even if they explain why there hasn't been a big drop in gasoline consumption.
As a side note, I would expect more of the reduction in fuel use that does eventually come to be in the form of people driving more efficient cars rather than people not driving.
Some of that reduction might also come from SUVs carrying a solo driver being converted into carpoolmobiles carrying a full load. And note that the passengers, by the way, are not driving at that moment.
In answer to one of your concluding questions - what will it take to see aggregate demand destruction in the US? - I would guess that you won't see this until there is a substantial decline in the number of registered motor vehicles in the US coupled with a substantial improvement in US vehicle fleet fuel efficiency.
You people are so fond of your complicated mathematical models you can't see the wood for the trees.
Here's demand destruction in a nutshell: UNEMPLOYMENT.
In 2002 after the tech crash I was unemployed.
My demand was destructed for me because I was flat broke. After I was forced to sell my SUV I had no choice but to take the bus.
Unemployment is the only thing that will realistically stop people from driving and even then it will have a limited effect: If I had had a cheap jalopy I would have continued driving whenever I could have afforded gas.
Mathematically (or even statistically) speaking, this statement is false. What we have to know is:
I kind of 'see' where you are coming from, but I don't like this statement in its simplicity.
I would imagine that the 4.33 year metric that is being cited is backward-looking and, given the end of the easy credit era for at least a while, may not apply to the next few years at all - if we assume at least 3 years of flat/declining new-car sales ( 2007, 2008 and 2009 ) this would suggest that the replacement time is going to expand somewhat and that the US vehicle fleet is going to age quite substantially.
Just for completeness, there is another demand reduction path I haven't seen mentioned.
-drive the other (smaller) car/vehicle more miles and the less efficient vehicle fewer miles. (most families have more than one)
Sure, you have a point. Strictly speaking, that's not 'fuel efficiency' but conservation - however, the effect is similar. (Not the same though, as [largely enough] decreased mileage will have a negative effect on the economy by itself.)
studies of the price elasticity of gasoline strongly suggest that the elasticity over time is non-linear; ranging from -.25 in the immediate aftermath of a price increase to something in the range of -.6 in the longer term. if this is so, then the increases in gas prices in the last year would naturally tend to show a modest change in behavior. presumably,a more extensive shift in the quantity demanded can be expected over the next 1-3 years.
Can you talk some more about the numbers, etc? A lot of folks here know what that all means, but we have so many new folks coming here day that a refresher may not hurt.
i'll try, but i hope that no one will take offense if the explanation is too basic. i'm well aware that many of the readers of tod are econ literate and need no elaboration on the concept of elasticity.
price elasticity is just a way of describing consumer response to price changes. some commodities, such as gasoline, are relatively inelastic--i.e., there is little change inm the quantity demanded in response to a change in price. in the case of gasoline, an elasticity of -.28 implies that gasoline purchases, as a percentage, will decline by .28% for each 1% increase in price.
its important to be aware that elasticity measurements are most reliable for relatively small price changes over the near term. things can get very confusing in the event of large, rapid price changes. it's also important to note that some commodities behave in contrary ways. a friend of mine recently got a second job, to which he drives from his day job. why? the cost of gasoline to commute to his day job was killing him. now he has one job to support himself and his family and a second job to support his car.
I think your numbers are incorrect for the short term. Short term gasoline elasticity in the US is in the neighborhood of -0.05 (ranging from -0.02-0.07) and in the long run it is increased to the value you were talking about (-0.3-0.6)
This paper has the details on page 9-10 (in a table).
(pdf alert)
http://www.oxfordenergy.org/pdfs/WPM32.pdf
you may well be right. the studies are widely divergent. the two points on which they agree are that gasoline is relatively price inelastic and that the elasticity increases over time.
i have a suspicion that gasoline may, among some populations, be a Geffen good, the characteristic relationship becoming inverted as, e.g. truckers drive more hours to replace the income lost to fuel price increases.
Sort-term: I've seen numbers around -0.2 quite a bit from studies that used data from the 70's and 80's, and at least one study showing that it's declined more recently to perhaps -0.05.
Long-term: This is my favorite meta-analysis: http://www.tinbergen.nl/discussionpapers/06106.pdf
Across a range of studies (industrialized countries, not just US), they find an average of -0.53. They also find that longer studies have larger values, and cross-sectional studies have higher values than longitudinal one. Finally, they break it down into components:
~40% is due to reductions in car ownership (a couple deciding to continue commuting together rather than buying a second car, or a teenager who doesn't get his dream birthday present).
~40% is due to increased vehicle efficiency.
~20% is due to reduced miles/vehicle.
The other demand elasticity concept that I would like to see addressed, but have not seen mentioned anywhere, is the notion of declining demand elasticity as demand decreases due to higher prices. I don't know what the "approved" term for that would be, but what I mean is that the first 10% of demand reduction is normally much easier than the second 10%. And I think (intuitively, I have no data to back this up) that this would scale--there are at least 10% of very low hanging fruit for America to reduce gasoline demand overall, but the next 10% is significantly "higher" in the tree, and so on. The final 10% of America's demand for gasoline is, comparatively speaking, completely inelastic. So while I wouldn't be at all surprised if a -.25 (short term) and -.6 (long term) are accurate initially, it seems that these numbers would fade as demand decreases. Any data to show what this curve might look like?
Economists generally assume that the coefficient is constant in a log-log relationship. log(Q/Qo) = k*log(P/Po), where Q is new quantity, Qo is original quantity, likewise P and Po for price. This approximates to linear in the case of small fluctuations (if k = -0.5, a 1% price increase will reduce quantity by 0.5%). But in the case of larger fluctuations, you need the log-log formulation. Thus, price must quadruple to cut quantity in half, increase 16-fold to cut quantity 4-fold, etc.
In practice it's pretty rare to have data over a wide enough range to know whether the model is followed, but it's a reasonable starting point for thinking about it.
Very insightful piece - I think your conlcusions are valid.
However, I think you are a little dismissive at the end of the piece in saying that "Europeans are in a very different situation". I think this is only true to the extent that we have become somewhat habitualised to higher petrol prices. Anyone trying to enter London by any of the main driving routes at 8-9am on a weekday will testify that there are still millions of people who commute by driving relatively long distances every day (although I'll accept there is more widespread use of public transport). Outside of the major cities, the vast majority commute to work by car.
The price of unleaded in the UK has risen from an average 76p a litre ($6.7 a gallon) in 2000 to around £1.10 a litre ($9.7 a gallon) today, and people are still driving as much as ever. The point at which we will start to see demand destruction is not an absolute matter, but more one of percentage of disposable income. On the ground here, it feels like it need to get up close to £2 a litre ($17.60 a gallon) before this starts to happen in a serious way.
Working from a current tax base of 50.3p per litre (plus VAT of 17.5%), one can crudely linearly interpolate the impact of the crude oil price on UK petrol prices. In 2000, the 'ex-tax' cost (duty and VAT) of a litre was 17.6p and oil prices were an average of $30 (which, at an average exchange rate of 1.52$/£ works out conveniently at around £20 a barrel). Today, the ex-tax cost of a litre is 43.3p per litre, and oil prices are at $120 (which, at the current exchange rate is roughtly £60 a barrel). Obviously there are massive limitations to the linear approach, but extrapolating from these two points we get that for £2 a litre petrol (which is 119.9p ex tax) implies £180 or $360 a barrel.
Perhaps I'm being too optimistic, but coming from somewhere that is used to high petrol prices, oil still has a long way to go before people start to change their ways.
I've left my fag packet Excel sheet at work but I seem to remember my figure came out somewhat similiar but I have searched this thread and only Londanium seemed to point out that it is the percentage of disposable income on fuel that is the important figure -NOT the cost of gas/petrol.
So if real demand destruction begins at -say- 9% and we are only at 6% then prices will rise 50% more. Of course this is an average so that those on lower incomes will be hit harder (already at 9%+) while those flying high are probably going to keep on buying.
In a way this is a microcosm of what is happening in the World as a whole -so we see poor African Nations imploding while we in the Rich West ride around in 20mpg SUVs filling up on Corn derived fuel whose feedstock could feed a family at each fillup.
A post mentioned that the cost in India is already $5 US and as a % of the average wage this is a huge amount -but what we should remember here is that a small % of Indians are comparatively wealthy to their countrymen and can afford that $5. If its 1% of 1.3 Billion that's 13 million -like a small wealthy country and that small but growing % of the Billions in India and China are able to outbid the USAs poorest.
Nick.
Demand Destruction: Where is it?
In the poorer developing countries.
Something I posted in an open thread the other day:
I looked at the 1991-2003 linear trend:
2004-2008 data points are pretty much on the linear trend.
Looking at the residuals:
The residual variance seems to have come down since 2004 which means that the summer demand peaks are a little bit less intense than prior to 2004:
So prices do have an effect on demand but it seems to affect the discretionary driving (peak demand less intense). However there is a begining of curvature in demand that seems to appear since last year (see how the residuals are all negative since mid-2007 in the third chart above).
A couple of questions.
First off, if I paid 8 bucks a gallon for gas, but knew that a big part of that price -- say half -- was a tax going to pay for roads, transit, and other things, then I would remind myself that I'm really only paying 4 bucks per gallon for the gas, and 4 bucks for other things that we need to pay for with taxes.
Does this affect demand destruction at all?
Secondly: I understand that the average ICE has maybe only ten or twenty percent efficiency. In other words eighty or ninety percent of the fuel we buy becomes heat and exhaust fumes. Maybe some is lost in the drive train as well. This would make me think that it is a big waste of dollars as well as resources to burn gasoline or even biofuels.
I've been a workbiker -- eight years of it -- and now drive a little electric utility vehicle. The electric motor is very efficient and is tied into the back axle very simply. I have forward, neutral, and reverse -- no long, inefficient drive train.
So I feel like when I am driving electric, I am getting a bigger bang for my energy buck. This makes me less inclined to drive our ICE vehicle, even though it is a hybrid.
Having tried serious alternatives to the ICE makes me less inlined to drive the ICE unless I can't do the trip by walking, biking, taking the EV, or even transit.
As people begin to seriously explore other transportation options, might they feel like they have better ways to do what they need to do than the ICE vehicle? That may encourage more drop off of demand for liquid fuels.
I talked with one elderly farmer, for example, who was considering buying a little electric utility vehicle for running around on the farm a bit, plus zipping into town 4 miles away and back sometimes, instead of always using the pickup truck.
Modern electronic ignition, EFI, ovehead cam, etc., engines are more like 25 - 30% efficient. When you consider the cumulative inefficiencies of converting the potential energy of coal into current electricity, resistance losses in the lines, conversion of current electricity into electrochemical potential energy in the battery, then back to current by the motor, then to mechanical in the drivetrain... the ICE is probably more efficient than the scooter.
The overall fossil fuel energy consumption is the metric that counts.An electric scooter with an equivalent 80mpg would use less fossil fuel in almost every conceivable scenario, unless the person had been driving a highly fuel efficient car. Then it would just be most conceivable scenarios.
The electric car could be burning nuke or coal. Very different C emissions than an oil car.
You said "As people begin to seriously explore other transportation options, might they feel like they have better ways to do what they need to do than the ICE vehicle?" and that is a key factor.
People will put on a down coat an Inuit would envy just to run to a car in the driveway. We've been made to feel helpless without the things that are presented to us as needs.
I did not think I could ride a bicycle to work (10 miles) until I saw a coworker doing it and he challenged me to give it a try. I was convinced I would arrive at work tired and sweaty. I was wrong and I ride my bike everywhere now. Unfortunately, I was a user of public transportation so I can't claim any energy savings from going to the bike, but at least one more person has a seat on the train now. : )
Just a thought about Mastercard's estimate of a 6.8% decline in gasoline purchases (obviously false).
This is presumably a function of the ongoing credit crunch / recession:
i.e. people are maxed out on their cards so they are paying cash for gas, and Mastercard's estimators for other payment forms are all cuffed up by this.
Where I live in the Western US, you budget gasoline first, house payment second, food third (and if you want to keep your computer up and running, you might slip electric bill between the second and third priority). Some car pooling can be done, some trips can be combined, but WE MUST DRIVE to survive! The nearest stores are several miles away, my wife's job is several miles away, and anything I need is several miles away. Bus lines around here don't come close to cutting it: a trip of just 15 miles requires three transfers and at least one hour (I know, because I actually did it for awhile, and went back to my car). So, I am not surprised that gasoline usage has barely changed. But then, I never thought it would; those who thought it would obviously don't actually live in our environment. You've got to actually come here to appreciate this stuck-in-our-car experience. (Also, my tank is going dry again, and I have to fork over another $65 tomorrow to fill it, though I will combine that trip with going to Costco, dropping by the bank, mailing a letter, and picking up my wife. Normally, I would also get a Mocha, but that luxury has now become gas-tank fodder.)
celticoil, you don't say where you live, but I have found that most of the West has better cycling infrastructure than the rest of the country. You might be surprised how enjoyable a bike ride is when you go those several miles to the store. Give it a shot. Your comments about skipping the Mocha is right on, as evidenced by Starbucks' recent earnings announcement.
As for demand destruction, here is a great example of why we haven't seen much: Entertainment.
Driving is entertainment, and as such it assumes a different place in the budget than common transport. I think driving for entertainment is a much bigger 'sport' in the US than Europe. I remember as a child the family would load up the Family Truckster and just...drive around.
http://origin.sltrib.com/news/ci_9079764
I own a Schwinn La Tour I bought in 1980, the year the mountain blew (I live in Vancouver, WA, about 40 miles south of Mt. St. Helens). I had the bike tuned up last year, and started riding it for short jaunts to the store. However, the average speed in my suburban area is about 10 mph over the speed limit, and on those roads where there are no bike lanes (just ditches) the average speed is an actual 40 mph. On the roads which have bike lanes (about 3' wide) the average actual speed is about 50 mph. I soon learned to ride on the sidewalk, which didn't make the occasional walker happy, and led to more than one encounter with overgrowing blackberry limbs. In the Portland/Vancouver area we go through about one dead bicyclist a month. I decided to forgo the honor.
Our area isn't the flat, dreamy landscape of the midwest or certain towns in the local valleys. Everything here is up or down, and sometimes severly up or down. Believe me, it takes a very hearty soul to bike with any regularity in this environment. They're there, but far and few between (compared to the number of drivers).
celticoil, I want to make it clear that I am not bagging on you personally, but I'd like to use your comments as an example.
Safety is a huge issue for cyclists. Even without having to confront tons of steel being driven (and I use the term loosely) by distracted motorists, cycling is just an inherently more dangerous activity than, say, walking. You mention one dead cyclist a month.
I'd like to ask, how many dead motorists? Do you wear a helmet in your car?
I bring this up because a lot of people selectively ignore the dangers around them, while inflating the dangers of cycling. High speed transport is a dangerous business. Period.
Up or down, rain or shine, bikes are going to have to be a huge part of the solution to our transport issue. Nearly every city has an old archive of photos of cycling clubs that flourished around the country between the mid-1880's and about 1920, when the Model T really took over. We had 35 years where bicycles were a huge transportation factor in the US.
I guarantee we'll be back there soon. I'm guessing electrically assisted bikes will be a big part of the solution this time.
I am looking forward to gasoline prices rising into the double digits and rationing being introduced. That is what it is going to take to thin out the vehicular traffic and slow it down and permanently park the Hummers - and especially to clear out the adolescent joyriders - on urban streets so that they finally become safe for bicyclists. Much as I like the idea of bicycles, I am not willing to risk disability or death until the streets have become much safer than they are now. Sorry, that is just the way it is.
Your inbuilt assumption is that "cycling is dangerous". This is not a correct assumption. See, for example: http://www.kenkifer.com/bikepages/health/risks.htm
The long and short: sitting on your rear end is far more dangerous to your health than biking is. With 30-40% of Americans seriously overweight, increased biking would save far more lives than it would take.
This is a perfect situation for an electric bicycle.
It helps climb the hills, flattening them out so it feels like you're in that dreamy midwestern landscape.
And it helps you maintain a higher speed, to reduce the dangers of traffic passing you at a high speed differential
But it still allows you to get exercise.
celticoil
can you say more about the distribution of trip lengths and range requirements? Or, put another way:
a) What kind of range would a BEV need to have to be useful?
Assuming only charging at your hosue? Assuming charging at destination?
b) Or, what ranges (electric-only, fuel) in a PHEV would work?
Assume serial PHEV, i.e., engine only runs to recharge battery, no mechanical drivetrain. The real question is: how much mileage is needed on fuel, hence how small can the tank be? Having to stop every 50 miles for gas might be annoying. How about every 100?
I'd observe that over the next few decades, we're leaving the era of personal ICE vehicles where:
a) Cost ~ distance traveled (as affected by average traffic conditions)
b) Effectively no range limits
In favor of mix of:
a) BEV: cheap, up to some absolute range limit.
b) PHEV: cheap (but not quite as cheap as BEV) up to some range limit, more expensive beyond that.
If that's true, then car-based suburbs may well continue to exist, depending on the range needed.
One element of demand destruction is fairly clear: people do two-hour commutes (each way) from the CA Central valley over here to Silicon Valley. The prevalence of that will certainly diminish.
I don't know a BEV from a Bev, or a PHEV from a Phew, but if you are talking plug-in electric, the range for that type of vehicle (say 150 miles on a charge) would be perfect for our needs. However, it is unrealistic for two reasons: 1) electric power generation in this region is by hydroelectric dams, and they would never be able to supply the needs of masses of Northwest plug-in cars; and 2) there is no way we can afford a new car, especially one with an initial price of around $40,000 (as estimated by GM) and a need to replace expensive batteries every 5 or so years. To me and many other like me we are stuck with what we have, or we will have to do without. (I see today that some economists were predicting $8 per gallon gas [very probable]. For my Voyager, that would be $160 per fillup. It will hurt, but what are the viable alternatives?)
A smaller ICC?
My VW Polo (a bit smaller than a Golf, or Rabbit as I believe you call them there) costs around $100 to fill up, with petrol in the UK already costing around $8/gal
If you trade the Voyager for a used compact or subcompact in good condition now, then at least your refills won't be quite a big a hit to your wallet. Longer term, it should be feasible to convert a compact or subcompact to an electric. You won't be able to afford the batteries to have much range with it, but if you are looking to maintain at least some minimal local wheeled mobility once gas becomes too expensive or your rations approach zero, this might be your best plan.
Ha! Good luck with that. Selling a big vehicle is tough now and you don't get much for it. Small vehicles are in demand, few people are selling them and those that are selling get top dollar.
You might be able to sell a 2000 Voyager (their final year) with say 100K miles for $3000 by the book price, but I'd guess you'd have trouble getting even that in reality.
A 2000 Toyota Corolla with the same mileage has a book value of $4500. you'd have to drop all the way down to an old 1997 Corolla clunker with 136,000 miles to be able to buy it for the $3000 you could sell the Voyager for, and as I say I have strong doubts you could actually get someone to pay you the $3000 these days.
Wow! I've no idea what the import regs in the US are, but you can buy a little s/h RHD run-around in Europe for a song.
Perhaps a personal import?
It is very difficult to import a car into the US. I checked into it a few years back, it sounded like several thousand dollars to have things (lights, fuel gauge, speedometer etc) Americanized. There are specialty shops that do the work, but they focus on $75,000+ sports cars.
I was thinking about a Lupo, or any of the other small european diesel cars. Still have to wait a few years for the US auto companies to sell those here. (maybe Toyota diesel Yaris in two more years?)
Something funny (ha,ha funny) I've noticed lately is older people (my age - 65) driving around in pretty good looking '70s and '80s Honda Civics and such. The other day I got behind a guy in a Datsun B210 (the Vitamin car) from at least the '70s. Hadn't seen one of those in at least 15 years. Like to know where they find these things, even though the cars are probably now going for a premium.
It was a spare car kept in the garage and used when the real car was at the dealer for a tuneup. I picked up Dad's old van when he died. It had had an oil change last around 600 miles and six years ago.
If you want to keep it running then change the oil every year and brake fluid also.
I use Synthetic DOT 4 brake fluid, stainless steel braid over teflon brake lines and change every 3 years. Much lower water absorption from our humid atmosphere, and fewer points of absorption with these brake lines.
Best Hopes for Low mileage old diesels,
Alan
On the other hand, if you wait much longer you might not be able to even give the Voyager away. Unless you are pretty sure that you'll be able to use it as a carpoolmobile, I'd advise to unload it while you can.
Bigger cars are worth more as scrap steel. The catalytic converter alone is probably worth $250. Lead in the battery, copper in the alternator, etc. It all adds up.
My wife says there is regular traffic down our dirt road of trailers loaded with old cars, etc. I think it must be the shortest path between the farm field junkyard and the salvage yard. There was one place a few miles south of us that must have had 200 cars parked in the back. I suspect it will be a corn field this year, should swing by and see.
BEV - battery electric V, PHEV - plugin hybrid EV (i think - no context was given by the parent post ; this thread has had a bit of an acronym attack)
I doubt PHEV will have small tanks - the whole reason to have the PHEV is to be able to travel long distances.
Of course when you are not planning to drive a long distance you would be well advised not to lug around a full tank of fuel.
In fact, that is one of the design issues of PBEV's - if you have been running around in electric-only mode for a few months, then want to use the petrol in your tank, how do you keep the petrol in good condition?
Your alternative if you rarely do long distances is to buy an EV, and hire an ICC when you need to make a long trip.
You then put yourself in the way of several major advantages.
Throwing away the ICC greatly reduces weight, which means less batteries, which means less weight....
You have also greatly simplified the drive train, and have a low maintenance car which will last more or less forever, perhaps one reason why car manufacturers have been less than enthusiastic about them - you would probably build them from carbon fibre or fibreglass so they would not rot for weight reasons.
For those who need longer distances and are prepared to pay more for the batteries, the technology is finally advancing rapidly so ICC like ranges should become possible, together with more substantial cars to transport the whole family.
Either fast recharge or swapping the batteries might take care of recharging on a really long journey.
Employers would have some incentive to provide recharging points at work, and could earn green points by doing it with solar power which in many areas would work well for charging cars up during the day when they were standing in the firm car lot.
PHEV's would seem to me to be likely a relatively short-term solution, both because of their added complexity and the increasing shortages of oil.
John,
I too live in the Silicon Valley area.
As you know, many of the local gas stations here have already rolled their 87 octane gasoline prices beyond the $4.00 mark.
Each fill up is now a major pain in the wallet.
When making trips to stores, we make sure to hit as many stops as possible on a single loop rather than haphazardly running over to Walgreens whenever we forgot something.
Demand destruction is happening. It's happening in small incremental steps. For example, when picking out a movie to see over the weekend, we looked first for the theater that is closest to home and has the cheapest ticket prices. A few months ago that would not have been a major consideration.
40 miles to 80% Depth of Discharge (double this if you can charge at work/destination). Apparently 40 miles is the average distance a US private vehicle travels in a day, so any BEV that can do this is going to be appropriate for the average USian. Conviently, 40 miles is about the limit of a BEV using Lead-Acid batteries (Law of Receding Horizions. You can add more Lead, but it adds a liner amount of weight, and you have a hard limit in the amount of sprung weight a vehicle can handle).
Modern chemestries like Lithium (specifically LiFePO4, rather than the old less-thermally-stable LiCo) can give you 100 miles with a pack two people can manhandle out of a boot (sorry, trunk). It's expensive, but lasts longer than Lead-Acid. The only real holdup for Lithium at the moment is a lack of a decent, reliable, appropriately-priced Battery Management System.
If you want added range for the occasional trip, buy a old Diesel, replace all the lines with synthetic rubber instead of natural rubber, fit it into a trailer you can hook up when needed, and run it on homemade BioDiesel (which can apparently be stored for years).
On the other hand, consider someone like myself. I and my wife live in a small town. 2 miles to work for me, 3 miles for her. All shopping and services in town are within a radius of maybe 4 or 5 miles at most from our house. Thus, except for the very occasional trips out of town to the nearest larger city, all we would really need is an NEV like a GEM. That would work just fine for us, as is, right now. It would probably even be OK minus a battery or two, which could reduce the price if they would let us get it that way. At least when it comes time to replace the batteries, we could not replace one or two then and save some money. Converting our 1990 Honda Civic to a BEV would work too, but probably wouldn't save all that much over the cost of a new purpose-built GEM.
Not everyone is in our same boat, obviously, but our situation is by no means unique either.
Demand destruction for fuels takes a lot longer than people think. Here's a chart of nominal and real oil prices from 1861 to 2006, from Wikipedia on oil prices.
Here's a really nice graphic from The New York Times showing how prices and consumption in the US have changed over time. [Flash warning]
The stockmarket crashed in the late 60s, housing crashed at the beginning of the 70s. Oil prices started to rise in the early 70s. The recession of 73-74 (about where we are now, I reckon) resulted in only a slight reduction in oil consumption. The big drops in demand came after the oil price spike in 1980 and the 80-81 recession. So, after 10 years, an oil price increase from a real price around $15/barrel to around $90/barrel (both in 2006 dollars) and one of the worst recessions since the depression, we finally got significant demand destruction.
Buffett says recession may be worse than feared
http://news.yahoo.com/s/nm/buffett_recession_dc;_ylt=ApGv5e4tZTSDuCrwBLh...
I recently moved from Russian Hill in San Francisco to St. Petersburg, FL. The former being quite affluent and the latter not doing too well, with a lot of people, seemingly, with their heads just barely above water. It appears that the largest employer here is a group of local hospitals, and lowly retails.
I keep seeing all this traffic, yes of coarse in SF (could see the freeway from my apt., every day a sea of cars) BUT also HERE in St. Pete. And there are a lot of Bubba-cars (10-20yr old beat-up tucks) and SUVs here.
I keep asking myself, where is the slow down in demand?
If it's not noticeable in this city, then I would think that demand destruction across the US might still not be happening in any material way.
.
Urban areas won't see demand drop off for a very long time. Currently at 20 mpg a trip of 5 miles costs 90 cents so it isn't exactly priced like caviar.
Perhaps some political economy would help explain the demand destruction (or lack thereof)... see Hirschman in "Exit, Voice, and Loyalty" where he says “The reason for which humans have failed to develop a finely built social process assuring continuity and steady quality in leadership is probably that they did not have to. Most human societies are marked by the existence of a surplus above subsistence. The counterpart of this surplus is society’s ability to take considerable deterioration in its stride.”
I keep wondering if we've got a bit of receding horizons here, too. Even when times were better every year's county budget included bus route cuts and fare increases. Now, even more. Maybe someday we'll conclude that rising fuel prices mean we need more public transit, rather than that we need to save money by cutting it. Maybe not. Ridership in my city is in fact down in the face of increased fuel prices, almost inevitably given that there are fewer buses to ride even if you want to.
Jad Mouawad of the NY Times is also wondering...
Even Amid High Oil Prices, Troubling Signs in Production
Wow, that was actually worth reading. No new ground for TOD types, but much better than the stuff Mouawad has been writing. I wonder if he's coming around or if the editors are letting him sneak in some realism?
It looks like Americans will stop driving after they pry their cold dead fingers off the steering wheel. (I remember something like that from some other issue) Starbucks sales are in the "tank", Walmart says sales of canned spaghetti are up. Domino's says pizza sales are down. Choices are being made, but not driving still has a low priority.
Well, we should wait untill production start decreasing to see agregate demand destruction. Remember "supply = demand" in the sense that they are two names for the exact same thing.
Production isn't declining, so agregate consuption isn't either. Of course, you can get anedontal evidence to the contrary, but for each person/country using less oil, there is another using more, and, since the ones going with less are mainly poor, they have little impact at the overall picture.
The possibility that the Bush Crime Family is meddling with the data shouldn't be dismissed out of hand, either.
The age of missing information. - By Steven Aftergood - Slate Magazine
On regulating fuel economy:
States (USA) have the authority to impose weight-adjusted registration fees on all vehicles to compensate for wear and tear on the roads. So, higher fees for heavier cars to eliminate road maintenance "subsidy" for heavy cars.
On driving behavior and fuel economy:
I agree that any driver can achieve 10-25 percent improvement in fuel economy by changing driving habits: keep to 55 mph on highway and accelerate slowly from stops. I drive a Prius so I get instant feedback on my driving behavior. It would be an improvement if all new cars were required to display instantaneous fuel economy in an easy to understand display.
Economics is a science of law and demand. Generally demand will fall as prices rise, or in the case of the United States gasoline market, demand growth has slowed.
In Japan demand has shrunk:
United States Energy Information Agency (Country Analysis Briefs)
Yes, oil consumption is going down here in Japan, mostly because the population is decreasing, due to the low birthrate (about 1.3, used to be 1.2!). We have an aging society and some suburbs of Tokyo are now known as "ghost towns" with no one to be seen on the streets, the aged are closeted in their apartments, no one else lives there. Schools (at every level) are being closed and consolidated everywhere.
BUT if you go into Tokyo it's JUST PACKED still, you can't ever get a seat on the popular Yamanote line during rush hour, so no worries!!
However, about the important topic of demand destruction, does anyone out there have any idea how this concept will relate to Tainter's theory, where energy consumption supports complexity in a society? That is, if demand destruction occurs, will complexity also be reduced or shed, and if so, how and starting where??? The top? The bottom? I imaging complexity as a very desirable thing that societies mostly value highly, and the people with the most "complex" jobs also usually have high education, high status, and high pay, in general, not always of course. So when the complexity is shed, how do these complex jobs fare? (I'm talking about highly paid lawyers, surgeons, executives, professors, chefs, designers, etc. )
At the bottom level, it's easy to see that the poor suffer first and most directly as their incomes are eaten up by energy costs. But what happens after that? What happens to a person working at the highest level of complexity I guess in his or her field........How does complexity fare as demand destruction takes hold?
Recently an article in the Oil & Gas Journal cited a Deutsche Bank study, which took a different look at "inflation adjusted" oil prices:
Maybe this gives us a more realistic idea when oil prices will really start to hurt the economy.
Global demand destruction
I am not too sure about US demand destruction just as the author indicates, but on a global scale, I have wondered about the fact that oil production has remained relatively flat for the past few years and yet for a number of countries oil consumption has grown.
The only conclusion that I can come to and which has been reported here, is that in many of the undeveloped countries in the world, the increase in the price of oil has hit them very hard and it is they who have seen the greatest demand destruction and it is only because of that, that growth in oil usage has been able to occur in other parts of the world.
When you look at the list of countries using between say 20,00 and 100,000 barrels per day, I get around 29 countries and their totals give 2.4m b/d. But even say they were all using 10% less, that gives about 240,000 b/d. Since these are some of the poorest countries, we are less likely to hear of their problems and they are also the most likely to be on the front line of demand destruction, because hard currency is usually a big problem for these places.
I guess one could call it the "poor countries suffer more model".
And based on this reasoning, the plateau will largely unaffect the developed countries, until these bottom rung of countries have basically cut back as far as they can and or reductions in these countries trigger a new round of global effects. What I am thinking of here, is the production (+ harvesting + transport) and export some key commodities or minerals used by the rest of us, but shortages of fuel or other chronic problems caused by shortages of fuel elsewhere in these countries causes widescale problems. Rather like the recent coal crisis in South Africa.
Here's a link to some oil consumption by countries figures.
http://www.nationmaster.com/graph/ene_oil_con-energy-oil-consumption
Gidday from Melbourne, Oz.
I'm a simple kind of guy, average IQ and all that. Most people are, I should think. 17 years married, three kids, mortgage. Ho, hum... Until every newspaper runs the headline, "The World Is Running Out Of Oil", it will be business as usual for the vast majority. Road chaos - aided by under-developed public transport - will continue indefinately as we all SIMPLY work longer, or do without stuff to pay for fuel.
The options? From what I've been reading these last few months, there really don't seem to be any just yet, let alone around the corner. A $40,000(AUS) Hybrid versus $40,000 maintaining and feeding the current guzzler? Solar-charged electric scooters (even if they were government "gifts" and bikes-only time zones were created)? It's gone from summer to damn chilly in a mere few days. Water-to-hydrogen? If The Terminator can't make it work...
Frankly, there's only one thing this little Average Joe can do... Pray you TODsters are all barking mad! (which may be difficult as the idea we're running out of liquid fuel seems a whole lot more believable than a few of the other mainstream concepts - religion, top of the list).
Thanks again for your site. (I scan through every few weeks, more a curiosity - even starting to pick out the regulars. Do you guys sleep well at night, knowing things may get a little dodgy in the next ten years? Or are you all hopeful?)
G'dday there Average Joe mate,
Here on the North American side of the lemming digs, I pretend by day that I am an average lemming and I try to go along with the herd in order to get along. Like the rest of them, I keep burrowing like mad in hopes of obtaining a hollow form of prosperity. Of course it drives me mad to know I am just an average lemming and that soon the crazed dash for the cliffs will begin. But one can't speak of that in polite society. You'll be ostracized and lose your job. So I keep my mouth shut and my nose to the grindstone.
TOD is a form of temporary night therapy. It lets me know I'm not the only one with these crazy schizophrenic thoughts that our society is not on "the right track" and that our choo choo train is somehow blindly chugging towards the edge.
But you're right. There's not much a single average Joe can do.
You can make noises. Talk to your friends. Drop some hints about the situation, but not too overtly. Your fellow lemmings don't like to be lectured to. They want to think they came up with the idea all by themselves. So you might say something, like, Gee I wonder if the rise in gasoline prices will ever stop? I wonder if there is something the government isn't telling us? And stop right there. Saying too much is too much. You plant a seed and walk away.
The elites in society already know all about Peak Oil. Why do you think George Bush and Dick Cheney (American President and Vice) invaded Iraq? Because they loves their freedoms?
It's just a matter of how to psychologically control the sheeple and bring them into conformance with the new world order. Convince them that some evil enemy did it to us and that it's time for the cavalry to charge towards the cliffs. Only unpatriotic lemmings cut and run. Good lemmings plunge forward for sake of God, honor and country. What kind of lemming are you? :-)
Looking at reduced driving/petrol consumption as the only indicator of demand destruction (even within the US) is probably not going to work in the short term
From this website http://www.eia.doe.gov/neic/quickfacts/quickoil.html - the US consumes about 390 million gallons of petrol/day. At 28 gallons of petrol/barrel of crude that amounts to 13 million barrels of crude oil equivalent- about 65% of the crude oil consumed by the USA (20mbpd).
The US overall imported about $3 trillion of goods in 2007 - assuming a US crude oil usage rate for GDP- this would be in the range of 4-5 mbpd/day.
The US gasoline consumption is thus responsible for probably 50% of US crude oil consumption. It's the other 50% that will likely give in before gasoline for some reasons given below.
a. The US uses twice as much oil/$GDP as does the UK, Japan and Germany. There are probably some structural reasons for doing so and probably some wasteful reasons - some waste will also go out before lifestyles and driving get hit.
b. Given that oil is pretty much in everything that we consume - Starbucks Coffee, a pizza, a new car, imports from China and the ROW; any drop in these is also demand destruction. These are probably what you need to watch out for rather than gasoline consumption per se. Some anecdotal evidence is in with Starbucks' reducing its outlook, people eating out less and so on.
c. Gasoline is still cheap in the US. India with a per-capita income of about $1000/year has petrol prices equivalent to $5/gallon. For a family in the US - say with a household income of $50000 (42% of US households are above this) and driving a combined mileage of say 20000 ("non-discretionary") miles a year @20mpg - gasoline bills will be $3600/year. That is less than 10% of their household income. Remember the $50000 probably won't happen if they dont drive. So this is probably the last thing that will go out of the system.
In the long run, when people reduce purchases of discretionary items, unemployment will go up and then more demand destruction will take place in gasoline as more people will be forced to give up driving their cars
Srivathsa
THE DESTRUCTION HAS JUST GOTTEN STARTED
Even though the population of the USA has increased and, even though, ethanol has dropped mpgs, the quantity of gasoline purchased has been flat since 2005. If there had been no price increase, consumption would have increased several percentage points. This is a typical change. The first event in a slowdown is a reduction in the rate of change. It takes a major attitude shift to produce an actual decline. Like the current "recession", that really has not happened yet. So far the GDP has not declined, so technically we are not in a recession but no one would deny that there has been a slow down (data out tomorrow may upset the apple cart).
GM just announced the closing of another truck/suv plant. This means GM will have 150,000 fewer big vehicles for sale. GM held on to this production for a long time after the demand for these vehicles fell. At first, the company reduced its profit margins to keep moving the vehicles out the door. The sales price of these vehicles had to fall a long way to make them losers relative to variable production cost, so it took a lot to convince the company to give up on the sunk costs.
Today, when a new customer walks onto a car lot, the salesman's job is to "sell the customer up". Selling up in size has become very tough. The current supply glut of the biggest SUV's is being discounted heavily but, the sale is still a tough one to make.
On the flip side, the smallest of the "new" cars have hardly made a dent in US sales because the total production is still a relatively small number. Indeed, the super small smartfortwo was only approved for sale in the USA in recent months (there is a waiting list). Consider how different the possibilities will be in another couple of years. Right now, it is nearly impossible to buy a smartfort or any other super small vehicle in the US and the dealers still have an abundance of super sized SUV's. In a couple of years, the US consumer will have the choice of going super small, all electric or hybrid.
Auto and light truck sales are posted somewhere on the Wall Street Journal site. The data show that car sales have exceeded light truck sales in the USA for the first time in many years; yet one more piece of evidence that demand destruction has started. In the auto sales category, as I recall, the only increase in sales this year has been in the sub-compact, compact and hybrid categories.
Since the average vehicle in the USA stays on the road close to 17 years, a 100% change over would only result in a 5.9% per year switch. The portion of the 5.9% who will make a significant change will increase dramatically if gasoline stays at or near current prices, especially after more "small" options become available.
The one year effect of replacing 16 mpg trucks with 35 mpg cars is no big deal but the cumulative effect is like the energizer bunny. A 100% fuel economy improvement in half of one years sales represents only a 1.5% decline in the total consumption, but 17 years of saving half leads to a very large total savings. If the doomsters are correct, in another year or so, the demand will be very strong for the VW UP style vehicle. Some of those who buy 35 mpg vehicles in 2008 will trade them in to get 95 mpg vehicles in 2010.
So, with current technology, it is possible that half the vehicles in the US will be replaced with vehicles with a 600% increase in fuel economy. Since the UP is not a hybrid, the potential is even much greater. The demand for fuel is inelastic in the short run but elastic in the long run.
There is already strong demand for smaller more efficient cars. My wife and I were just shopping for a replacement for hers 10 year old buick. I was leaning toward a Honda Fit, my wife toward a Smartcar. The Honda dealer didn't have a fit on the lot. Not even one to look at. The Smartcar dealer had around 40 people milling around looking and a 2 hour queue for test drives. I saw 4 of them sold while I was there and I now have one in my driveway.
They first wave of demand destruction in the US is going to come from more efficient vehicles. It can't happen over night because the auto makers made bad decisions 2-3 years ago so there aren't that many to buy. I think the auto makers have noticed the problem but it will be another year or two before the results show up in the show room.
Drillo, thank you for the information from the O&G Journal.
kjmclark, likewise, thank you for the link to the excellent graph from the NY Times.
This situation is so complex--there are so many variables and so many unknowns--that I am left wondering if comparisons to the 1980's are helpful or not.
But your information does illustrate two things:
1) Demand destruction is possible if price reaches a certain threshold, and
2) We are rapidly approaching the real oil prices that led to demand destruction in the 1980's, but we still are not yet there.
From a purist pov, demand cannot be destroyed; nobody can known what ‘real’ demand is (theoretically, infinite or nil), or how it might be affected by anything. All one can see is what ppl did pay, buy, use, destroy, as is discussed in the head post. That ppl buy more energy efficient cars is not, in itself, a sign of demand destruction (as I understand it), it is a reaction to high prices for one commodity, an attempt to minimize oil costs with better choices of machines, life style, etc. See posts on heroin and unemployment..
Movement on the demand curve (econon 101) is not useful here; in any case the notion holds too many things constant.
A Google on demand destruction shows, on the first 3 pages, links that refer to oil specifically or to other energy. Except: one article on nickel (which includes ‘curve’ in the title), one entry for and about lawyers, and one wacky blurb about? banking?
What is the point I am trying to make? Hum.
Something like: oil (+ other energy) is the real currency and what is used to pay for it is funny money or not tallied properly. Taxation, war, control of the Gulf, Ben Bernanke and bail outs, etc. muddy the issue so thoroughly that econon. 101 notions like ‘demand’ are best formulated more simply in the energy area.
Oil is not lemon yoghurt.
I'd like to point out that the current prices for gasoline are being manipulated downward. As recently as a year to a year and a half ago, oil was around $60. The price of gasoline at that time was running $3.25-3.50. We are now at $120 a barrel. Where should the price of gasoline be? There are some fixed costs that don't go up with market price, but surely we should be at a price higher than $3.75-4.00.
It's an election year, plain and simple. If gas were at $6.00-7.00, THE campaign issue would be the price of gas. The powers that be do not want the whole issue of Peak Oil and high gas prices to move into the main stream and become the main talking point for the coming election.
Gas was high for a while due to a shortage of refining capacity. This gave good margins to the refiners. These margins have been collapsing as the price of oil went up which buffered the price of gas from the price of oil. Those fat margins have now been consummed so oil price increases are now reflected at the pump.
Remember that demand will always match supply, with a little slop due to inventory build/withdrawal.
Thus, if supply is up 1%, then demand will be up 1%. If supply is down 2%, then demand will be down 2%.
Within that overall context, there may be some shifting of use. If use in developing Asia increases, then of course use somewhere else will fall, if overall use is flat (as it roughly is today).
Good point--a few comments have focused on this issue, and I'd like to address what I see as the relevance of demand destruction specifically in America. While global demand will continue (with slight adjustments for inventory as you noted) to match the total global production, I think that the inelasticity of US gasoline demand (in isolation from global demand) is highly significant. The more that the US is willing to bid-up the price it pays for crude oil to maintain its current rates of consumption, the more that other nations will be out-bid for the limited supply. This has two (related) impacts. First, if we bid the price up high enough, an increasing proportion of global agricultural land, water, and labor capacity will transition to providing biofuels. It doesn't matter how inefficient they are, if the price is bid high enough, the energy inputs required can be provided by human labor. This is already happening, but it will continue to exacerbate tight global food markets. Second, inelasticity of demand in the US will continue to force a more aggressive (and, as I've argued elsewhere, mercantilistic) foreign policy to secure preferential access to oil supplies.
Bottom line: declining global oil production will create peripheral geopolitical problems in direct relation to the degree that demand inelasticity in rich countries (such as the US) continues to exceed demand inelasticity in poorer countries. Basically, if they see "us" refusing to give up the Escalade, forcing "them" to give up lunch, there will be continuing and increasing geopolitical problems spawned by and impacting oil production decline.
Well, the EIA's status report for the week ending April 25th states:
"Over the last four weeks, motor gasoline demand has averaged nearly 9.3
million barrels per day, up by 0.4 percent from the same period last year.
Distillate fuel demand has averaged about 4.3 million barrels per day over the
last four weeks, up 0.7 percent from the same period last year."
Still no demand destruction according to this set of data. Who knows what their actual data tables will say--they conflicted with the status report last week...