Eliminating Subsidies Won't Cut It (Demand for Oil That Is)
Posted by jeffvail on June 13, 2008 - 10:00am
Topic: Demand/Consumption
Tags: domestic consumption, fuel subsidies, opportunity cost, peak oil [list all tags]
Cheap gas and diesel due to government fuel subsidies has become one of the favored whipping boys of late—a convenient way to blame high oil prices on the actions of some other government or faraway people (See 1 2 3 4 5 6 7 8). But how much can subsidies really be blamed for present oil demand? Would cutting a 30% gasoline subsidy reduce demand by 30%? Why not? I’ll stake out and defend a somewhat extreme position: reducing, or even eliminating fuel subsidies will not cause a significant, long-term reduction in demand and may even cause demand to increase more quickly than with subsidies in place. More importantly, we must not fall prey to claims that cutting fuel subsidies is an easy solution to our energy problems.
A Hummer dealership in Caracas, Venezuela, where consumers pay only pennies for a gallon of gasoline as reported by the New York Times
Fuel subsidies are currently in place for nearly half the world’s population. Fuel subsidies around the world have previously been covered at The Oil Drum in Fun With Subsidies and Taxes, as well as numerous articles in the media on the topic in the past few weeks (links above). Additionally, most OECD states indirectly subsidize fuel consumption in a variety of ways. I won’t rehash this existing coverage, though I do need to point out that every article* I’ve been able to locate has argued that cutting subsidies will have a significant effect on demand, and will help to lower oil prices (*only one analyst, Benoit de Vitry of Barclay Capital, seem to agree with me). To me, this wave of media coverage of subsidies is just like the waves of media coverage past on speculators, big oil conspiracies, and the promise of oil shale: a source of false hope that a magical solution exists to our energy problems. For that reason, my intent here is to argue that the long-term effect of cutting fuel subsidies is, contrary to the reports in the media, not of much significance.
Demand Elasticity is a Marginal Matter
The first reason that cutting subsidies won't have a dramatic impact on demand is that the fuel demand elasticity of a country is the aggregate of the marginal demand elasticity of each of its consumers. For that reason, the elimination of a 30% subsidy for fuel will not result in a proportional drop in demand of 30%. For some users, price increase will completely price them out of the market, and their marginal demand will be completely eliminated. For others, either because of wealth or the value of liquid fuels to their economic activity, the elimination of the subsidy will result in no decline in consumption. The vast majority of consumers will lie somewhere in between. Therefore, right at the outset, we can say that the elimination of a 30% subsidy will not result in a 30% drop in demand. I’d love to be more precise on this point, but neither the data nor methodology currently exists to project with any confidence exactly how much demand reduction would result from the elimination of subsidies—all we can say with any certainty is that it will be smaller than the size of the subsidy eliminated.
Evaluating the Energy Intensity of the Opportunity Cost to Subsidy Expenditures
The next question—and perhaps the most important—is to evaluate the opportunity cost of a government’s expenditures on fuel subsidies. If a government does’t spend $X billion on fuel subsidies, what will it spend the money on? What is the energy intensity of that expenditure compared to the amount of demand reduced through cutting the subsidy?
Take India, for example. In India, the total cost of fuel subsidies could be as high as 2-3% of GDP. What happens to that spending if it doesn’t subsidize fuel use? There are two theories here, both of which create at least some fuel consumption that didn’t exist before. One theory is that it will be spent in a way that results in lower fuel consumption—but almost certainly not in a way that results in NO fuel consumption. The argument in favor of this position is that, because fuel subsidies distort economic calculations in favor of consuming fuel, a neutral use of the same amount of funds should result in less fuel consumption. However, there is an opposing position: because subsidies are, according to market theory, a sub-optimal allocation of resources when compared to free-market allocation, the elimination of subsidies will result in stronger economic growth (or less economic decline) than with the subsidies. This is especially true if the money saved from subsidies isn’t spent at all, but rather reduces the tax burden or lowers the rate of inflation. It remains potentially true to a lesser degree even if the money is merely spent elsewhere, since neutral spending is likely to have a less distorting effect on economic activity. Therefore, according to this theory, elimination of a fuel subsidy may actually result in greater fuel demand over the long term—and that demand may be even more inelastic because it stems from a more efficient allocation of resources. This is the argument of Benoit de Vitry of Barclay’s Capital. In the end, it may come down to this question: What’s worse (from the admittedly very skewed perspective of demand management): 100 million Indian middle class paying 40% under market for diesel with a GDP growth rate of 5%, or 200 million Indian middle class paying market for diesel with a GDP growth rate of 7%?
Cutting Subsidies Won’t Slow the “Export-Land” Effect
Finally, cutting fuel subsidies in exporting nations won’t significantly slow the grinding effect of the Export Land Model, whereby rising revenues of fuel exporting countries lead to increasing domestic consumption and declining net exports. What happens if subsidies are suddenly cut, and citizens of Venezuela or Saudi Arabia have to pay the market rate for oil? The extra money they spend on oil goes to their own government, rather than to some other nation. And that money can then be spent on other projects or programs—the opportunity cost issue noted above. However, to make the cuts in subsidies viable, they are likely to be offset by progressive spending plans that disproportionately benefit the poor. This is exactly what is currently happening in Malaysia. The result may actually increase demand: the rich, who are not the beneficiaries of these offsetting handouts, are also the least likely to reduce their demand due to price rises. The poor, who may otherwise reduce their demand, are the most directly benefited by the handouts. And, because it may be possible to prevent any demand destruction by simply handing out 1/2 or 2/3 of the money previously spent on subsidies to the poorest consumers, there is likely to be money left over to be spent elsewhere (or not taxed in the first place), which brings us right back to the previous discussion on the energy intensity of that alternative spending.
To conclude, I’m certainly not advocating the maintenance or increase of existing fuel subsidies. They are an inefficient allocation of resources, resulting in less economic activity for every barrel of oil consumed. Rather, my intent here is only to dispel the notion—increasingly popular of late—that eliminating fuel subsidies is some kind of magic bullet to derail the demand train. At best, I think the elimination of fuel subsidies will result in a minor and short-term decrease in the rate of demand growth in developing nations. It will not significantly alter the energy crisis facing humanity. Either way, the elimination of subsidies may not be politically practicable—where they have been cut there have been riots (1 2), and there are numerous movements attempting to actually increase fuel subsidies (1 2 3 4 5).
Thanks for an excellent post. It is a central subject to consider. It also works the other way around in that in Europe for example motor fuel is taxed heavily and since price has risen and tax has not fallen motorists vote with their credit cards, they buy less so consumption is falling. In those countries with subsidies the income to fuel price differential remains large. A small increase in Chinese retail prices is having an effect. People start sharing cars and using less too. Car sales are still booming hugely but the volume is still relatively low so far on a per capita or per GDP unit basis. If we look at prices per GDP purchasing power unit and personal incomes I agree that dumping subsidies will not resolve the global demand/supply issue or even dent it.
Regarding the Export Land Model (ELM), I assumed a country producing two mbpd, consuming one mbpd and therefore exporting one mbpd that hit final peak production, with production declining at -5%/year and with consumption increasing at +2.5%/year. This resulted in net oil exports going to zero in nine years. The net export decline rate for a given exporter is a function of their consumption as a percentage of production at final peak, their rate of change in production and their rate of change in consumption. Mexico, like the ELM, the UK and Indonesia, was consuming about half of their production at final peak, and like these examples, Mexico is on the fast track to zero net oil exports by 2014, at the outside (10 years from their peak in 2004).
In any case, if we assume no increase in consumption, Export Land would go to zero net oil exports only five years later, 14 years to zero instead of nine--not exactly a big difference.
It seems to me there is little incentive for oil producers to protect export volume if export revenues continue to rise. As long as increasing domestic consumption does not erode oil profits, then governments are unlikely to change subsidies.
But over the long run, cheap petrol and diesel is only workable as an opiate of the masses in countries that produce more of it than they consume. Developing countries that import oil and subsidize fuel will increasingly face fiscal disaster.
On the other hand, every oil importing nation may eventually be forced to subsidize fuel prices for key industries like commercial/industrial transportation and agriculture while rationing non essential consumption.
I agree that there will be a push to continue or increase subsidy to certain industries, but I don't think we can ignore the political will to use fuel subsidy as a populist measure. There is a great deal of sunk cost in the assumption of continuing ability of cheap energy--suburbia, cars purchased, roads built, etc.--and there will be a great deal of pressure to use subsidy, even if it leads to financial trouble, to maintain the viability of these sunk costs. Developing countries may have less of this sunk cost, but they also tend to have larger populations of people who aspire to move up to the idealized "middle class" status of a suburban home and a car, and that will only increase the pressure to populism. There also tends to be a greater need to pacify the populace in developing countries--take China, for example: the previous constitutional basis of Maoist theory, equality, etc. has largely been replaced by a capitalist mentality, therefore the authority of the current authoritarian regime is now based on their ability to deliver increasing wealth to the people. They're likely to incur great long-term problems to eek out a few more years of maintaining a facade of growth and increasing wealth for the poor, and that will partly mean fuel subsidy...
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It matters. Thanks.
"I’ll stake out and defend a somewhat extreme position:" -- I see nothing extreme about your position. Consider this: When gas in the US rose from $2 to $3 did demand fall at all? No, it actually increased!
One theory runs that most people in Asia are less well-0ff so it will hurt them more. The problem is that that there are ten times more of them, meaning that their well-off probably equals our well-off, so whatever reduction in demand takes place in US will be offset by increase in Asia. I think you are spot-on. Yet another factor is that they are driving a new, smaller fleet of more efficient cars so that these prices don't hurt them as much as Joe Sixpack driving his F150 and soccermom her LandRover, both of which are financed to the hilt.
You raise an interesting point here. I think there is a similar psychological/social motivation to own a car (even a very small one) in China or India as there is to own a big SUV or truck in the US.
Also, the high fuel taxes in Europe have something of a similar effect to the small cars driven in Asia, in that they make the increases in underlying oil prices less significant. If you've already oriented your life, work, housing, etc. in Germany around $8/gallon gasoline, it's not a huge change in your budget when that goes up $2 because of underlying oil price increase. On the other hand, an exurbanite in the US who oriented their life (exurban home that they're probably upside down on, big F250, long commute to work and shopping and kid's school, etc.) around $3 gas, it's a huge change in your budget to go up those same $2 to $5/gallon gas...
Yeah, but when gas rose from $2 to $3 home values were shooting through the roof, and availability of credit on that equity was free and easy. Oil supply and demand do not live in a vacuum...
I would also wager that the elasticity with regard to demand for oil drops rapidly at some point - so behavior doesn't change until it cross some threshold - mostly because those changes are significant. In other words there is a point at which consumers change behavior in response to oil prices - and that change is somewhat drastic with regard to consumption - e.g., carpooling (which is a hassle) instead of taking one car cuts your daily gas consumption by 1/2 (roughly) and so that hassle might not make sense at $3 but at $4 it does - the resulting change in consumption is a toggle on/off...
Subsidized commodities tend to be available in inflexibly limited amounts. And by "inflexibly limited" I mean even more inflexibly limited than mere nature requires.
The more usual case, with natural gas and petroleum-derived fuels, of heavy consumption taxes -- negative subsidy -- makes government push them by means that are available only to it. Laying urban developments out in such a way that people have to drive long distances often, for instance.
--- G.R.L. Cowan, H2 energy fan 'til ~1996
http://www.eagle.ca/~gcowan/boron_blast.html
This is an interesting argument, is there actual correlating data to back it up or even historical causal evidence to prove it?
Correlating data are more likely to be available than proof, I think, if by proof one means Hansard or local council excerpts saying anything like "We must make them burn more fossil fuel"; one would not expect such candour.
Here's an instance of the argument being used predictively: http://autos.groups.yahoo.com/group/future-fuels-and-vehicles/message/51...
--- G.R.L. Cowan, H2 energy fan 'til ~1996
http://www.eagle.ca/~gcowan/boron_blast.html
Thanks for this post Jeff. Regardless the fact that I like the argument, I'd like to see at least a back of the envelope calculation. Let's limit our discussion now only for direct subsidies, that is ignoring the whole of the US/AUS/JAP/EU military expenditure in the Middle-East, etc.
1. The amount of fuel subsidy per volume unit of fuel in each country and how much would the price rise if subsidies were removed completely
2. The total amount of consumption in all countries that have subsidized fuel prices
3. A price (in)elastic equation showing probable short/mid-term consumption decrease as a percentage of original consumption, duel to the price rise from subsidy elimination.
4. Calculation of total absolute fuel consumption eliminated as a result of price elastic behavior change in each subsidized country.
5. Oil to fuel distillation ratio and calculation of how much crude oil would be used less, if pump fuel consumption would fall by X barrels/day.
Noting that most OPEC exporter countries' citizens are paying c. 1/5th to 1/10th of the real world price for their pump fuel and that even Chinese are paying -30% to -50% less than the world price... well, that's not a small amount of oil, I'd guess.
Now, what that cut in oil consumption (short to mid-term) would to the oil price is a different thing altogether, but I'm not sure that the potential cut in oil consumption would be inconsequential. After all, ME + Asia do account for roughly 33% of the oil consumed today and their share is growing the fastest.
Also, there is no saying what it would do the growth in fuel consumption in the aforementioned areas, if prices were to double or to increase manifold. I guess it would wreak havoc in the economy and may be even do structural damage to consumption for a longer term than just the short term.
But alas, all that is theoretical as it would be suicide for any politician to put through such measures and as such they will rather drive their economy to the ground and blame foreigners, than take the heat from the voters for eliminating the subsidies :)
PS To get a rough idea of subsidies, the following might be helpful, although not conclusive:
http://en.wikipedia.org/wiki/Gasoline_usage_and_pricing
In the short term, I don't see a drop in subsidies significantly affecting consumption. In the longer term, it will. In Europe, we have had high fuel taxes for twenty years, and as a result we drive smaller, more efficient cars than the US. However, the trend for the last ten years has been for larger, more powerful, heavier cars in general, and a fashion for SUVs in particular, because disposable income has been rising way ahead of the cost of fuel. We do not drive any LESS because of the fuel price. We are now just beginning to see a reduction in fuel consumption, due to changed driving behaviour. I suspect this effect is limited and short term, it is due to people driving more slowly and smoothly, etc., and cutting out a few unnecessary journeys, because of the price shock. However, our attention span is short, and behaviour will return to normal soon, if the shocks do not continue.
Our shocks are less steep than yours, precisely because of our high taxes. Indeed, our government has been reducing the taxes in real terms these last two years.
I think that a sudden removal of very high subsidies might cause a short term economic dislocation, as it would be difficult for people to adapt at short notice. However, that would simply make efficient transition to a reduced oil society even harder to implement.
Of course, we know price shocks will continue, and soon shortages. Those WILL reduce consumption.
Other critical factors in European demand are the higher population density, tighter city streets, less of a "cowboy psyche" whereby big trucks are socially preferred, greater availability of mass transit for short AND long-distance trips, more of a green consciousness, etc. I'm not sure how much of Europe's different driving habits are due to the former, and how much is due to higher prices/taxes, but my opinion is that the former factors are more significant than price. There have been periods in the past few decades when gasoline/diesel price just wasn't a very significant factor, and the European driving habits still differed in the same ways from America--I think this suggests that the key reason is cultural/geographic, and not price...
True, but I suspect that as fuel prices increase, more Americans will begin to demand European-style public transport, and then the political direction will hopefully be towards building more efficient transport.
At least I hope that will be the case. I am worried that the government will think that it is easier just to subsidise fuel, rather than make lasting transport improvements. The government will provide what the people want, but most people over here in Europe seem to be demanding subsidies rather than more efficient trains. (English trucker strike, Portuguese fuel riots)
I really don't follow the logic on the cutting subsidies won't cut demand. To the degree that it makes oil more expensive it definitely will cut demand and spur investment in alternatives. People underestimate the demand response mechanism that consumers have with regard to oil. For instance in February California cut fuel usage by 2.5% year over year compared to 2007. The bigger problem, though, isn't the direct subsidies such as tax credits - its the external costs that are borne by the commons, and for the most part show up somewhere else on our grand societal income statement - pollution, environmental degredation, military costs to protect our oil interests - these are subsidies as well - and a big part why renewables look expensive in comparison.
Even though these externalities are nebulous and hard to quantify it doesn't mean that they aren't real costs to us individually through our taxes and collectively. The reality is that our energy market is so badly gerrymandered that it doesn't function well as a capitalist market at all - and the more we mess with it the worse it performs - both with regard to the cost of oil and with regard to the market's stimulation of alternatives. This leads to volatility due to a lack of transparency (hard to do a risk/reward analysis when an oil minister or elected official can radically change the nature of your market overnight) and ultimately a higher cost of capital for investment in alternatives (to offset uncalculable risk) as well as existing fuels needing to cross a higher price hurdle before investments are made in alternatives (to create a margin of safety for the capital). All of this slows down investment and prolongs oil's stranglehold on our economy. We need to clean up that market - and getting rid of subsidies is a good start.
Cutting subsidies might not be an "energy policy" panecea - but its a step in the right direction.
More expensive oil can spur investment in alternatives all it wants (this is also an energy intensive economic activity), but it can only PRODUCE alternatives to oil to the extent that technology allows. I'm not overwhelmed by any of the alternatives in the pipeline, but that's just me.
I disagree that people underestimate the demand response mechanism that consumers have with regard to oil. Oil prices have risen in China (AFTER subsidies) and India over the past few years, and demand has continued to explode. A 2.5% decline in demand in California is nothing compared to the increase in price, and is not representative of the US as a whole (where YOY demand has decreased much less than that). US gasoline demand as a whole was down in February YOY (just like California), but was only down 1.4% YOY as of the first week in June (based on EIA's 4-week average). 1.4% isn't a very impressive decline in demand given the increase in price. If demand destruction isn't greater than the rate of depletion post-peak, there's a problem (OK, there's a problem regardless...).
I agree that the unaccounted for externalities are a huge issue, but I don't see any hope of tackling them in the near future. As prices go up, the probability of prioritizing the environment over immediate perception of economic needs goes down.
Also, I agree that cutting subsidies is a step in the right direction, but not because it will either benefit the economy or reduce demand (it's just as likely to push toward VERY dirty coal-to-liquid fuels for cars). I think it's the right move because it improves economic efficiency, but we need to remember that a more efficient economy structured toward growth will grow faster--and the long-term result of that may be more (or at least less elastic) demand... I'd love to see a totally transparent, subsidy free economy, but that just isn't likely to happen.
Actually a 2.5% decrease in fuel usage is not trivial, either from a consumption standpoint or from a market impact basis. First off any decline in consumption is the functional equivilent of increasing domestic production by the same amount so its perhaps the easiest way for us to reduce our energy dependence. For every 1% we reduce usage here in the U.S. we cut our daily oil usage by just a little under 1MM barrels. And the reality is that CA is out ahead of the curve on this issue - so I would expect the rest of the U.S. to catch up to those rates. Lastly, the EIA numbers are hard to use because you have to adjust for the SPR and inventory buying which screws up true consumption - while the CA numbers are from the franchise tax board and track gallons at the pump very effectively. Finally, if that 1.4% YOY number you quote above is YTD that is a.) less important than the trendline - we care about what is happening at the margin rather than cumulative, and b.) will be off by about 0.75% anyway because YTD 2008 is one day longer than 2007 so far - so has an extra day of consumption.
That 2.5% is at the margin equal to a 5% or more change in prices because the supply/demand curve is so tight.. Your point about the price just illustrates how oil had been underpriced in the market relative to its utility... only now are we reaching the point where elasticity on oil is shrinking - and again for consumption purpose most changes are step changes not incremental.
As for alternatives - my point is that oil consumption in the U.S. is more flexible than the peak oil scenario allows for... so our first alternative is to conserve. Peak oil theory assumes switching will be impossible for a significant amount of time(which may or may not be true, e.g., algae was a crazy idea back when peak oil theory was put forth) and second and more importantly it completely underestimates, as almost all studies of these things do, the ability of a wealthy society such as our own to conserve when necessary (in this case due to high prices) other examples include California changing electrical usage habits to cut nearly 10% to stop rolling blackouts and gain control over its energy market again, or recently in Juneau Alaska where users cut electrical use by 40% when their sole source of cheap electricity went off line due to a transmission tower failure ... The U.S. makes up roughly 20% of worldwide demand of oil - or 4x our population foot print - and about 2x what Europeans use... so there is a bit of fat in our usage pattern. Just because we haven't conserved in the past, doesn't mean we won't in the future.
A 1% decrease in consumption, year on year, is a 0.2 Million barrel per day reduction, not a 1 Million barrel per day reduction. That said, I don't disagree that conservation in the US is the way to go--I think you're right on the mark here. And I think that we will decrease our demand in the US, I just don't think that we'll decrease it anywhere near as fast as net export availability on the global market begins to decline over the next few years. Even if we can get demand destruction up to 2.5% per year (we're roughly half-way there at current figures), that would probably be less than half the rate at which net exports decline...
Not to bicker, but I don't understand what you're saying that a 2.5% decrease at the margin is actually a 5% change in price. Demand has actually decreased around 1% year on year in the US, and price is up 70+%. I'm not sure what you're arguing?
I agree that there is some "fat" in our usage pattern, but there is also much greater sunk cost in the US than in Europe (e.g. suburbia) that supports our high level of consumption.
Okay no more multi-tasking when posting.... 1.) You are correct - I grabbed the global consumption number not U.S. when calculating the 1% savings. Even then I screwed up because a 1% reduction in refined oil equals a 2% reduction in crude consumption. 2.) I shifted to the refined products market to make a point but didn't explain that at all to you the reader - The price leverage I was talking about comes from an ethanol study done by Iowa State University which showed that the addition of Ethanol to the fuel supply (totaling about 4%) saved motorists approximately 10-15% at the pump (rough numbers) - which (if you believe the study) means that the marginal 4% of fuel supply is getting a 2-3x leverage in change in price given current supply and demand. Were oil prices to flow directly through to gas prices I suppose that would be a bit more useful an argument... It does, however, illustrate how gas prices have begun to reach a point of inelasticity... and that also underscores how oil prices are behaving differently - which could be an indicator of speculative bubble on oil futures (which I believe is true to the tune of about 20-30%) but is likely due to a number of other factors as well.
Your point about conservation is truly the crux of the biscuit - Peak Oil theory is predicated on economic growth being tied to oil consumption - in that scenario consumption can't be curtailed without economic pain - so we either consume or suffer drastic economic (and therfore societal) upheaval. This makes the supply side much more important to the pricing equation - and where declining supply results in ever acclerating prices in a net sum zero game. The problem is that conservation (or to put it differently how efficient the use of oil to drive economic growth is) isn't calculated at all and neither is shifting due to technological change - particularly in those net importing countries that are the biggest consumers of energy. As a result, worldwide consumption is overestimated because small changes demand behavior in those large importers have large impacts on export markets (where ELM models show no impact whatsoever). And producer country consumption growth (a key component for dwindling exports) is grossly overestimated because they are primarily based on models of industrialized nations such as the U.K. where industrial and economic growth wasn't tied to oil production because of the availability of inexpensive imports. In countries where oil is the primary source of national income that same pattern is unlikely to emerge (because a.) growth in those countries IS tied to oil and 2.) without other industries to support a middle class there is only so much oil the ruling class can use (e.g., a 4% per capita consuption growth rate for Saudi Arabia is silly). This doesn't mean that we won't run out of oil - just that the Peak Oil model has way overstated the impact of dwidling supply in its pricing model mostly by underestimating flexibility in the demand model to react to higher prices to curtail consumption...
Maybe Europe has some natural advantage over the U.S. due to its geography and mass transit infrastructure (to the degree it does, however, its way overblown as a contributing factor) - there is still the fact that Switzerland and most of Western Europe is nearly twice as efficient per GDP dollar than the U.S. So lowering our consumption by more than 2.5% a year without impact on standard of living are well within reach. And since the U.S. imports 50% of its oil - that 2.5% reduction in total consumption of oil is the equivilent of 5% of our imports - we represent 25% of the world import market so that 5% is 1.2% of the world export market - or equal to the rate of projected decline in world exports. How it gets done will be a combination of a number of things - but the biggest, and perhaps the biggest reason that Europe is more efficient than the U.S. today is automobile efficiency. Expect the gas mileage of the U.S. auto fleet to change dramatically over the next few years - even without CAFE standards - it did in the 70s when small cars were crap - today many small efficient cars are quite nice - and there is the whole diesel issue as well which can further change the fuel efficiency of the U.S. fleet (which if bio-diesel starts to work its way into the fuel chain in any significant amount will also make a huge impact on import demand). Second, and this is admittedly a bit warm and fuzzy reason, but the shock to our wallets has opened our eyes to the way that we can make small changes to conserve - and even more importantly that there are options for indivuduals to shift the recurring costs of energy consuption to a capital cost through existing renewable technologies. For instance, in our family we used to segregate our cars by driver - mine and hers - I drove mine, she drove hers - even if it was just her despite the fact that she has a big minivan that gets lousy mileage ... Now we use the smaller car first and the larger car when needed... My car is 30% more efficient so if that shift in driving habits is 10% of our miles driven (which is very conservative) we just lowered our annual fuel consumption by 3% without making any sacrifice at all... It has also gotten people thinking about renewables... At current fuel prices the payback on solar and wind power to support a plug in hybrid would be somewhere around 5 years - less when combined with a system for the household electric. If we get feed-in tarrifs in CA that number goes down further... If gas goes down to $2.00 again and my payback goes up to 10 years - so what - I am free of the two recurring expenses I hate the most - PG&E and the gas station... and I still have 10+ years of free "fuel" left on those systems...
The Hummer picture is very representative of the first thing that springs to many minds when high oil prices and subsidies are discussed. However, we shouldn't forget that, for many of, say, India's 1.1 billion population (and the populations in many other developing nations), the subsidy that matters is the one that keeps down the price of kerosene used for cooking and lighting. That demand is surely even less elastic than demand for motor fuel, making removal of subsidy very problematical for riot-averse administrations. India did not reduce subsidy on kerosene when it recently raised prices for gasoline and diesel.
So... Lemme see if I have this right, are you suggesting that the 50% difference in oil consumption per capita between the US and Europe is caused by....? Or that the 50% greater oil consumption in qatar vs the US is caused by other than subsidies?
It's fairly clear that the demand curve for oil is somewhat discontinuous, it has flat spots and steep spots and is slow to respond over time, but it is ludicrous to suggest that it is simply dead flat. Removing a 30% subsidy is unlikely to result in a 30% drop in consumption, but it is absolutely certain to result in some % reduction in demand. A total reduction will be seen over several years. Notice that although there was an actual increase in oil consumption in the US from $2 to $3, there has been a substantial reduction in consumption on the road from $3 to $4.
As far as the alternate uses of the money go, ANY use of the moneys by government will constitute a suboptimal resource allocation and thusly slow growth by roughly the same amount. Only if the cost is offset by lowering taxes (anyone see that happening?) will it result in faster economic growth.
I think the 50% difference in US v. European oil consumption is, as I argued above, primarily due to geographic and cultural factors, not price.
Having lived in Qatar, I think that some of the same factors are true. I've swam in a cooled swimming pool there, and walked through a 6-story air conditioned shopping mall. I'm sure that subsidies have an impact, but I'm equally convinced that cutting subsidies wouldn't have a very significant effect on their consumption.
I don't think you can support the assertion that cutting a 30% subsidy is "absolutely certain" to result in some % demand reduction. It still depends on what the opportunity cost is of that spending, and the energy intensity of that opportunity cost. It's similarly not true that alternative uses of the money will be equally suboptimal (politicians can make good calls, they're just not very good at it!). The most likely scenario, since most of these nations are already in deficit spending mode, is not lowering taxes, but rather a decrease in monetary inflation, and that will almost certainly result in a more optimal allocation because it will result in a market-driven allocation. That can very realistically accelerate growth...
I am no economist but here are my thoughts.
I don't think the loss of subsidies is a magic bullet but I do think it will lead to less demand more quickly as the market price increases. I agree that a 30% reduction in subsidies isn't going to lead to a 30% reduction in demand but this seems like a straw man argument to me. Who is proposing such a relationship?
As for opportunity cost, if the "less distorted" market now results in greater growth, I think it will be because the economy will have become less oil dependent. What is a well "oiled" market to do when one resource (oil) gets more and more expensive? Find a substitution. This applies to government savings as well. If the governments had any sense, the newly found savings would be spent on facilitating substitutes.
Since you're export land arguments are essentially the same as your opportunity cost arguments my arguments above also apply.
Degree of oil dependency doesn't cause or reduce growth, so I disagree that the cause of greater growth in the absence of subsidies is because the economy is less oil dependent. More efficient allocation of resources does lead to more growth (or less decline), and that's the key here.
The substitution argument is the classic free-market argument against peak oil--that a valid substitute is available, we just need sufficient motivation. If that turns out to be true, then I agree, eliminating subsidies will have a significant impact on demand for oil. However, I don't think that we'll find a valid substitute, but that instead we're in a total energy constrained world. Reasonable people can certainly debate that, but IF I'm correct, then governments can spend all they want to find a substitute, but that spending won't actually produce a substitute for the economy to use. Same with the export land argument. IF a valid substitute is out there, just waiting to be discovered or seized upon, then that's great, and eliminating subsidies may speed market transition to that substitute. But if there's no substitute way to keep the amount of energy available to our economy growing (as I contend), then the opportunity cost spending will still consumer energy, and largely negate any demand that is destroyed purely through elimination of the substitute.
It seems to me what you are saying is that there is no hope (subsitutes) therefore there is no hope (taking away subsidies won't help). Starting from this assumption I cannot disagree with you!
But I don't see how anyone can say there are no substitutes. Our ultimate energy constraints are the sun, gravity (the moon) and geothermal, for which there is plenty. Don't get me wrong, I also don't think we can avoid demand destruction (as is already happening). The real question is timing. Will we get time to implement substitution technologies or not before economic collapse. I would say therefore that keeping subsidies in place reduces our chances for this since oil prices will rise faster thereby risking a more rapid economic downturn.
I think you raise the key point--and something that I should have been more clear about previously. I don't think that there is no possibility of developing a true and ongoing substitute for oil to power economic growth into the future (e.g. fusion, high EROEI solar, etc.), but we need to begin a massive-scale implementation of such a project soon because the energy required to implement such an alternative is massive and may not be available for long. Even IF we accept that we currently have positive EROEI solar panels, the energy to put them in place must all be invested up front, and won't be paid back for years (how many depends on your EREOI figures). I agree with you that subsidies probably reduce our chances of developing and implementing such a plan in time. However, I think it's not necessarily a prerequisite that we get rid of subsidies to do that. What is a prerequisite--and what I think is very unlikely to happen--is for humans to suddenly start acting in a more cooperative, more far-sighted manner. One of my "laws of reality" that I'm playing around with is "any solution that requires a large group of people to behave better than they have in the past is doomed to failure." Pessimistic, sure, but supported by history (not that that's dispositive...)
Fair enough. Keep your eye on Project Better Place and other large scale developments. They are starting to happen.
Interesting formulation; mine is slightly different: the US lacks the unity necessary to effectively confront the converging problems of Peak Oil, global warming, and resource and environmental depletion.
Remember both these ideas are just hypotheses. There is no reason to be convinced they are absolutely true and good reasons to think they are not. While it is good to be trying to spread awareness of peak oil I don't think its very helpful to preach fatalism.
I like to think of it as preaching the importance of individual action and responsibility, rather than expecting "people" or "government" to do the heavy lifting for us. That said, it is certainly only a hypothesis (what isn't?), and I'd love to see me proven dead wrong. I'm just not holding my breath...
Oh, absolutely they are just hypotheses (your mileage may vary) and I agree with Jeff that it would be nice to be wrong. Having sat through quite a number of events that I considered decent "wakeup calls," since, oh, about 2005 or so, though, and observing very little waking up, I have to conclude that, for now, we're not capable of handling these issues effectively.
Very interesting argument, Jeff, and consistent with the "peak oil theory" as I understand it.
According to "POT," global demand is driven by global supply which, in turn, is dominated by geological factors.
Subsidies provided by various governments merely serve to shift consumption around among countries, and among various classes of consumers within countries.
Subsidies do not change consumption in the aggregate.
It is the aggregate balance of supply and demand that determines the global price.
So, yes, Jeff is quite right to argue that subsidies are not to blame for high global oil prices.
The world petroleum "pie" is being re-allocated. The USA will end up with a smaller slice. Asia will have a larger one. Some people may not like that. Oh well.
I agree with this and is somewhat related to Jerome a Paris' "Anglo Disease."
Many people around the world, especially in oil "producing" countries expect an equal share of a resource commonly owned. It is perceived as unfair not to have access because of price.
Removing subsidies won't substantially reduce consumption, but temporarily allow more consumption at a lower price for the world's wealthy.