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Demand destruction isn't working out so well
Posted by Yankee on September 28, 2005 - 9:14pm
Topic: Demand/Consumption
Tags: gas prices, peak oil [list all tags]
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.
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.
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.
T E L E C O M M U T I N G
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.
- For the short-term post-hurricane crunch, we only need to work on the margins, to reduce the last few percentage points of consumption.
- 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:http://www.stcwa.org.au/journal/210405/files/background_IEA.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.
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.
Smaller Cars Enjoy New Chic
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."
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.
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.
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.
My Honda S2000 is sitting in my garage and doesn't move much ...
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.
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.
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.
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.
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.
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.
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.
http://money.cnn.com/2005/09/28/pf/debt/delinquencies/index.htm
http://tonto.eia.doe.gov/oog/info/twip/twip_gasoline.html#demand
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.
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.
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.
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 peakoil.com 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.
Conspiracy theory from Wikipedia:
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.
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.