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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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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