Demand destruction isn't working out so well

When you start to look at the financial implications of high oil and gasoline prices on the individual consumer, it becomes obvious that there are many subtle factors contributing to the problem. Because they're so subtle, consumers may not realize for a while what a bind they're in.

For example, peakguy notes on Peak Oil NYC today that the reason that people—and the economy—seem to be putting up with $3/gal gas is because they don't have another choice. As the Slate article that peakguy refers to argues: "The rule of thumb in economics is that people react to price increases only when they can turn to substitutes...people can't change the type of fuel they put in their cars, and they can't stop going to work."

If people can't stop using gas, what happens? Well, they charge it on their credit cards, of course. But this AP article reports that as a result of this credit card activity, Americans have fallen behind on their ability to pay off their credit cards. (In fact, this topic seems popular in the news today.)

"The rise in gas prices is really stretching budgets to the breaking point for some people," the [American Bankers] association's chief economist, Jim Chessen, said in an interview. "Gas prices are taking huge chunks out of wallets, leaving some individuals with little left to meet their financial obligations."

Couple this with some other problems we've seen lately in the financial realm, and we should be scared. Remember the talk about the relationship between the new bankruptcy regulations and the Katrina (and Rita) evacuees? Well, now Rep. Sensenbrenner, who's the chair of the Judiciary Committee, has said that he will not hold hearings to determine whether the new, strict regulations should be waived for those affected by Katrina. This, despite the fact that these people are already running into just the kinds of problems you might expect:
Katrina survivors are already starting to run up huge debts on their credit cards as they struggle to find new jobs, new homes, and new lives. Although many banks and credit card companies have offered leniency on payments and loans in the short term, the long-term effects of their displacement and loss of finances may put them hopelessly in debt.

Also, in case you missed it the other day, Spooky left the following scary story in a comment:
Fractional banking now retains just .08 of each dollar in their central vaults. I recently tried to get $5000 from my bank. I was told I would have to "place an order" for that much cash.... credit and lending is not just out of control, it is the only game in town, and every single bank in the world is built of nothing but debt.

This, of course, prompted more discussion as to whether we should all be buying gold or not.

As if this doesn't seem scary enough, I'll leave you with one last thought. The Reserve Bank of Australia is warning of an impending global financial meltdown. Their analysis is based primarily on the unrealistic housing market in many countries, but also says that the financial situation is exacerbated by increased oil prices and growing personal debt. While I can't necessarily assess the validity of this article, it seems to me that even the other subtle signs—when all of them are added up—should be making us all pretty edgy right now.

Of course there are no reasonable short-term substitutes for the overwhelming majority of gasoline consumption--that's why the demand for gasoline is price inelastic.  We sure as heck don't keep buying it because we like the lovely smell of petroleum.

The bottom line is that absent national leadership or any major effort at educating people about the realities of our energy situation in the post-Carter period, the only thing that will make people use less gasoline is higher prices.  We're at that sorry point now--we ran full-speed into the wall, and it hurts.

In the very short run people will conserve a little on gasoline by batching errands, driving a little slower, avoiding some trips, etc.  Those who were planning to (or had to) buy a new vehicle now are very likely shopping for something more efficient.  Expect to see some amazing results in the first week in Oct. when the Sept. car sales figures are released.

In the longer run people will begin to adapt and minimize the impact of high gasoline costs.  Collectively they'll continue to downsize vehicles, lean more towards diesel models, get smarter about how and when they drive, etc.  It will lessen the pain, but it certainly won't eliminate it.

What concerns me is the triple impact of increased gasoline, winter heating costs (heating oil and NG), and electricity (NG).  We've only seen the impact of the first one so far.

By the way: In the spring, the US car market will have three interesting new options: the Toyota Yaris (replacement for the Echo), the Honda Fit, and a Nissan that's sold as the Tiida [sp?] in other markets.  All are small 3- or 5-door, $12K to $14K, non-hybrid gasoline engine vehicles that should get above 40MPG highway.  Expect this to become a very hot market segment.

In the longer run people will begin to adapt and minimize the impact of high gasoline costs.  Collectively they'll continue to downsize vehicles, lean more towards diesel models, get smarter about how and when they drive, etc.

I'm desperately hoping that as part of this process, people start demanding (and moving to) mixed-use communities where you don't need cars to buy groceries, go to the post office, or run other errands. If we demand them, undoubtedly developers will start to build them.


Only our psychology prevents us from taking better advantage of this practically free, immediately available, productivity enhancing method of demand destruction.

People who use and like telecommuting will ask, more and more, to be able to use it as fuel prices increase.  We need to make sure that public policy encourages their managers to allow them to use it liberally, at least until managers understand the benefits and learn to get over their personal antipathy.

"Of course there are no reasonable short-term substitutes for the overwhelming majority of gasoline consumption."

  1. For the short-term post-hurricane crunch, we only need to work on the margins, to reduce the last few percentage points of consumption.

  2. It depends on expectations, what the gas user perceives as reasonable. This is a problem of value trade-offs: is the utility (did I actually use that word?) I gain from saving gas worth the investment, time, stress, hassle it requires? What Americans may see as unreasonable (less heat and air conditioning, smaller cars, more diesels, more public transport) is standard everyday practice in Europe.

There are some non-draconian options to shave a few percentage points of consumption immediately. The IEA signatories have a treaty obligation to produce an immediate 7% decrease in oil consumption if a large supply disruption occurs. Their IEA worldwide draft plan is available as a PDF:

Some of these are almost embarrassingly simple. A public information campaign to encourage adequate tire pressure would save over 100,000 barrels per day worldwide. That's 36 million barrels a year of pure, unmitigated waste. I know that's not a lot now, but I'll bet we'll wish we had those 36 million barrels at some point in the future.

There is a story making the blog rounds about people turning in $40,000 SUVs and picking up $15,000 Corollas.  I commented on my blog that this could be a gas thing, or part of a wider economic tipping point.  I know people who I (conservatively) think shouldn't be driving big SUVs.  It may be that the combination of higher gas prices and lower consumer confidence  encourages them to get their house in order.  Or at least the smart ones.

It would be cool if driving smaller cars became a little more acceptable, and if the middle aged guy showing up in a Yaris, Fit, or Tiida, was seen as partiotic/sensible rather than poor/cheap.  We'll see.

And small diesels are still essentially illegal in California.

Here's your article, odograph:

Smaller Cars Enjoy New Chic

Here's my data point on that subject.  Earlier this summer I traded in a BMW 540i/6 (big V8, 6-speed stick) for a 2001 VW Jetta TDI.

The reasons were purely fuel type and efficiency.  I get twice the mileage I did on my Bimmer, and the day I took delivery of the VW the first biodiesel pump opened up in my city.  I've been running it on B20 ever since, and I'm about to brew my first batch of home-made biodiesel.

My decision came about a month after I "got" the concept of Peak Oil.  It took me a month to get over my initial doomsday heebie-jeebies and ask myself what I, personally, could do about it.  The first thing that came to mind was, "Dump that damn ego-mobile."

Interesting story.  I dumped my "EgoMobile" as well, a BMW 740iL.  What a waste.  And anyone who tells you that a BMW is a good machine is either (a) luckier than me or (b) lying.  That machine had more problems.  Funny, when I traded it in, with about 60,000 miles or so, the guy said "Good to trade in now, these engines have a tendency to blow at mileage above this."  Friend with a 540 had his blow just around this time.

I bought a Prius and then, after my wife decided she wanted to drive it, bought myself a Honda Insight.

An aside:  When people consider the whole issue of demand destruction, I think their thinking is so tightly constrained by the "mind manacles" of the existing socioeconomic structure, they're unable to even consider how we might work our way out of this conundrum in a way minimizes the pain and suffering.  Hence my diatribes against the constant hand wrining and whining.

What is an automobile?  What is transportation?  What sorts of convenience has it brought us?  And what kinds of inconveniences?  The automobile itself is an result of government interference, isn't it?  Would a pay-as-you-go highway system have produced the excesses that we see everday?  I live in San Diego.  Right now they are spending millions and probably billions to widen the 805/5 merge.  At the meeting point: a megahighway.  Good timing folks!!!!!

I suspect a good part of the energy used in the US is in fact used to purchase convenience.  And little more.  The convenience of not having to turn out the lights.  The convenience of not having to consider energy when purchasing a car.  The conveninence of untold random trips in that automobile to transport 100-200 pounds of flesh in a container of thousands of pounds of metal and plastic, from 0-60 in a handful of seconds.

What nonsense.

Alright, TRE, I'm starting to think that our approach to this topic is not so different after all. We disagree on economics, fine. Let's not dwell on that.

Regarding demand destruction, I don't really understand what peeves you about it, but in any case, I don't think I said anything that should have bothered you too much. Are you talking about the topic in general, or something I said specifically?

I'm sure I've said this a billion times already, but I live in New York City! I do happen to own a car, but I drive it maybe 10 times a year, and only to get out of NYC. We'll probably get rid of it soon. I also suspect that a lot of energy use is about convenience, but that also has to do with the type of environments we prefer in the US. Suburbs, exurbs, residential-only zoning. It doesn't have to be that way. In fact, it could be that the urban landscape is designed to make walking and biking maximally convenient. And they wouldn't have to be megacities like New York--they could be more like Kunstler's Saratoga Springs.

Obviously this is a massive problem, since changing the urban landscape would involve repurposing or destroying a lot of current structures. But there weren't always suburbs in America, and they don't always have to be here. Those who follow this type of thinking just have to come up with a PR campaign designed to encourage people to think that mixed use development is desirable rather than something to be avoided at all costs.

Ianqui, do you know about car sharing? Zipcar serves NYC and could prove cheaper than owning a car for occasional trips out of town.
Yes, I know, which is one of the reasons we'll probably get rid of it soon. It's mostly been about inertia up until now, but we're making plans for transitioning to car-free.
Our opinions probably aren't that different.  Sometimes, no doubt, I'm acting too much the gadfly (jerk might be a better word :-))  All of the editors and most of the posters here at OilDrum are great. Personally, I'm just not that interested in diving into the details of depletion modeling like Stuart (I should, but don't have the focus right now).  But given the great amount of work going on, both here, and at other sites (econbrowser, Peak Energy, etc) I tend to focus more on negative contributions--what I find wrong or adding a voice of caveat emptor--rather than actually contributing something.  I realize that is somewhat self-serving and a bit cynical--or negative.  JD, if I might be so bold, is also coming at this issue from a similar perspective to mine, though I think he's a bit more enamored or convinced that humans can technologize their way out of this conundrum.  (He's also contributing more in-depth analysis in many cases).

I'm not so convinced that we can technologize our way out.  And that's coming from some with physics and engineering degrees, twenty years in high technology companies (some of the best if I don't say so myself--BBN and QUALCOMM), and an appreciation for the limits to limits, e.g. the thinking at the turn of the twentieth century that the future of physics was the fifth digit (all was known).  Then the world changed (quantum, relativity, etc).  Nanotechnology to improve solar, for example, a fusion miracle might happen (I doubt it).  I think John Horgan's book "The End of Science" should be on the required reading list for all peak oilers with a scientific bent.  Peak oil is about people accepting and learning to live within limits.  For a society indoctrinated to think that there are no limits (in particular those who came of age in the Reagan years and beyond), this will be hard to accept.

I completely agree with you. And that comes from a physicist, too :-)
I met another Prius owner (I have one) at a party.  He mentioned that his BMW (IIRC a 745) had been sitting in the garage, and he is happy with his little Prius.

My Honda S2000 is sitting in my garage and doesn't move much ...

I just bought a Corolla myself, in March.  I was driving a Ford Taurus.

I was actually considering going car-free.  I live only 2 miles from work - walking distance.  Maybe getting an electric bike for grocery shopping.  

But I finally decided that it's just not safe to walk or bike around here in winter.  I chose a Corolla because it's cheap, fuel-efficient, and reliable.  I figure it's the last car I will ever buy.  If the gas stations go dry in two years, at least I won't have wasted a lot of money on it.  If the cornucopians are right, and we're all still driving in 20 years, I figure I will still be driving this Corolla.

I've been walking instead of bicycling lately.  We already own the last two gasoline-powered cars we will ever buy, a Regal 27 mpg and Elantra 34 mpg, both ten years old.  I'd love to buy an enclosed electric vehicle for the winter, but there are almost no choices.  
I like walking.  There's even sidewalk some of the way.  And it's good exercise.

But in winter, it's often not possible.  The sidewalks and shoulders are under 5' plow drifts.  Huge SUVs are skidding all over the road.  And forget about trying to walk or bike anywhere at night. You're asking to be hit by a car, or mugged.  

Maybe when people realize what a bind they are in they will stop driving an SUV, they will not sit in an idle car to listen to the radio, they when not move to the 'burbs so that they can have a larger home, they will not heat and cool their lager homes as much, they will consider car pooling, they might even consider mass transportation. You always have a choice, and that is what will reduce demand. What we have seen is that the demand for gas/oil is much less inelastic than we had thought a year or so ago. This has nothing to do with how much oil is in the ground, but only shows that the price is not too high for much of a habit change to occur
Right, but these changes take time.  If they and millions of others have blown their credit, and they still owe $20,000 on that SUV, nobody is going to give them a car loan to buy a replacement.  Likewise, if they and millions of others are having trouble making payments on their $800,000 mortgage for a McMansion that is now worth $350,000, no one is going to issue them a mortgage for a smaller house closer to their job.  In fact, they might have trouble finding a landlord who will rent to them with that kind of credit record.
The current economic expansion is fueled entirely by debt and investors' confidence that those debts can be serviced.  The degree of leveraging in the economy and its vulnerability to a solvency crisis is well known among major market players.

This is what Australia's central bank means when they say

[CITE]"The preconditions are in place for quite abrupt swings in sentiment and a disruptive snap-back in pricing"[/CITE]

That is, as signs of trouble mount, investors' will rush for the exits, leading to a fairly rapid crash in the most leveraged markets, including asset markets (stocks, speculative real estate) and derivatives.

What is not clear is what safe haven these investors will rush to.  Will they rush to cash, perhaps to solid non-dollar currencies?  Or will they rush to gold and silver?

I gather that a couple of things are going on here.  For one, credit card companies have increased the minimum payments - it used to be that it could take something like 30 years to pay off a credit card, and now it will be much more reasonable.

The second is that the bankruptcy bill will take effect soon, and that some people may be positioning themselves to file.

I don't know about the gasoline thing though.  I know that the cost to fill up has gone above what many people carry in their wallets, so charging it seems to be the way to solve it.  This impacts the station owners too, as the credit card fees come out of their bottom line.

Regarding the banking system, I know that a lot of other people have talked about issues like this.  Before Katrina, it seemed like we might be starting to get the deficit under control, but now the government is throwing money all over the place.

Seems to me, someone has said in this debate (last summer ?) that true demand destruction happens only with a depression or severe recession.
That would be me; if you look at petroleum usage over the past 20, 30 years, the only time demand actually shrunk was due to political reasons - the OPEC oil embargo.

A recession in business activity will reduce the growth of demand on petroleum, but not reverse it. Only a sustained recession - a very large drop in world wide GDP, over more tha a mere quarter or two - would put a halt to petroleum growth.

The sorts of recessions that we modern folk are used to will merely slow down petroleum year over year demand growth.

I hope we are beginning to see some reality come back into the discussion regarding the impact of high gas prices.  All those who have been marveling at how unaffected the consumer has been really needs to consider the fact that so many small transactions are now done by credit.  This acts like a capacitor.  When these expenses are inelastic, the only change that is felt for long periods of time is a gradual increase in the balance on the credit card.  Not so bad when that can be periodically wiped out by refinancing the house.  If and when that source of free money dries up the whole ponzi scheme crashes down.
Sorry, I have to disagree. This is a classic correlation of two events that are at most minimaly connected. Written with a preconceived viewpoint. Two data points taken together at this instant in time that are not historically compared for trends or proper analysis. In other words, bullshit.
I agree with oilman that all we may be seeing is correlation.  further, there is no indication in the figures given of what the historical standard error (S.E.)is to let us judge if the blip can be explained by random variation based on historical variation - is the S.E. greater than the difference between the two latest measures? - if so, we cannot draw any inference from this whatsoever.
I'm not trying to argue that there's any causation among any of these events. However, there are not 2 troubling financial events here (as Oilman says), but at least four: (1) rapidly increasing personal and credit card debt, (2) troubling new bankruptcy regulations which may have dire consequences for hundreds of thousands of people (hurricane 'refugees') who may need just that sort of protection right now, (3) banks that are not able to pay out "large sums" (not that $5000 should be such a large sum) to their customers, and (4) a housing bubble that could burst any day now. I didn't even mention the fact that (5) consumer confidence is lower than it's been since 1990.

Fine. Maybe this will all come to nothing, and we can go on buying just as we're expected to. But these certainly don't seem like good signs to me.

Another of the "top stories" of the day is dire forecasts for the California housing market.

Thornberg points to an almost doubling of homes on the market in the last six months, a flattening of sales activity and the increasing reliance on high-risk mortgages by buyers to acquire today's expensive homes. Property in California, he said, is now overvalued between 40% and 45%.

"The forecast for California is mediocre at best; at worst we are liable to dip into another recession," Thornberg said, putting the odds of a recession by the end of 2007 at "at least 50% if not more."

The American Bankers Association reported Wednesday that the percentage of credit card accounts 30 or more days past due climbed to an all-time high of 4.81 percent in the April-to-June period. It could grow in the months ahead, experts said.

The previous high of 4.76 percent came during the first three months of the year, in keeping with a generally steady rise over the past several years.

It is interesting that this is all pre-hurricane season.  In April-June prices were nearly a dollar less than when Katrina hit (here's a graph that is difficult to read precisely but which gives a good general feel of prices over the last year)

YES, I agree that this needs to be examined more closely before making such a broad assumption is valid.  Like so many new items, it is often assumed that the most obvious answer is the correct one.  In this case, energy prices have obviously climbed (and we've documented before that the percentage of folks paying for gasoline with credit cards has increased dramatically in the past couple years) so it is not unreasonable, to me, to think that IF people are paying more AND they are charging more often THEN higher credit card balances may be related to fuel prices.  Still lots and lots of wiggle room, though.

Speaking on a personal note, years ago I went through a period where I had a long commute (approx 100 miles total per day) and not-so-good paychecks, and my Texaco card was my best friend.  When the balance hit $500 I finally started paying it down.  And this was when gas was $1 or less / gallon.  I learned the trap of always charging gasoline when cash was needed for things like food and rent (my landlord did NOT accept credit cards).  

I said before in one of these many threads that it makes sense, from a consumer standpoint, to charge gasoline if you don't have the cash to pay for it.  On the one hand it is easy - pay at the pump (which we didn't have not that long ago) makes it simple to swipe and pump - it's almost like you aren't paying for it! (I can't be overdrawn - I still have checks left).  Also, if you are driving a Suburban or similar, with gas near $3 a gallon chances are you aren't going to carry enough cash in your pocket to fill a big tank.  If you have the cash, you may be in a neighborhood where you don't want to show off that you have a huge wad of cash.  Finally, when prices jump after a hurricane (or similar event), mentally it is easy to justify charging gasoline "this week" because prices have jumped and you haven't been paid yet, yada yada.  

I also noticed that the time period was earlier in the summer.  But part of what caught my eye was

The ABA started tracking delinquencies in 1973.

That doesn't answer the comment above about the standard error, etc, but does say something about the scope of the delinquency.

Maybe all the interest rate hikes and climbing gas prices are starting to catch up.

Despite the claims that there is nothing people can do to reduce their gasoline usage, that demand is essentially "inelastic", the figures out today show that gasoline demand has continued to maintain its post-Katrina lows:

Gasoline usage last week was lower than the previous year. Such a drop is almost unprecedented, at least as far back as that chart goes.

I don't think anyone's ever said it's perfectly inelastic, just fairly inelastic (ie the elasticity is a good deal less than 0.5).

The regional effects are pretty interesting here:

Most of the loss of stocks through the summer and most of the rebuilding now is happening on the east coast and the midwest. I could see the midwest being harder hit by high prices as the economy there is weaker than the coasts. But I don't have an explanation for why the East coast would have that pattern, or for why they should be the areas losing stocks through the summer.

I have a REALLY long commute to work, and just traded in my regular car for a Prius a few weeks ago.  One of those downturning green squares is me!

Generally, the average age of a car/truck on the road is 8-9 years, so every year, 11-12% of cars/trucks are being replaced.  I don't understand why everyone is saying that demand is "inelastic", just because most people can't reduce their gas consumption today.  If 1% of cars get replaced with new ones every month, it seems easy to decrease demand very quickly, even in 90% of the people do not change their behavior at all.

I'm getting heartburn from this post.  Yes, we live in a fiat monetary system, with a fractional reserve system.  But it appears someone is REALLY confused.  Money is not paper money.  Money is an accounting concept.  It is a number.  There is only so much paper money (or coin) in circulation.  This is not a fractional reserve issue, by and large.  It's a practical matter.  It is a waste of physical resources--read paper--to have a one-to-one correlation between money in circulation and hard currency.  I get the feeling the person quoted about this is very confused about this issue.  Banks do not carry that much paper currency because it would be stupid to do so. Most transactions are handled electronically.  The need for a large amount of cash, particularly unplanned, is often a good sign that something illegal is taking place, often as simple as the attempt to make a purchase without paying taxes.

So that's my first complaint.  Second, peak oil is a serious issue.  More whining and hand-wringing about the pain of demand destruction and how it will or will not happen, credit card debts, etc, is just plain boring, particularly when we've not seen nothing yet--when it comes to real increases in energy prices.

Tell you what:  You be scared.  I'll reserve that for more appropriate occasions.  Say living as a Jew in Nazi Germany.  Now that's a good time to be scared.

We've just lost a good part of a major american city, new orleans, yet the world didn't end yet.  Over at the paranoids and lemmings have probably filled up megabytes worth of meaningless posts analyzing it's pertinence to peak oil and their favorite end-of-the-world scenario.

Housing is overpriced.  Trade is imbalanced. Budgets are imbalanced.  If it's not oil, it will be something else to address these issues sooner or later.  Get over it.

'zactly. This site does seem ripe with consipracy mongers. Thank you for your breath of fresh air.
It's not really worth my time to try to explain myself even further to you guys, but let me just say that I'm the furthest thing from a conspiracy theorist that you could imagine.  

Conspiracy theory from Wikipedia:

Outside the realm of law, it is common for person(s) with some grievance to promote conspiracy theories--claims that some other group is involved in a conspiracy to promote some nefarious (and usually self-serving) end. Often times, the alleged conspirators are not identified with any specificity, and may include ethnic groups (i.e Jews), or socioeconomic classes (i.e. the rich). Many such theories are advanced with scant evidence (or none at all); in many cases what evidence is advanced is circumstantial in nature. In extreme cases, evidence contrary to the conspiracy theory is assumed to have been planted by the conspirators.

Did you see me trying to place blame for any of these financial points on a person or organization? No. My post points to none of the above signs of conspiracy.

If you don't think any of these are troubling signs about our economy, then fine. We're entitled to our disagreements.

But you're also entitled not to read TOD if you don't like what we have to say.

Please note that I never said anything about conspiracy theory.  I said that the quote posted about banks short of cash was nonsense.  And I'm right. The person quoted confuses a fractional reserve monetary system with the amount of physical cash maintained by a bank.  Different issues.  The amount of physical cash in circulation is also unrelated--in the most basic sense--with a fractional reserve monetary system.

Second, I said that the hand wringing about economic dislocation is--in many ways--independent of peak oil.  E.g. I'm a regular reader of Stephen Roach at Morgan Stanly. He's been pointing out the issues related to global imbalances for a while--actually a VERY LONG while.  They will reset, with our without the nudging of oil prices.  And that will cause economic hardship.  A given. Just as the squeezing of the American middle class causes hardship--and reliance on debt.


I was not addressing your post, but he Peak Oil forum in general. Which includes the Peak Oil web ring. There's a lot of emotion involved in this, definitely. But a lot of the comments (speaking in broad generalities) do tend in that direction.

I'll continue to contribute as an oilfield manufacturer. And I'll share with you and everyone else on this site my reality. And my opinion.

$10 a gallon? according to Matthew Simmons, we are!

talk about being crippled! tell me it isn't so!

Simmons said we could be at $10 a gallon this winter.

Don't worry Daniel Yergin will tell you everything's OK.  Look at today's open letter to Yergin on Energy, in which they note the first red flag as Yergin professing ignorance of the Hirsch report.  At Bartlett's Frederick conference, when Heinberg was complaining about the Hirsch report being ignored, I wanted raise my hand, say, "Ooh, Ooh, Ooh" and complain about that same interview.  

BTW, people are widely quoting a 71% increase, but I notice that natural gas is up from about $6 per MCF in June to near $15 per MCF.  My commodity charge in June, also $6.00 per MCF, was only about half the $12.20 per MCF I was billed.  I am wondering if all those delivery and piping charges will go up as well.  IOW, will the entire bill more than double or will only the commodity charges more than double?  

If Simmons proves right, I'll eat my words.  But I think his mouth has become a loose cannon of late.  Or perhaps for a while.  $200 oil in 2010?  $10 gas in winter?

I admit to not yet reading Twilight, and must do so, but my reading of his arguments all along is that we don't have enough data about Saudi Production capabilities.  And that we have supply chain bottlenecks that we do know about.  So he analyzed the data he could get--which is old and, if I understand correctly, very incomplete--and then surmized--and rightly so--from this limited data that the Saudis have problems.  But it's incomplete data.

So he's gone from supply chain problems and unknown production capabilities to "I know we will have $200 oil in 2010" and "I know we will have $10 gas in winter."

OK, he doesn't say I know.  He uses what I call weasel words. "Might" and "could" and other hypothetical modalities to give himself some slop if it doesn't prove true.

I don't believe $10 gas for a second.  Just doesn't seem right. Maybe $4 gas if things are bad.  $5 if really bad.

Floating the $10, unless he knows something, is irresponsible. It's idiotic to say "well, something bad could happen to make gas $10 a gallon."  I could say that at almost any time, e.g. in the last 20 years if someone had destroyed Saudi production capabilities, or US refining capabilities, we would have very expensive gas.

I often wonder whether the limelight of attention causes some of the peak oil folks to lose their good sense.  Suddenly they've found a "cause."  I'm not trying to be malicious here.  Or condescending.  The work these people are doing to raise consciousness is important.  I started out thinking extremely highly of Simmons as a voice of reason.  But I think some of his more recent comments are motivated by the effect they will achieve to wake up audiences, not by their truthfullness or likelihood.

I don't think $10/gallon is particularly extreme.  We had $6 in some areas right after Katrina.  

We have barely begun to assess the Rita damage.  It could be worse than Katrina:

nor do I, here in england diesel is £1 a litre,
4 litres to the gallon
1.8 dollars to the pound
= $7.2 a gallon

I buy 10 year old cars and run them on a diet of vegetable oil, nothing else and no there not converted, they run just fine.

someone said earlier their bmw was going to burn out at 60,000 that has to be built in design flaw to keep more cars selling

my peugot has done 180,000 and is still going strong.

veg oil is approx $2.80 a gallon, and ALL my friends are impressed with how much money I am saving.

veg oil is not the answer to the peak oil problem I know that, I am just pointing out that people do live with much higher gasoline prices, and they dont die...

USA Today reports that demand destruction is going strong:

Douglass says gasoline demand in his area has dropped 10% below last year's, starting in August. It's "a huge change" that he previously thought would take years.

Factoring out the few days of panic buying after Katrina, demand for gasoline has "been down 6% to 15%, depending on the store," says Jay Ricker, president of Rickers, a chain of 33 convenience-store stations in Indiana. "When we crossed the $3 threshold, that was a defining moment, getting people to think more about their driving."

I've read all the comments on this post and, unlike Mad Oilman, I don't see any signs of 'conspiracy mongering', so I'm not sure I even know what he's talking about.

What I do see are rational and intelligently expressed concerns about the extent and manner  in which the negative economic impact of high oil and gas prices will work its way through the economy.  The very term  'conspiracy mongering'' connotes a belief in a group of all powerful secret forces colluding to do evil upon the general public. I haven't read anything here to suggest that the various posters are of that mind set.

I don't think one has to be a conspiracy mongerer to believe that the current energy situation could be the straw that breaks the back of our debt-ridden, artificially stimulated economy.  Is there any doubt that if the current energy situation continue of the same track, we are going to i) worsen an already dangerous trade deficit, ii) increase the government's budget deficit, iii) push consumers to the limit of personal debt, and iv) seriously weaken many sectors of the economy as more and more money flows from them to the energy sector?

By the way, I think 'demand suppression' is a more accurate term than 'demand destruction' for what is going on. For example, if one scraps his SUV for a bicycle, that is true demand destruction; but if one forgoes that  sunday afternoon drive in the country, that in my view is better described as demand suppression. This is more than just  nit-picking semantics, for one is a more or less permanent measure, while the other is temporary. Demand suppression is not all that difficult (to a point), but true demand destruction will be quite painful and wrenching and will not occur overnight.

As expressed by others, a full-blown global economic meltdown would do wonders for demand destruction, but let's hope there are less painful ways.

Good point.  Demand suppression.  Demand destruction will occur when modes of transport change significantly, people start relocating.  The ugly stuff--or beautiful, if you think the current automobile culture stinks.  I do.
Tre -

You can kiss my gray haired bottom, sir.

That lovely tidbit about large cash withdrawals indicating illegal activities - I vomit in your general direction.

Something stinks when I need to fill out an order form to request my own cash from a bank because they do not keep enough on hand to give me fifty $100 bills. I do not believe it has anything to do with cash on hand, but that it is due to a very nosy and intrusive government.

People like you in control would soon have bathroom cams in operation in private residences - may your home be first.

It has to do with both.  The govt is trying to keep an eye on cash transactions.  Why not?  I don't think it fair that some people have to pay taxes on their well documented transactions and then others try to beat the system with cash transactions.  Second, I think you are wrong about cash on hand.  Or should I say:  the banks want to set expecations about cash on hand. If you've worked in any business setting which random requests can arrive, you--being of sound mind and good business sense--would have created an allocation scheme.  It's good business sense.

All of which has nothing to do with a fiat/fractional-reserve monetary system.

Another reason your point is total nonsense.  Consider a bank.  All branches. All that cash.  Not earning interest.  Doing nothing.  Just sitting there.  A risk--of robbery.  Not a positive.

You, my good vomitting man :-), have no business sense.  A bank will allocate cash to regions and then move it around on request.

Good day.

Now here is some Conspiracy Mongering. On some of the boards I frequent, we had all given our opinions about genralities that would preceed peak oil. High on allot of peoples list, would be a "peak oil" spokesperson who would rush in to fill the power vaccuum. Because we felt that as peak oil went from tin hat foil wearing status, to Wall Street Journal status, someone would have to step up to be the poster boy of "peak oil". Mike Ruppert was the standard bearer for the tin foil hat wearers, but he won't do for the mainstream of America. This is where Matthew Simmons comes in. He is respected, and is very well spoken(usually, he does tend to stutter a little to much).

But we all concluded that whomever this "mainstream" person would be, we all felt that it would be a sham. That this person would start making claims that would seem outlandish, and thereby discredit the "peak oil" movement.

I think $10 gasoline by 2006 is one of those types of claims. Like a previous poster said, unless Matt knows something we all don't, that is a boy crying wolf claim.. Expect allot more people to jump up and claim to be the standard bearers of peak oil. But beware the ones that get excepted by the mainstream, as this is almost certain to be a bought and paid for spokesperson for TPTB....

Robert NW Ohio

mabye its just me, but there seems to be a lot of people who seem to genuinly believe that hierarchial social structures work.

they dont

george w. bush

does not speak for america

does he?

He thinks Saudi production is likely to collapse soon. If that were true, gas probably would go to $10/gallon pretty quickly.
You may also want to consider one of this type of machine for short distance use.
They're not bad, but did you notice this:


The other two are limited to 30 MPH.  Again, not a real bad choice, but I wouldn't ride them in the winter.  Besides the stopping issues, I used to ride my moped and my motorbike in the winter, and got chilled to the bone.  On a bike, I'm working and don't get as cold.

On the z-20 there is this clarification

On the other models, the nice thing is that they are considered motorized cyckles, and hence do not need a license to ride, and I believe the vehicle registration is much less inexpensive also.

As someone who has been doing finance one way or another for 20 years, I am not worried about fractional reserve banking either. Nor am I worried about a catastrophic failure in the financial system.

Every time we have a banking crisis this is what happens: we drive the weakest and dumbest managements out of business, and we have the Fed provide lots of credit to everyone else.

In 1987 Greenspan provided liquidity and the stockmarket crash was halted. In 1989 we bailed out the FDIC and S&L depositors but jailed malefactors who ran crooked S&Ls like Vernon Savings of Texas and Centrust in Florida. In 1998 we allowed the prinicipals of Long Term Capital Management to lose their equity in the firm but made sure that LTCM's sins did not spread to the rest of the banking system. This is how the system works.

If we have a major epidemic of personal bankruptcies due to credit card problems after the hurricane, this is my guess of how it turns out: some relaxation of the terms of the new bankruptcy law, but an attempt to punish consumers who game the system or were outrageously imprudent, will also happen. Most banks will be okay but if a couple get in trouble because of really lax lending standards in their credit dard divisions, they will not be the ones to get bailed out. Alot of people will suffer some financial pain but life will go on. And yes, peak oil will be something that will continue to make all of our financial lives somewhat more difficult but that is a given too.


Consider this:  I think a lot of people read a bit on Collapse of Complex Societies, then think about how complex or just-in-time society is, and they put two and two together.  Peak oil could mean a disastrous collapse of society, a toppling of a precarious inverted pyramid. But to say that is, in many ways, to have so little faith in people, in anyone, to look at humans as little more than their basest tendencies.  That's why I bugged out of  Dominated by negativists--who then try to sell their negativism as somehow a positive.  "We show our love for humanity by demonstrating to you how pathetic they are and how they will soon be eating one another."  Or something like that.

Look at Katrina.  Some terrible problems. Some rumors.  All those deaths and rapes in the convention center.  Some truth.  The really really bad apples. But life is going on.

Here's my issue.  We've got hoards of people in the peak oil community who argue, using fiat money and entropy, that the end-of-the-world is nigh.  Financial cataclysm.  What cataclysm. How about the bank collapses in the 80/90s.  How about the housing crash--and it was a crash--in the early 90s.  Here in So Cal, it was a crash.  We watched housing prices drop, for the expensive homes, by $100,000s in months.  I just think people need to keep some perspective on all this.  Look at the last two hundred years of history.  Plagues.  Wars.  Financial collapse.  Depressions.  We got by.  We'll get by somehow.  It won't be pretty.  Some will suffer.  And unfortunately many will die.  You know what?  They already are.  Every second.  In Africa.  In Latin American slums.  In Indian slums.  And they have been.  Ever since all of us have been born.

None of this is new.  What is new is that the free energy ride is over.  But I have faith that we can deal with the calamity like we've dealt with others.  It's just that this one will go on, and on, and on.

I have read most of the posts here.  A thought.

As of yesterday 100% of oil production and 80% of NG production was off line in the Gulf.  About 25% of the entire U.S. refining capacity was off line.  Any way you want to look at it supply in the U.S. has cratered after Rita.

I know, we have reserves, and the rest of the world can help us some.  But, and this is a BIG BUT, the U.S. was very close to capacity 6 weeks ago before any hurricanes.  The sniff test right now is if you believe that demand can decrease between 10-20% in a 3 week period.  We now have to meet demand AND rebuild stocks with less supply capacity.

I find this difficult to believe.  Many co-workers (I don't work in any energy related field) have paid 0 attention to energy supplies and are not changing behavior at all.  Yes, enlightened people are doing things; but does it come close to reducing consumption by 10% nationally?

If not, we are going to have an economic crisis on our hands.  Too little energy, not enough growth.  Many people will want hard currency.  Not stocks, not equity, not line of credit.  They will want cold hard cash.  If the bank doesn't have it, word will spread and there will be a run on banks.  I believe this has happened in the past?!

Banks net value (branch or main bank) is based on cash plus book value of tangible assets like property, equipment, and debts owed.  If too much stuff loses value (property bubbles?) and too many people don't pay their debts (out of work?) the bank will be insolvent.  Those people who were solvent and employed all of a sudden can't get back ALL of their money.  The Fed only insures to a limit.  Those peoples net value just took a hit as well.  A dominoe effect could ramp up quickly.

I know that changes were put in place to prevent another great depression.  But many of these safeguards have been watered down in the last 2 decades.  Is there enough cushion and safeguards in our economic system right now to cope with high unemployement, high energy and food prices, and stagnant wages?  If not, than I posit that the financial institutions are no more safe now than they were in 1928.  Just because lending practices in the last 25 years has not got them overextended (because of constant growth)doesn't mean they won't be in the next 5 years (when growth will be very small or negative).

I am personal nervous about all the interconnectness (is that a word!) of everything today.  What happens in the Gulf region with energy will impact all regions.  What happens to the housing market in California will affect all regions.  What happens to the manufacturing sector in the midwest will affect all regions.  A run on cash at banks in Mississipi (because they need cash in devastated areas) could drain too much paper out of the system and affect other banks.  Only one of these components of the economy needs to go into decline to drag another down with it.

With respect, please re-read these posts. It has already been pointed out that money does not equal hard currency.

A bank's value is indeed based on what you say, which the lion's share being "debts owed." As explained above, some banks with particularly weak loan portfolios may fold. That's what happens in a downturn.

I can't see, however, why the FDIC is a problem. Sure, there is a limit, but that limit is $100,000 per account, and I don't think many folks have more than that in a single account. Moreover, the FDIC would most likely waive the limit, as they did (if I recall correctly) when Continental Illinois failed.

I suppose in some catastrophic die-off scenario the FDIC will go away. But in that event hard currency isn't worth anything either. Better buy gold! ;->

NC -

Well put!  

If a person dodges a bullet once, his confidence justifiably grows. But if a person dodges a bullet a dozen times,  then that person begins to truly believe that he is immune to bullets. Then when the next bullet comes...........

I too am very concerned about the interconnectedness of our global, 'just in time' fast-paced economic order. It is far too complex and sensitive to things we don't even realize are happening. (BTY, I have seen first hand several examples of how a just-in-time inventory system can bring production to a very expensive and catastrophic halt, a halt which costs many times more than any illusory savings from being 'just in time'. In my opinion, just-in-time is but another management buzzword, a blindly followed  article of faith that belongs in a Dilbert cartoon).

What we need is more 'damping', independence, and time-lag in our economy: something that can better absorb the peaks and valleys, a system that won't fall apart when that proverbial butterfly flaps its wings in Hong Kong.

One should not confuse efficiency with effectiveness. Many people think the two are synonymous, but they are two very different things. One can be very efficient at doing the  wrong thing.

I will grant one point on the cold hard cash issue.  If the financial system were to collapse (whatever that means), having cash on hand is preferrable to electronic digits on some computer somewhere.  And of course, that is the argument for gold as well.  Or any repository of value (e.g. land).

This is an extreme case argument.  But my point about cash above was specifically to address the idea that banks holding some cash reserves in each branch had something to do with anything other than trying to save a few bucks (and the feds wanting to keep track of cash transactions).

I agree with you that negativism and doom-casting does not get us to a better place and that "all" of humanity will not die-off.

However, we are all starting to sense that something is not quite right with the way our society is organized. The "machine" keeps driving itself toward the cliff even though knowledgeable members of society are shouting, "Stop, there is a cliff up ahead!"
We have to reorganize the "machine". It is programmed for self destruction.
How? I wish I knew.

Things have always been "not quite right" in one way or another, as we all learned when we took world history.

The way we re-organize the "machine" in a liberal democracy is to keep doing what we are doing now. Hammer the point home, again and again. Do it in a sober, responsible fashion. Discuss scenarios and make plans. Hope we reach the "tipping point" sooner rather than later.

While Zimbabwe 's multiple economic problems make it an atypical case, it is the first country to run almost completely out of oil. This, in turn, gives us a look at what will happen as the consequences of expensive and scarce oil spreads around the globe.

I forgot quotation marks.  That's a paragraph from the article.
It's true. But Zimbabwe is also a failed state in civil war without workable nongovernmental institutions, a bitter colonial and postcolonial history and racial divisions that make ours look like four part harmony. I'm not saying we are "better"than they, or that "it can't happen here" but I don't think it is the right comparison.
And in Germany people are "happily" paying about 6$ per gallon (converted from about 1.34 Euro/liter - you should know that we have big taxes on gas - which I find ok). I mean "happily" because I still can't see most of them driving less. So the article must be right somehow. And it should show you, that with Americas 3$ per gallon there is still some headroom. People will pay much more, even if it will hit them hard economically.
But how far must Germans drive?
Depends on. And it is not an easily answerable question (well one would nee comparable statistics to be correct). But I could try. Shure in germany we don't have the distances like in the US. Citys and suburbs are much mor denesely packed. So a normal daily commute would be around 10-30-40 Km's. But there are also many who driv 100 km's on a daily basis. Then germany has a very dense highway network where in many places there are NO SPEEDLIMITS. So if possible, many drive as fast as they can (170-200 km/h are not uncommon). On the other hand  transport traffic is getting denser by the day. Often one lane at the highway is completely filled up with trucks which often try to take over each other --> resulting in traffic slow down. But all in all we could say, that there is big trafic on the roads in germany. So yes, they use they cars much - still at 6$/gallon (and many other countrys in europe are at or way over 4$/gallon).
OK.  Here in Frederick, MD, I am told that 50% of the local workers drive in from Pennsylvania, and the PA towns are 90 to 120 km away.  A lot of the people that live here work in Gaithersburg, 40 km, Bethesda, 60 km, Washington DC or Baltimore MD, 80 km away.  I'm giving drawings tonight to a fellow that drives from Frederick to Towson MD every day, 85 km.  The fellow sitting next to me drives about 50 km because he can't afford the houses around here.  His wife works here and drives in separately after dropping off the toddler.  I've seen a few small changes in behavior , my bro-in-law now takes a bus to Bethesda, but I know a lot of folks that drive long commutes.  $6.00 a gallon will hurt.

BTW the founding partner has asked me to present a ten minute summary of the Bartlett conference to the main office at the next staff meeting.

Around here, day trips of 200+ miles (out and back in one day) are common.  Nobody bats an eyelash at driving 120 miles to catch a flight from another airport to save some $$ on airfare or avoid leaving 1/2 a day early just to connect in the same airport.

I could go on...

data on commutes:

On average Americans spend 100 hours a year, or 30 minutes for 200 working days, commuting.  I'd assume that the distribution of commute times is power-law with a huge pool that have very short commutes (home, walk, etc); and a small pool who have very outrageous commutes and account for a significant proportion of the total.

Not sure you can assume that. The range of choices available increases rapidly as commute time grows. Also, the physical landscape is not power-law organized, but rather in suburbs. I'd expect that commute time would be distributed around the time that causes pain: more like half an hour a day--rather than around zero minutes per day.


Well, that is exactly how I assumed it. In the US you have longer ways (the suburbia kind of problem). So this is a point where in Germany we have a small advantage.
But as far as I see, there would still be many-many people driving their cars if prices would double. I speak about 2.50 Euro/liter and upward (the 10-12$/gallon rang).Though this would be the kind of price which would begin to really hurt here. But I think that at this price the driving for leisure would go back drastically (in germany people love to drive everywhere for leisure - and then they go 100-200-500 and more km's). And on the other hand if we had your 3$/gallon prices tomorrow there would be immediate and endless "we love the emperor" celebrations (for those of you who played the game Civilization :-).
All in all I see tha in the US the 6$ price would really be a problem ... in other parts of the world it is already reality - but thanks to our "shorter" (not allways) distances it is bearable --> and it makes me happy every day when I drive to my work 17km's (one way) every day by bike ;-)
Let us see, 6$/gallon, half as long a commute, and DOUBLE fuel car efficiency, makes it equal to 1,5$/gallon in the USA!!!

I contend that in the USA people already have to pay a more expensive fuel bill than in Germany (and we don't take into account that the people who can't afford it CAN actually take the bus or train in Germany).

I can say that with an outsiders perspective, as I am form Spain, and only recently came to Germany. People do use and love their cars way too much in Germany. But most also understand the importance of using the train and bus, and even like it better than traffic jams.

The new MMS numbers are out for 09/29.

We moved some oil:

Only 98.59% is shut in now.  And only 60% of the platforms are evacuated.  Progress!  Maybe I can buy another Hummer now.

Re. matthew simmons and $10/gallon gas:

This is my first post.  I've been reading for many months and greatly appreciate the insights at TOD.  

I just wanted to toss out a quick note about Simmons talking about $10/gallon.  Simmons outlined why he thinks something like that could happen in a few of his recent interviews.  As many of you know, there has been some discussion about the fourth and first quarters seeing oil demand running in the neighborhood of 86 million barrels per day, when production could fall 2 million barrels per day short of that level of demand.  Simmons has been making the argument that price would serve as the rationing mechanism in such a situation.  For example, you can see him making this argument in his August 6, 2005 interview with Jim Pauplava.  Bear in mind that speculation about a 2 million barrel/day shortfall was discussed by many well before the hurricanes.



 MATT ... So we have actually now created a pending domestic embargo, and we're going to be lucky to get through the Summer without some periodic shortages. We probably will, but the odds are probably as high we will have some shortages, and then if we get through the Summer we have a fabulous respite from Labor Day to Thanksgiving, until we hunker to try to figure out how the world gets through the Winter of 2005 and 2006 because oil demand globally could easily go to 86-88 million bpd during the Winter, and that could easily exceed supply by 2-5 million bpd.[38:53]

JIM:   If that was to happen we would almost be looking at $75-80 oil, I suspect.

MATT:   No, no, no. Oil prices could easily go up 5-10 times.