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51 comments on Demand Destruction: Myths and Reality
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51 comments on Demand Destruction: Myths and Reality
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Memmel, you hit many of the points I had in mind:
• OECD uses / wastes most oil per capita and therefore has much scope to make painless savings.
• Oil producing countries and some poorer countries are not paying "OECD" market prices, so OECD is encouraged to conserve whilst many others are not.
One point you don't make which I think is maybe highly significant is;
• OECD exporting manufacturing capacity and petrochemicals industries to China and ME OPEC respectively and importing manufactured goods and chemical products, e.g. fertilizer. These are essentially energy imports that don't show on the stats we look at.
Would you care to elaborate on comments you made about fuel oil. Where the stats come from and what the uses are? I always believed that oil fired power generation got substituted by gas, coal and nuclear following the 70s oil shocks. I'm not sure how much fuel oil is used for domestic heating and industrial uses in Europe - not much I believe.
But I'm still intrigued about what evidence exists for demand destruction in poor countries making a meaningful impact upon global oil supply - demand balance.
The fuel oil usage is in the referenced pdf. As usual with pdf no way to link :(
I'd say that the drop is a combination of cases where multi-fuels can be used fuel oil or NG. This is a lot of industrial usage and continued exporting of industry overseas.
I agree with you 100% the energy assesment are a bit whacked since a lot of energy goes into the production of goods in China/India and then these are shipped to OECD countries. So even though the energy usage is counted against China its really underpinning OECD economies.
In many cases this results in more coal usage and less oil so overall it might even lower total oil consumption.
Notice that overall the US has less room to reduce fuel oil usage and I suspect we won't see many more cuts. So I think we are now starting to reach the point that not enough oil is available for those who can afford it at current prices.
http://uk.reuters.com/article/oilRpt/idUKN2742223920071227
Also I might add I predicted that once we are past peak that prices for "cheap" fractions of a barrel fuel oil etc would rise above the price for gasoline. As refiners optimized for gasoline production.
Heating Oil is at 3.30 a gallon which is more than the price of gasoline.
So everyone that laughed HAH !
http://www.oilnergy.com/1heatoil.htm#since78
The other indicator Asphalt is closely coupled with construction and tax revenue so right now its uncertain but in time I expect asphalt to also rise above gasoline on a volume basis.
And Asphalt prices are still increasing.
http://www.wsdot.wa.gov/biz/Construction/CostIndex/CostIndexPdf/HotMix.PDF
Using the CPI Calculator, if heating oil averaged the same as general inflation from that 1981 level of $1.20 per gallon, it should be at $2.77 this year. So up until this last run above $3, heating oil was at or lower than general inflation, which certainly gives argument that oil and energy are in early stages of huge increase.
I'm still convinced that the CPI calculated index of inflation has been understated for quite a while. Though it is obviously more complex an issue than just inflation calculation method, it seems to me we have a ways to go in price of crude to get to an analogous place we had in the 70s with the huge dip in crude consumption.
I agree but its not all that important by almost all measures energy costs are now a lot lower part of the overall GDP. I think that most people incorrectly calculate the velocity if you will of higher energy costs since oil is like money oil inflations leads to broad overall inflation.
In anycase we would need to see a lot higer prices in the US 5 dollars plus a gallon for Gasoline to even begin to get the demand destruction effects like the 1970's this implies oil needs to rise to 180+ before we can assume serious demand destruction is possible.
However we seem to be on the verge of a big debt deflation and a lot of people or moving to progressively lower paying jobs so don't discount salary deflation as we enter a recession.
In real terms few Americans have a lot of excess cash over their fixed expenses such as mortgages and car payments. So in terms of disposable cash income not credit I'd not be surprised to see us at the lowest levels since the last Depression. I significant percentage of Americans can now nolonger meet their monthly debt payments. CPI calculations don't capture this and its the BIGGEST factor.
The fact that demand in the US has even stagnated at prices well below those which caused destruction in the 1970's indicates that we are not as rich as simple measures indicate.
I think the bottom line for Americans at least is it really depends on lifestyle. Someone who owns a underwater McMansion with a reseting ARM and several large SUV's say dependent on sales commission is very sensitive to oil prices since they effectively have no disposable income.
The opposite end is some who drives seldom if at all and they are just affected by general inflation from higher oil prices.
Unless you have a good grasp of how much disposible income people have and how much flexibility they have to do substitution such as car pooling etc its almost impossible to guess what the magic price is that causes demand destruction. At least in the US we can probably figure 10% of the poor are sensitive and 10% of the middle class (McMansion owners) further say we have 5% that fall into this class periodically because of job loss etc.
Thats potentially 25% of the population that cannot handle todays prices long term much less increases.
Better understanding of who is at risk and the actual numbers seems critical to understanding how price will effect the economy. As in most financial situation's prices and problems are set by the marginal players not the majority.
My interpretation of this factoid is that today a much larger percentage of GDP is dependent on a smaller amount of crude. One result of this is that a smaller dip in crude availability will likely affect a larger portion of GDP, opposite of what many pundits are implying.
The other implication of this factoid is that in the 70's, since less GDP was dependent on each barrel of crude, a greater cutback in crude consumption could happen with a smaller impact on GDP. I believe that the statistics bear this out. In fact many optimistic economists point out this fact about the 70's 'big dip' in crude consumption without making the connection that now things are different and a given drop in crude consumption will affect a large portion of GDP. This pressure, along with the decades of cheap credit, is keeping our consumption high in spite of the prices.
This may be a reason why the economics of the situation are going to reach a different kind of breaking point than we reached in the 70's. A family's actual cash available to spend is easy to calculate if there is little or no credit involved, and spending stops abruptly with a drop in consumption like the 70's crude oil 'dip'. With lots of credit, a family (or society as a whole) can continue spending until the whole credit structure freezes up. We seem to be approaching this point rapidly. It is economic overshoot.
Nice concepts. Maybe it makes sense to take a harder look at other countries say Japan ? Europe's a bit warped in a good way because of the high fuel taxes. I think Japan/Korea might have similar dynamics to the US but both places in general have better public transport and thus substitution.
I think maybe one of the big issues that your saying in a round about way is the US may be sensitive to oil prices since it has a small cushion for substitution. Substitution includes conservation and alternatives. So the real issue is as oil prices rise how well can a given economy substitute and keep its economic vigor if you will. Off the top of my head the US and Australia are probably the least flexible economies vs oil.
Europe can at some point start scaling back taxes or better aggressively pour gasoline taxes into mass transit and localization.
I think that increasing oil prices are going to uncover structural problems in various economies over time. Even though the OECD economies are similar the ability to substitute for oil seems to vary fairly dramatically across countries and even regions.
Take Arkansas my home state a lot of the poor people live in rural areas with inefficient large trucks as transportation. These people will be hard hit by rising fuel costs. The inner cities and even close in suburbs are in poor shape and this is in general where a lot of the black population lives. Something called white flight played a large role in the shifting demographics of the cities and its still a force.
What I find interesting is that fuel prices will force the poor whites to move back into and integrate with the poor black population. Also the wealthy will reverse their migration back towards the close in suburbs.
You can see that attempts to move to lesson dependency on oil can have some real social implications esp in areas that have large rifts.
Knowing the south what will probably happen is the government will mark a neighborhood as being revitalized and will emminent domain most of the homes and take them at low prices then the builders will refurbish and sell them to the wealthy. I can't imagine that the poor blacks will be allowed to profit by this change of fortune.
I too am from Arkansas and have seen the same trends.
Reverse white flight from Benton, Conway, and Cabot?
Everything from Shackleford out to Pinnacle and Ferndale
will die on the vine.
Asher, University, to Baseline and Mabelvale will be
refurbished.
I got that right?
Yes thats pretty much what I figure.
My parents live out Col. Glenn :)
I grew up in Twin Lakes for example and I think that area would grow.
When I was a kid white flight was at Baseline for example.
And sorry to the rest of the world but Southern Racism is complex.
Now wealthier blacks and whites are pretty much fully integrated and not a lot
of racism outside of the older people. But the poor have some serious racism poverty issues.
The white flight situation in Little Rock is also closely tied to some very messed up
schools. You have something similar in California actually but at least CA kept neighborhood schools so its possible to have decent schools if a area gets refurbished.
I was actually surprised to find CA had problems similar to Arkansas.
In general public education and our "hidden" class system have never worked well together.
One reason I like smaller towns is the rich and poor are forced to work together since they
cannot afford two schools. Anyway suburbia and class problems and education and tax revenue are tightly linked. At least in the South the suburban sprawl is driven by white flight and associated attempts to localize tax money.
The whole cesspool is going to be forced open as peak oil advances.
And gasoline prices will cause further division between classes and damage tax revenues.
I don't think Americans realize how much rampant suburban expansion has allowed us to avoid dealing with our internal problems. Now not only will we have to deal with them but they will worsen.
Small cars are cheaper than trucks. Motorcycles are cheaper still. Scooters are even cheaper. I do not see how poor people will be unable to adapt.
Plus, rich people selling big cars will have to sell them for less in order to sell them. That'll cut transportation costs for poor people.
People have many ways to adapt.
I would say that in many ways the economy is less vulnerable because we waste more. Look at car fuel efficiency, vehicle size, and acceleration. If we returned to the average vehicle weight of 1985 and to 1985 average acceleration with today's technologies for using fuel efficiently we could probably boost fuel efficiency by 30% to 50%.
We have lots more technologies available to use energy more efficiently. We have new types of insulation. We have much more efficient ground sink heat pumps. We have hybrid technology and much better batteries coming.
I'm more optimistic by nature. I see big problems and wrenching adjustments coming. But I also see vast capabilities we can bring to bear and lots of ways we can adapt.
But 70% of the American people have not kept pace with inflation.
As they were not supposed to.
We don't have a ways to go because Americans have
been crushed since 1974.
Note the first chart above.
The downdraft in demand that "ended" at 1985, the year the US went bankrupt.
Debts and imported oil are the only things that have grown in the US since.
Top Story of 2007
Russia, Iran tighten the energy noose
By M K Bhadrakumar
Schroeder pointed out that energy rivalries lie at the core of the US policy of encirclement of Russia and behind Washington's persistent attempts to denigrate and isolate Moscow. He warned of dire consequences if Washington persisted with such a course, as Moscow is "certainly not happy about it".
Iran factor becomes important
In such an overall context, during the months ahead Moscow can be expected to make robust efforts to coordinate with Iran over its oil and gas output and exports. The rationale for such a coordinated strategy involving Iran is very obvious. First, Moscow is intensely conscious of the Western awareness of Iran's enormous untapped hydrocarbon reserves as an alternative to Russian supplies. Russia will strive to stay ahead of the European, and eventually American, overtures to Iran.
Second, the hydrocarbon sector in Iran is firmly under state control and Moscow and Tehran are in harmony in this regard. Third, the two countries will be coordinating their energy policies for wider geopolitical purposes within the broad framework of their strategic cooperation. Furthermore, market forces dictate the rationale of Russia-Iran cooperation.
http://www.atimes.com/atimes/Central_Asia/IL22Ag02.html
We tend to think of poor nations as "price sensitive" but when oil is being used to transport food to consumer or exports to world markets, many nations are not going to be in a position to cut back without going hungry. I agree that the demand destruction is most significantly going to come in nations that are more wasteful now and can cut back without meaningfully impacting lifestyle.
The other side of the "subsidization" issue is that subsidization is just a way of distributing oil wealth to the people. So, it reflects the increased wealth of oil producing nations and will create a greater share of global consumption for those nations going forward.
Nations that will be relatively poorer (e.g. post real estate bubble OECD, and especially the US with its massive current account deficits) will naturally consume less.
Really, the idea of a 3% overall decline in petroleum production is not so troubling. A fuel efficient vehicle can use a quarter of the petroleum that a big inefficient vehicle does. This buys a lot of time to develop alternatives while allowing individuals to get to work, etc. The real problem is the distribution of the remaining 97% each year.
I just purchased a 42 mpg hybrid that uses a third the fuel of my 14 mpg SUV. Thus, I was able to reduce my fuel consumption by 66%. That is a lot of years of 3% annual declines. One might say that not everyone needs a new car every year, and indeed this is one of the key points of the doomsayers, "17 year vehicle lifespans." But it is easy to substitute an efficient vehicle for an inefficient one for tasks which they do equally as well, such as transporting me to the office every day. The free market will encourage the individual with the inefficient vehicle and high usage to swap vehicles with the individual with a more efficient vehicle and low usage.
For deep snow, and those difficult to get to Sierra Nevada trailheads, the big SUV will still have its uses. But most of the time, it will probably just sit in the garage.
lots of doomers don't want to hear you say that.
John,
I'm one of the biggest doomers on TOD and I don't give a darn what people do vis-a-vis vehicles because I'm not counting upon them or their actions to "save me."
In my case, I'm currently considering whether to buy a used full sized 4x4 with a stump pulling-sized engine rather than having my old, small 4x4 engine repaired. Why? I need a 4x4 in the boondocks and I don't drive much. Gas mileage isn't important for my usage. And, if TSHTF, I'll convert it to wood gas.
Todd
You should get something you can run off propane.
The old big strait sixes actually made a better 4X4.
I actually like a old jeep or ford bronco with a trailer
vs the modern trucks.
If your serious I'd get the really old ones refurbish the drive train
and engine. These can be worked on basically anywhere and most machine
shops could make all the parts.
But how would that benefit the individual with the more efficient vehicle? Assuming they still need to drive the same distances (albeit short ones), all they've done by swapping their vehicle is to is increase their cost-per-mile.
The vehicle they've acquired would also, in a world where petrol is scarcer and more expensive, be less attractive on the open market (i.e. intrinsically worth less and faster-depreciating) than the efficient vehicle they gave away.
Just a thought. I don't think it makes me a doomer.
Is it OK to break in? I'm new to this.
this would be a great use for the cheap SUVs that flood the market when high gas prices cause a glut of used SUVs for sale. have them sit for times when you need a driveway plowed or some other sort of work where an SUV would be a good tool.
Do the math:
A quick back of the envelope calculation for consideration:
Current US daily gasoline consumption = apprx. 380 million gallons a day
Gallons in a barrel = 42 gallons
Barrels of gasoline consumed in the United States daily = apprx. 9 million barrels of gasoline a day
Total current world production of crude oil + condensate = 73.1 million barrels a day
Now of course one barrel of oil isn't exactly one barrel of gasoline but close enough for a rough approximation.
Assuming a 3% decline yearly in world crude oil + condesate production results in the 9 million barrels of crude oil dedicated to producing that ENTIRE 9 million barrles of gasoline used by the ENTIRE United States fleet being off the market in about 5 years after peak. Even faster for U.S. actually since imports will drop quicker.
We probably can outbid poorer countries for the those barrels for a while but all in all it might not take too long. Reducing consumption like you did is bright and so is being prepared even if you don't actually need the preparation. Are you an idiot for buying a life insurance policy even though you didn't die during the term?
This is an over simplistic calculation. The US will still easily outbid many poorer countries, and there is no way that
100% of the world's demand destruction will take place in the US. That said, there is huge inertia on the demand side. A relatively wealthy and aware American can easily trade their SUV for a hybrid, but they are very much the exception. The largest part of the populace will not consider trading in until they are so far in debt that they cannot afford to. There is virtually no domestic production of hybrid vehicles in the US, and with the falling dollar few will be able to afford imports, even if global production of hybrids could be ramped up to meet the demand. Here in Europe, hybrid technology is rare because we prefer small, low power diesel cars which get better performance at lower cost.
Europe as a whole will fair well for a good few years, but are already so efficient that future demand destruction will be painful. The UK will not fair so well, we have high debt and relatively poor and overstretched public transport. The road lobby here is rabid, and every government eventually buckles under the pressure and starts building more roads.
We sound like were on about the same page. The calculation was stated to be simplistic. Of course all demand destruction won't be in the US.
The calculation simply makes the point that large amounts of barrels will be moving off the market quickly and multiple years of 3% oil decline will not be simply be mitigated by everyone in the U.S. switching from an SUV to a hybrid. A better plan than that might need to be considered.
The one assumption you make that I question is your faith that the entire U.S. citizenry will continue to outbid. Probably can, but I won't take that as written in stone.
The U.S. is not the center of the world and the entire U.S. fleet consumption is only about 12% of world oil consumption. And its getting to the point that a growing upper middle class in Russia, China, and India are weathier than the average American and European. In fact, at my old firm, one of my co-workers and her rich doctor husband left the U.S. to return to Shanghai since he could now make just as much money and have a similar lifestyle there.
Over 10 years, that is 30%. You see your car in isolation to everything else. You probably want to have the same amount of food on your table, so you can't save any fuel which goes into production and transport of food. Similarly, you want to buy the same number of consumer goods and also fly the way you are used to now. So if you want all transports to continue business as usual YOU will have to save for that to happen. In the Australian context I have calculated that Capital city motorists would have only 20% of current fuel supplies for their cars by 2020. Happy motoring. You would need more than mandatory car pooling to achieve that sort of saving. Once peak oil damages the economy, the purchasing power to buy new cars will go down. The financial system is weakened already from the subprime crisis. Some car manufacturers may go out of business. We have no idea what will happen. In the worst case scenario we'll be stuck with whatever car fleet we have when the crunch time comes.
No, it is actually 34.39%. That 3% over 15 years turns into 55.79%. And 3% over 20 years is not 60% but rather a whopping 80.61%. What was it that Bartlett said about human beings not understanding exponential functions?
Actually a 3%/year decline after 10 years is a 26.26% decline and after 20 years it's a 45.62% decline.
If you start with 10000 and decline 3%/year after 10 years you have 7374.241
A percent decline decelerates as a fixed percentage of a decreasing number decreases.
--
JimFive
From the World Energy Outlook 2007 (pag 290):