Strange Behavior

With oil hitting $120, there are some things about the energy markets that don’t make much sense. Or maybe they do

We’ve all heard the reasons why the price of oil is soaring. Pipeline attacks in Nigeria, mischief in Iran, the plunging value of the dollar, those pesky hedge funds. The real reason, if there is one, isn’t as important as the impact. At $120 a barrel, the world’s oil bill will account for 8% of global economic output, twice what it was in 2006. Yet the market and consumers’ habits don’t seem to be changing all that much (the spike in Prius sales notwithstanding). Global demand, at 86 million barrels of oil a day, hasn’t wavered. Motorists are driving almost as much as they always have. And politicians are still blocking development of America’s untapped oil wealth in coastal waters, the Alaskan wilderness and the massive oil shale deposits of Colorado. Maybe everyone thinks the price of oil is going to drop, and drop big, in a few years. But other rational things explain our seemingly irrational behavior.


Why Aren’t You Driving Less?

The Department of Energy estimates that U.S. petroleum demand will sag by just 200,000 barrels per day this year, less than 1% of the 20.7 million BPD total. Wasn’t the wave of hybrid cars and higher mileage standards supposed to do more than that? Maybe it will 10 years from now. A lot of older, gas-guzzling vehicles are still being driven. The median age of the 135 million cars on the road is 9.2 years, as of 2006, up from 6.5 years in 1990 (for that you can thank manufacturers for making better cars). With that huge installed base of aging vehicles, the average car’s 22.4 miles per gallon is just 1mpg better than a decade ago.

Plus we’re still driving as much as we did five years ago, 1.7 trillion passenger-car-miles a year. Those fuel-efficient cars may be having a self-defeating effect on driving habits. “There’s no doubt that hybrid owners end up spending just as much on gasoline as before because the added efficiency allows them to rationalize driving more miles,” says David Littmann, economist at the Mackinac Center for Public Policy.

Forbes