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Why Aren't High Oil Prices Cutting Demand?
Emily Gertz, 1 Oct 07

Over at Grist, Tom Philpott offers a good read on why high oil prices (around $80 barrel right now, and the common wisdom seems to be that $100/barrel is not far off) are not causing a significant drop in oil demand. It's been a truism in some environmental circles for years that when oil got expensive enough, demand would drop and clean energy would find its footing in the market economy. But it ain't happening:

I was working in Mexico as a finance reporter in 1998-99, and wrote some about the first stages of the oil rally. Back then, most analysts seemed to figure that oil would settle around $30. Below that level, the oil companies and producing nations wouldn't make much money, and would thus cut supply. Above it, the global economy would slow as consumers and businesses cut spending, and demand would fall.

What happened? Why did oil demand keep growing right along with price, against economists' predictions? Why didn't U.S. consumers -- whose zeal to keep taking on debt and shop till they drop has been a major driver of the global economy -- not seriously cut back spending after oil hit $40, $50, $60, $70, and now $80?

Tom analyses a recent article from The Wall Street Journal, which posits that for Americans, higher gas and oil prices are being offset by the cheap prices of goods from China.

Hm. If this high-oil-price stick that clean power advocates have been awaiting for years isn't going to beat the US off of dirty power, then what will?

Read the whole thing.

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I think the argument is based on a false premise -- sort of. High oil prices will cut demand, BUT only if it's sudden and disruptive, which no politician currently in office desires. So while oil prices are rising, they're not that expensive relative to typical costs of living.

Add in the artificial wealth people have felt from low unemployment levels combined with flowing credit dollars and there's no real crimp in behavior.

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Posted by: Nicholas on 1 Oct 07

When oil is more expensive, alternative energy is cheaper by comparison. The demand isn't for oil per se, it is for energy and the machines that go along with production and consumption of certain energy supplies stay in the economy for years or decades even if the supply of a particular energy source rises. If the price of oil keeps rising, over time devices that consume oil will be phased out in favor of those that consume more affordable sources of energy, or less oil.

Posted by: Jarrett on 1 Oct 07

There's usually a 3 to 5 year lag between changes in hydrocarbon prices and significant changes in consumption. It takes time to turn over infrastructure: vehicles, building envelope and systems, power plant equipment, etc. It also takes time for people to learn (or relearn) how to tighten up a house, form a carpool, and so on. Meanwhile, high prices also encourage more source development, drilling, digging, etc. After the time lag, these trends collide. This happened in the 1980's, and could happen again.

Posted by: David Foley on 2 Oct 07

'Tis true. Demand for oil is surprisingly inelastic - and has become more so since the oil shocks of the 70s. But like second poster says - this doesn't actually hurt alternative energy. If the price of oil goes up, but the price of lithium ion batteries stays the same, at some point, having a plug-in hybrid car becomes the economically sensible thing to do, and people will start buying them (and probably not a moment sooner).

Car turnover time is several years, and people have to actually believe that prices are going to stay high if they're going to make big capital allocation decisions (like, should we live close to where we work instead of both commuting?). I think we've actually been perversely burned by the oil shocks of the 70's. The fact that everything seemed dire, and then the problem suddenly evaporated, has numbed us to the problem today - which is very different. Before it was an artificial shortage (and not a very durable one). Now it's a real shortage.

Even the oil companies still don't believe prices will stay high. They refuse to invest in anything that isn't economically feasible at $40/bbl. If we're lucky, that'll mean we get switched to something else sooner than if they were really aggressive about developing every resource in sight. When the stock market starts dumping the oil owners (Exxon, Shell/BP, Total/ELF, etc) without abandoning the oil finders and developers (TransOcean, Schlumberger), a change will have occurred, then we'll know the markets believe the black stuff is running out.

Then we start liquefying the coal and tar sands! Yippeee!

Posted by: Zane Selvans on 5 Oct 07

i think price is not so much the issue with oil consumption, energy is not a large spendingratio on the western budget and cutting on say your cartrips is one step to far for most consumers.

this is true even in the netherlands where i live, where gasoline prices dubbled in an few years and are on a much higher level than in the USA. the shock and awe affect, wich has been tried here as well, only lasted for a very short while for cartrips.

For housholdenergy consumption energyprice risings can make a difference in the long run, but legislation is a much better option in the netherlands imho, we just introduced some quite stricted new laws on energy savings considering building regulations and the goal of introducing 20% of sustainable energy resources (no nuclear that is) by the year 2020. this year it's about 6%.

interesting to see how the european and american views on making a change differ, I think we are counting more on the goverment to take care for us, you take the initiative more into your own hands (Don't worry about the Governement, to qoute the Talking Heads), maybe we should use the best of both worlds!

Posted by: wiebrand on 11 Oct 07



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