June 28, 2006
A reader writes, "Can you provide for readers of Econbrowser a range of estimates for the price of crude oil at which the US would be self-sufficient in the present and near future?"
A higher value for the long-run price elasticity of petroleum demand from recent studies is around 0.5, meaning
The U.S. currently consumes about 20.6 million barrels per day (mbd) of oil, of which we produce about 8.2 mbd ourselves. To eliminate all of those imports entirely through the conservation incentives induced by price increases with an elasticity of 0.5 would require
implying a price of
Some studies have suggested a much lower elasticity. It is amusing to calculate, for example, that if the elasticity were as low as 0.1, energy independence would require an oil price of
Of course the last number should make abundantly clear the limitation of this kind of calculation. It is quite wrong to assume that the log-linear summary of the historical relations (which is where the elasticity estimates come from) can be extrapolated to infer the results of a huge, ahistorical adjustment of the magnitude we're contemplating here. Indeed, economic theory tells us that an elasticity can't possibly stay below unity as the price becomes arbitrarily high. If you're spending all of your income on oil, for example, and the price goes up by 5%, your consumption is forced (by virtue of the budget constraint) to go down by 5%, not 0.5%, as an elasticity of 0.1 would imply. While the above calculations should hardly be taken literally, they do give us a sense of what I believe to be the fundamental reality-- trying to eliminate U.S. oil imports entirely through conservation efforts would be an enormously costly undertaking.
American politicians who speak of energy independence have in mind also alternative sources of energy, and here there is not such a simple way to wade through the thicket of possibilities. To take one of the more concrete and tangible possibilities, the Arctic National Wildlife Refuge might produce around 1 mbd, which would offset 8% of the U.S. oil import bill. But, even if exploration were approved today, the oil would not come into production for a number of years, at which point a good deal of that new production might be necessary just to replace depletion from existing U.S. fields. Expecting ANWR to result in a significant reduction in U.S. imports from current levels for this reason strikes me as quite unrealistic.
Finally, it is worth pointing out that, even if the U.S. somehow were to achieve energy self-sufficiency, that would not be the same thing as energy independence. It is hard to envision an arrangement that could effectively decouple the price of oil in the U.S. from that elsewhere in the world, even if our imports were zero. As a result, even if we were importing no oil from Saudi Arabia, I would expect a disruption in Saudi production to still have a very dramatic effect on the price that consumers pay in the U.S.
For these reasons, I am open to discussion about the extent to which it might be desirable to try to reduce the amount of oil that the U.S. imports, and strategies for achieving that goal. But when someone talks about "energy independence", I find it hard to take them seriously.
Posted by James Hamilton at June 28, 2006 11:07 AMdigg this | reddit
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Tracked on June 28, 2006 01:05 PM
At a sufficiently high oil prices, most everyone would decide to use battery powered cars (not hybrids), and the electricity for the batteries could be provided by some combination of nuclear, solar, and wind (and I'm sure some amount of domestic coal and natural gas). Nuclear power suffers from the NIMBY problem, and solar and wind are expensive, but if oil prices were high enough people would adapt.
I don't know what price of oil would be needed for such a change to become significant.
Posted by: ErikR at June 28, 2006 12:32 PM
Trade as a Stabilizing Force
Trade acts as a stabilizing force as a result of shocks to domestic supply. In response to hurricanes that reduced production and refining in the U.S. Gulf Coast, increased imports of crude oil and refined products mitigated the disturbance in the U.S. This is the opposite case from a disturbance to Saudi supply.Connection with a world market does not always result in adverse effects.
Posted by: Thomas Grennes at June 28, 2006 01:06 PM
If oil were to become untenable, other options would be adopted. Despite the NIMBY, nuclear seems the most likely short term solution, with electric cars, as inconvenient as they seem to be in general, becoming more popular by necessity. I suppose it would be interesting to calculate at what price would the conversion from an oil based economy to a nuclear based one be acceptable?
Posted by: pawnking at June 28, 2006 01:24 PM
I certainly agree with your dis-inclination to take seriously anyone who talks of "energy independence"...they do tend to be economic ignoramuses. But there are more reasonable (and less moronic) ways of looking at the issues. Consider the sheer cost of all that oil. At 20 million barrels/day and $70/barel, we're talking $500 billion/year (with most of that flowing out of the US to various unsavory despots - the fact that they happily lend it back is only a short term benefit...debts must be paid after all).
$500 billion/year is obviously a lot. In addition, it is a volatile number and the volatility itself causes all sorts of unpleasantness (they don't call them "oil shocks" for nothing). Reducing the average bill also reduces the impact of volatility on the US economy. So a reasonable way to look at "energy independance" as an objective is to frame it as (i) a reduction in the average "tax" paid by Americans to foreign oil producers and (ii) a reduction of the impact of the volatility of this tax
How do you get there? Using less oil is obviously the way to go. The US's 20 million barrels per day consumption is a quarter of the world's. Any increase in US production will only be marginal (what's ANWR? 1 million barrels/day). However, a significant reduction in US demand has a double-whammy of goodness. First it reduces the absolute amount of oil imported but secondly (since the US is such a big fraction of global consumption), it will drive down the price. This reduces the oil price "tax" on the global economy (especially the developing world) and also the vulnerability to price volatility.So who gets hurt? Well all oil producers obviously. We can all be happy about billions less flowing into the hands of the House of Saud. Unfortunately, Western oil producers will be hurt more since they're the high cost producers. Offshore oil in the Gulf of Mexico or the North Sea, oil sands in Alberta, etc.
How to get there? Since everyone seems to disagree about the elasticity of gas demand, take a two pronged approach. First,introduce a revenue neutral gas tax that sets a price floor (phase the tax in at 25 cents/year and aim for a target price floor of $4/gallon). With such a tax, revenues rock even if the price of oil falls. Use the revenue to give a nice big income tax cut, structured to mitigate the regressivity of the gas tax. Second, increase CAFE requirements by 1 MPG per year for all vehicle classes until mileage doubles. This is not impossible. Average car mileage in the US is 27 MPG (this excludes light trucks, SUVs, etc.). Consider the new Toyota Camry hybrid as a benchmark. It gets 40 MPG (today!!). Plug in hybrids will do better, maybe 50 or 60 MPG. To get the electricity for all those new plug in hybrids, build coal or nuke power stations (depending on whether you care about global warming or not). Phasing all this in (CAFE standards and the gas tax) will ease the transition. In 10 or 15 years, once the vehicle fleet has turned over, a doubling of fleet mileage should reduce US oil consumption by 25-30% (reducing global consumption by about 6 or 7%). And if all the new electricity you need comes from nukes, CO2 emissions will have dropped as well.
This is not impossible and won't even be particularly painful, unless you're an oil companiy of course.
Posted by: ramster at June 28, 2006 02:09 PM
Yet another excellent post, JDH.
Ramster, so who gets hurt? Yes, the oil producers, as you say, and, on any time frame less than the long term, US citizens, among others. An economy has some flexibility and ability to change, but *some* implies a limitation that cannot be broached without serious dislocation. Look at the trouble GM is having.
Posted by: Thomas James at June 28, 2006 05:11 PM
When youíre running numbers for crude oil costs, you need to take a few things into account.
First, 20 million BPD includes refinery gain. Thatís the volume increase you get from cracking the heavy oil into lighter products. The volume increases by something like 2 million BPD. Since the refineries already paid for that oil when it went into the refineries originally, they donít have to pay for it again. Hence you need to reduce the amount we pay by about 2 million BPD. (Iím sure the EIA has the exact number somewhere in all of their data.)
Second, the price quoted in the press is for a benchmark crude, usually West Texas Intermediate (WTI). It is a light sweet crude. We actually use a lot of heavy sour crudes that trade at a discount to WTI. That discount can be anywhere from $5 to $15 per barrel.
With those two things factored in, you get a lower number.
Also, when looking at elasticity, consider the following. Calculate the amount of crude we send into refineries every year. You can find that by looking at Gross Input to Distillation units http://www.eia.doe.gov/emeu/aer/txt/ptb0509.html Multiply that number by 365 and divide it by the yearís midpoint population estimate from the census bureau.
That gives you the number of barrels of crude oil going into refineries per person per year.
While the number bounced around some in the 1970ís and early 1980ís, for the last 20 years (since 1986) it has been between 20.08 and 19.22
Meanwhile the (nominal) cost of that oil has varied by a factor of 3.
For cost data see http://www.eia.doe.gov/emeu/aer/txt/ptb0521.html
Somebody might want to check my math, but that looks really inelastic to me.
Posted by: Scott Gustafson at June 28, 2006 05:21 PM
Scott, refinery process gain is included in the 8.2 mbd production figure I give for the U.S, and therefore is not a factor in the difference 20.6 - 8.2. One can also arrive at the 20.6 - 8.2 = 12.4 mbd figure for imports that I use directly from the EIA data for crude oil imports, which in 2005 averaged 12.4 mbd.
Posted by: JDH at June 28, 2006 06:06 PM
Top 10 Signs of Impending Peak Oil:
1.) Economic blogs look like peak oil blogs.
Posted by: mh497 at June 28, 2006 06:21 PM
Hamilton - "But when someone talks about "energy independence", I find it hard to take them seriously."
So, what are your thoughts on Brazil?
Posted by: Anonymous at June 28, 2006 06:48 PM
Hm. Let's start with Demand Side Reduction - reducing the amount of energy we use. Could we cut our oil consumption in America to within the amount of oil we currently produce? Of course we could - a lot of scooters and plastic diesel hybrid cars, ethanol and so on. Energy savings typically cost massively less than developing new sources of supply.
Likewise, don't forget about coal. At what price point do coal->oil processes become economic?
There are a lot of angles to this energy independence business!
Posted by: Vinay Gupta at June 28, 2006 07:04 PM
Top ten things peak oil advocates see as "proof of peak oil"
Posted by: Jack at June 28, 2006 07:08 PM
JDH Ė Your numbers take that into account. Other people donít. The same is true for the prices people assume.
The more interesting thing is how inelastic demand seems to be. Iíve never seen a more vertical demand curve. The quantity is 19-20 barrels per person per year regardless of the price.
Posted by: Scott Gustafson at June 28, 2006 07:25 PM
Vinay, and what should we do with all those unemployed auto workers, to name a subcategory of the surely unemployed in the scenario you draw?
Posted by: Thomas James at June 28, 2006 08:08 PM
To anonymous, who wondered about energy independence and the Brazilian example. JDH is quite right to scoff at those who who talk of energy independence for the US - esp. at current rates of consumption.
Robert Rapier recently wrote an excellent piece on just this topic. Quoting him:
There are some fundamental differences between the U.S. and Brazil that explain Brazil's energy independence. The first is that Brazil has a far lower per capita demand of energy than does the U.S. According to BP's recently released "Statistical Review of World Energy 2006", Brazil consumed 664 million barrels of oil in 2005. With a population of 186 million, annual per capita oil consumption was 3.6 barrels per person. The U.S., on the other hand, consumed 7.5 billion barrels of oil in 2005. With a population of 296 million, annual per capita oil consumption in the U.S. was 25.3 barrels per person - seven times that of Brazil.
On the production side, in 2005 Brazil produced 627 million barrels of oil, for an annual per capita oil production of 3.4 barrels per person. The U.S. produced 2.5 billion barrels of oil in 2005, for an annual per capita oil production of 8.4 barrels per person. The annual shortfall between oil consumption and oil production in Brazil was 0.2 barrels per person in 2005. In the U.S., the shortfall between consumption and production was much larger at 16.9 barrels per person.
or his excellent blog at
Posted by: perrnik at June 29, 2006 06:18 AM
Whoa whoa whoa....somewhere the ghost of Ricardo is screaming...
First of all, this discussion needs to kicked up a level and have oil removed from it entirely. Yes, oil is big and all, but it's still just a "widget" when you get right down to it. Professor Hamilton's post is just as valid for copper and green grapes and little plastic toys - yes, there is a price at which we can be self-sufficient - but at what cost relative to economic inefficiency? If we can get product X from elsewhere cheaper, then why not use our domestic production where we have far greater comparitive advantage?
Furthermore, I've never quite understood the rationale for ramping up domestic oil production - *if* and that's a big if, the world is running perilously close to running out of oil, it is in our best interests to consume everyone else's first and leave ours for last - what is this, a race to see which country can deplete their resources fastest?
Posted by: Jon at June 29, 2006 06:39 AM
Professor Hamilton, I would be interested in your take on Stuart Stanford's piece at the oil drum today, given its economic bent. Thanks.
Posted by: Jack at June 29, 2006 09:48 AM
Jack, there's quite a bit in Stuart's discussion, and it's hard to do justice to all the ideas with just a few words. But let me offer a couple of thoughts.
On the forest management issue, the usual way one sets up these problems, it is not a question between clearcutting or sustainability, but instead the calculation involves how high is the sustainable level of production (Stuart calls this number kX) that you would want to choose. The typical result is that, with a positive discount rate, you would choose a level of production that is sustainable, but less than the maximal sustainable rate, that is, you would overharvest relative to what would produce the highest steady-state yield. This is not simply a matter of what your accountant tells you or what a market economy would lead to, but is the characteristic of the solution to an optimal control problem if you run the forest all by yourself, and all you care about is yourself and your descendants who will also depend on the forest, but, with the positive discount rate, you care more about yourself than you do about your descendants.
Stuart then goes on to relate this to the inflation rate, and here I have some differences with him. My view is that, regardless of what is going on with anything else in the economy (more trees, less trees, more oil, less oil), there exists a time path that the government could choose for the money supply (conceivably a continually decreasing money supply in a really miserable setting), such that the purchasing power of a dollar does not deteriorate over time. If we used to have 10 potatoes and 10 dollar bills, and we now only have 1 potato, if there's also now only 1 dollar bill, there's no reason why the price of a potato can't still be $1 for 1 potato. Obviously it's a lot more complicated than that simple example, but the point is, it's a mistake to have a theory of the purchasing power of a dollar (i.e., a theory of inflation) that makes no reference to the total number of dollars that are in circulation.
Posted by: JDH at June 29, 2006 11:45 AM
The $70/bbl is for light, sweet crude. I remember seeing some chart a while back showing the spot prices for various other grades where "Wyoming Rotgut" or whatever was going for $20/bbl. There are also common reports about the Saudis trying to sell lots of lower-quality crude oil. We've seen the pictures of the gigantic pile of sulfur.
At what point does looking at the spot price for light, sweet crude start leading one astray from what's really going on?
Posted by: Jake at June 29, 2006 01:08 PM
Jake, I agree that these differences in grades are important, as I discussed here, and I tackled the specific Saudi question here. (By the way, where's the picture you're talking about?) The low Wyoming prices you're remembering from this spring had nothing to do with the quality of that crude, but rather the availability of local refinery capacity. In any case, the elasticity calculations I give here would describe the percentage increase in all prices, if all face the same price elasticity.
But please don't miss the main point of my post, which was not to defend a particular number such as $440, which is surely a very crude estimate, (and so is that pun), but rather to point out that trying to make the U.S. energy self-sufficient would be a very costly undertaking.
Posted by: JDH at June 29, 2006 01:45 PM
At risk of further hijacking discussion of your post for mine, I agree with everything you say above (on potatoes and dollars). My point is that the central bank would need in those circumstances to raise interest rates (probably sharply) in order to cut the number of dollars in line with the number of potatoes (just as the Fed did following the 1979 oil shocks). Inflation could be avoided if the central bank so chose, but rates would be higher than they would have to be under happier circumstances. That raise in interest rates not only has the effect of cutting back near-term consumption (eg of potatoes), but also of shortening discount horizons.
Posted by: Stuart Staniford at June 29, 2006 02:50 PM
Anyone know the current price for vegetable oil? Must be something close to that.
Posted by: Lord at June 29, 2006 03:47 PM
Let me return the discussion to the original question from a reader to Jim Hamilton: "Can you provide for readers of Econbrowser a range of estimates for the price of crude oil at which the US would be self-sufficient in the present and near future?"
Assuming that the questioner means self-sufficiency in producing/providing sufficient volume of domestic crude oil to the U.S. national market to satisfy existing and near-term future crude oil energy derivative demands, I suggest that the reader's questions (two questions rolled into one sentence) haven't really been answered thus far.
Let me add that in providing answers to the reader's question(s), one should factor in the potential 'present' and 'near future' crude oil pricing levels at which the U.S. economy could or would be projected to stall, decline, or plunge. To do otherwise is to similar to fueling a corporate jet that will never leave the ground as it is intended to be a static display.
I assume that 'present' means now, and 'near future' could mean five years. If so, the answer to both questions could be "None". For obvious economic and infrastructure/logistical reasons.
Posted by: Banacek at June 29, 2006 08:01 PM
There seems to be an important thing being overlooked here, which is the possibility of disruptive technologies.
This looks like an analysis for short-run and medium run elasticity. It seems to me that the traditional economic analysis assumes a linear, continuous mathematical relationship, in which there is always a tradeoff, and diminishing returns for conservation strategies. The reality may be very different.
If substitutes for oil have a high market-entry cost, and large efficiencies/economies of scale once they've reached a certain market penetration, then consistently fairly high oil prices could allow a new technology to enter which, once it got a real toehold, could almost completely replace oil for transportation.
I think that's what's happening with hybrids. The problem with EV's has always been the battery. Hybrids are achieving serious large-scale sales, and batteries are getting an enormous kick-start both in R&D and manufacturing volume. The only thing holding back hybrids now is the speed with which manufacturers can ramp up battery production. That's why the ROI of hybrids is now marginal, because Toyota and the others can't supply the market, so they're keeping prices high.
Once the new nanotech Li-ion batteries (search Amazon for Dewalt 36-volt, Google for Toshiba and "1 minute", and other technologies: Google for Firefly or Eestor)get through the lifetime testing car manufacturers require before they go out on a limb, and manufacturing volume ramps up, plug-ins become feasible, EV's are on the horizon, and the whole game changes. Then everyone will want to move to plug-in hybrids with large batteries which allow them to run 90% on electricity.
Oil for transportation might get replaced as quickly as manufacturing can do the switch-over. Some infrastructure might be needed, say power outlets in parking garages and parking meters (like exist currently in Canada and Minnesota, for engine pre-warming), but the momentum for the switch would be overwhelming, once it was clear that the new technology was not a marginal improvement, but clearly better overall.
James, what do you think?
Posted by: Nick at June 30, 2006 08:30 AM
I'm with JDH. US energy independence, under the current energy mix, is fictional .... in the manner, you might say, as Bush's early pronouncement that fighting in Iraq is officially over. 100% Hollywood. 0% reality.
Posted by: Thomas James at June 30, 2006 08:34 AM
To make us energy independent we only need to make consumption of primary energy sources equal to consumption. In a market economy, this is done through the price mechanism.
1) Coal consumption is already about the same as production
2) Natural gas consumption is above production by about 10% ? So we would have to increase the price of natural gas.
3) Petroleum is a problem. We consume 20.5 million barrels a day, but only product 7.5 Mbd. So we would have to tax the wazoo out of it. My guess is that a gallon of gas would have to exceed $10. The actual number isn't really important because oil production in the US is falling so it would have to be continually increased anyhow.
Any questions as to why we are at war in Iraq?
Posted by: vorpal at June 30, 2006 09:45 AM
One more note, the good news is that we have a huge National Budget Deficit/Debt, so we wouln't have to worry about finding a place to put all of those energy tax dollars.
See. In the end, things can work out well .
Posted by: vorpal at June 30, 2006 09:48 AM
One more one more note:
In summary, it IS possible to become energy independent. We may not like it, but it is possible, and the path to it is very straightforward.
In addition, the same principle could be used to balance the current account deficit, where all imports are taxed and all exports are subsidized with the very same revenues (making it tax neutral) ... until a balance is struck. The path to balanced trade is just as straightforward. Again, people may not like it (quasi-economists have ideological problems with it), but it would be effective, and in a market economy, is the only effective means of accomplishing the goal.
If there were other options, then why do prices exist in the first place? Prices only have one job, that is, to constrain consumption.
Posted by: vorpal at June 30, 2006 09:54 AM
the possibility of disruptive technologies
Is not that significant. If you think gas is expensive just compare that to electricity. The last significant change in energy was a century ago. There is little disruptive about hybrids, other than to the automotive industry.
Posted by: Lord at June 30, 2006 11:11 AM
"If you think gas is expensive just compare that to electricity."
I'm not clear - what are you trying to say? The electricity cost of an electric vehicle is 1/3 the cost of a gasoline ICE.
"There is little disruptive about hybrids, other than to the automotive industry."
Well, ok, but vehicles built by the automotive industry consume most oil. The point of hybrids is that they're a transition to electric vehicles, which consume no oil...
Posted by: Nick at June 30, 2006 01:48 PM
An important point to emphasize is that energy indpendence does not mean isolation from price hikes, as the original post noted. The UK is a case in point. Their North Sea oil production is just a tad higher than their domestic consumption. Their gasoline ("petrol" in their language) prices, excluding taxes and in local currency, have risen by about the same percentage as our gasoline prices.
I suspect that the people talking about energy independence think that it will get us back to paying $1.00 for regular at the pump. Not true.
Posted by: Bill Conerly at June 30, 2006 02:15 PM
1 gallon gasoline is equivalent to 33.6 kw-hr which at a local rate of $0.12/kw-hr works out to $4 / gallon. Electricity could be more efficient although probably not with current technology.
Posted by: Lord at June 30, 2006 04:51 PM
Lord is committing a thermodynamic foul. It's true that the thermal energy content of a gallon of gas is around 33.6 kw-hr, but there's no way to get anything like 100% of that out of a heat engine. Practical efficiencies are 20%-40%. By contrast an electric motor can be 90%+ efficient no problem. Hence electricity is a cheaper fuel than gasoline right now (ignoring capital costs).
Whether plugin hybrids can overcome the market barrier that they require consumers to change their behavior is the much bigger question in my mind. At least where I live (San Francisco), I cannot reliably park next to my house, so I could not reliably charge a plug-in hybrid at home. So there's no way I could be an early adopter - I'd have to wait until there was widespread charging infrastructure which would likely only show up late in the adoption bell-curve. That's a problem because cultural early adopters for plugin-hybrids are probably mostly liberal blue-state big-city kinds of folks who might face similar parking issues.
Posted by: Anonymous at June 30, 2006 05:22 PM
I was that last anonymous :-)
Posted by: Stuart Staniford at June 30, 2006 05:23 PM
Perhaps we should ask question a different way. At what price would the US become a net exporter of crude?
As for electricity, the rate varies with the time of day. I get power for 5 to 7 cents per kw-hr in the middle of the night. During prime air conditioning times, itís 10 to 15 cents.
Posted by: Scott Gustafson at June 30, 2006 05:29 PM
if we expect that oil prices go up significantly next decade it makes even more sense to tax the gasoline and energy today.
Consumer and businesses will have to start to react early.
Target prices in the area of $4-5/gal. look reasonable.
US consumes two times of energy per capita than average European. It's enough to see the streets in London and NYC to find out why. 3l+ engines in UK is not frequent (or should i say not "typical") view.
Tax the cars with engines larger than 1.8 70% sale tax is not something world did not see before. In Israel people pay 80% car tax.
Open swimming pools with heating is another thing to cut in with Fed taxes. Double or triple the electricity price after 6 kw-hr.
It is better to enforce energy savings now while the Fed can spend the money instead of doing it tomorrow without any room for maneuver.
Fed gets income which can be spent in environmental programs and energy savings programs.
Posted by: larytet at July 1, 2006 05:06 AM
"As for electricity, the rate varies with the time of day"
Then you're one of a handful of customers in the US who have this automatic incentive. Most of us pay the same rate all day long.
Posted by: M1EK at July 1, 2006 07:44 AM
By contrast an electric motor can be 90%+ efficient
Yes, but a battery can't. Add to this the replacement cost and some amount of taxes and it is pricey indeed. We could electrify the roads and not have to deal with batteries, but that too would be an immense expense. The point is electricity is no panacea, and certainly not a disruptive technology.
Posted by: Lord at July 1, 2006 10:17 AM
One could use solar panels for electricity at a cost of $0.25 / kw-hr.
Posted by: Lord at July 1, 2006 10:19 AM
come on lads - why have you left your 'peak oil' thinking until now ? 'THE LIMITS TO GROWTH' was published in . . . . . 1973. where have you been ?
the real question is - 'can the w o r l d become energy independent?' the answer is - yes always was, always will be.
as for the united states, JDH claims to be open to hearing the solution, so here it is :
1 sustained and controlled economic contraction.
1a. ( or expand into a messy crash.)
2 sustained and controlled population contraction, at a slightly steeper percent per annum.
2a. (or ditto)
3. - thus energy consumed per capita is theoretically sustainable.
3a. alternatively oil will be $10 per barrel but nobody on your road owns a car. political and economic momentum then passes from the united states to some society which has not yet quite reached the level now realised by all to be unsustainable.
Posted by: gillies at July 2, 2006 10:33 AM
all other things being equal - less oil means a higher price for oil.
but in a major historical / economic turning point, all other things are not equal - all other things are thoroughly disrupted.
so you need to accept that in the more extreme circumtstances envisaged - less oil will mean less demand for oil. you may even have to invade iran to keep the price up . . . .
Posted by: gillies at July 2, 2006 10:56 AM
Oil demand will equal oil supplied.
The equilibration will be price.
If the price goes high enough, demand will fall and/or substitutes will be found.
That said, we in the UK pay c. $US6 for gasoline (90p per imperial gallon at last look, and I don't have the pence to dollars and imperial to us gal to hand), and we still consume plenty of gasoline.
In a physically much smaller country we still drive a lot. And we drive *fast*: 90mph on the motorway is not abnormal. So clearly fuel economy is not a big factor in driving decisions.
(one factor: diesels are about half of new cars sold here, and I would guess about 10-15% of all cars (a very recent trend in other words). Hybrids are almost unknown (much more expensive than petrol cars). One has to adjust for the higher energy content in a gallon of diesel, but still, a diesel produces 10-30% higher fuel economy than its comparable petrol engined equivalent.)
So my guesstimate is that gasoline prices will have to go pretty high before they force serious efforts to conserve. I see plenty of Range Rovers on the streets of London, and a Range Rover averages less than 20mpg.
Also gasoline is a relatively small (c. 20-25%) component of the lifetime cost of owning a car, and of the monthly US household budget (c. 3%?). So doubling the price of gasoline, whilst it would cause screams, isn't going to cause more than a few people at the margin to move closer to where they work, take up bicycling, etc.
In the US this is compounded by the problems of GM and Ford. They are close to bankruptcy, and Michigan, Ohio etc. are electorally key states. No US president is going to do anything that would threaten the pensions and healthcare of the US autoworkers, if he can avoid it.
In the way of these things, it is Toyota which has pioneered high fuel efficiency power plants. No US politician is going to be seen to be favouring Toyota over GM.
The only country I know of that has made a really credible effort to reduce oil consumption is Japan post 1974. Since they are 100% dependent on Middle Eastern oil, the interruption of supply then frightened them-- and has echoes of Roosevelt cutting off their oil supply in 1941 and triggering WWII (from their perspective-- the Imperial Japanese Navy told the Cabinet that they had an 18 month window before the Navy could no longer fight due to oil short supply--it was either strike Pearl Harbour or give up).
In Japan, they have made a huge and credible commitment to public transport, bicycling is common etc. The average car has a small engine. Appliances are fearsomely energy efficient. Every business works to minimise energy consumption (both oil based and electricity etc.). It has been a nation wide effort involving both changes in public mores and bureaucratic dictat (as well as price mechanisms), and it has been going on for 30 years, during which time, AFAIK, Japanese oil consumption has actually *fallen*.
US politics is based on oil cornucopia. I don't see the US ever having that degree of focus. There isn't a John Kennedy who would declare energy conservation to be a national goal, and if there was, the oil and car factions in the US senate would block him at every turn.
Business, oddly, is probably more sensitive to oil price moves in terms of consumption. In most business, you can't easily pass on your cost increases, so you tend to do the maximum to economise eg by shipping more less frequently to save on shipping costs, or by having your staff fly less. Most businesses work on a net margin of less than 10%, so a 1% shift in costs can be a 10%+ fall in profits. You tend to react.
Posted by: Valuethinker at July 4, 2006 12:09 AM
"Elasticity" here seems to mean *demand* elasticity. What about *supply* elasticity? There are lots of drilling projects that make sense at $80/bbl that don't make sense at $50/bbl...and things like coal-to-liquids technology and cellulosic ethanol also have price thresholds at which they become good deals.
Posted by: David Foster at July 4, 2006 03:11 PM
?"By contrast an electric motor can be 90%+ efficient?...Yes, but a battery can't."?
Actually, the li-ions being prepared by a wide range of battery suppliers can do that. I?ve seen claims of 99% efficiency. The next Prius will use this kind of battery.
?Add to this the replacement cost?
replacement cost of what? The batteries? Toyota says their NIMH batteries will last the life of the vehicle, and every indication is that that?s the case for the planned li-ion batteries as well.
Stuart, you have a good point about infrastructure. The best estimate I?ve seen is 50% of drivers could charge easily. The rest would come much more slowly, with garage and parking meter chargers, like they have in Canada and Minnesota for engine pre-warming. But, I think 50% is enough to get started.
M1EK, the federal energy act of 2005 mandated residential time of day metering by spring 2007. I haven?t seen any news about implementation, but it seems to be coming.
Posted by: Nick at July 6, 2006 08:35 AM