[PhilBiker]

Interesting article in USAToday

[Permanently_Baffled]

Does this mean that the demand for gasoline in the US isn't as 'inelastic' as once thought? If people are doing this now , imagine it at $7 per gallon as per the UK!!

PB

[savethehumans]

I can, Baffled. That's about the time they'll realize they need to start opting for other modes of transportation, not just cutting back on the number of trips...and it won't be pretty.

The use of subsidies in this country for oil & gas is one of the Top 10 worst things this government ever did to NOT prepare its people for the future. At least where you are, you KNOW what the real cost is--my fellow Americans haven't got a clue!

[frankthetank]

I've cut use a little (not much ) .... 7/gallon would cut use...

[Anjorni]

Ive noticed!

Before gas started it's upward climb at the beginning of the year when on the train, there were very few people taking the train - maybe 20 to a car?

Now - you cant find a seat! People are loading up 20 at each stop now!

Although I'm very glad to see this happening, I'm very disappointed to see that it took this for people to realize how nice mass transit can be.

(and this is happening where I least expected it to - Los Angeles )

[BabyPeanut]

Yeah, it's got to be Twin Peaks, that's it. The present and the future are going to be exactly like the past and the price of gasoline will go down in order to form the second peakstarting right now if not yesterday. Only thing is I CALL Expletive deleted.! link
$this->bbcode_second_pass_quote('', 'T')win Peaks--The title of a popular television drama series, Twin Peaks, which first aired during the spring of 1990, may be a good description of an emerging trend in retail gasoline prices seen since 2000. Prior to 2000, retail prices would typically follow a pattern of slowly rising prices, starting in late winter or early spring. With peak summer gasoline demand occurring between the Memorial Day and Labor Day holidays, retail gasoline prices would correspondingly peak at some point during this period. However, since 2000, this price pattern has given way to one that shows two distinct retail peaks during most years.

[skyemoor]

Let's take a systems approach to describing the problem and the impacts of the potential solution alternatives. The main problem is oil consumption, but cascading problems from PO can include heightened use of other fossil fuels, so these are included as well.

DEMAND

1. Transportation: 40% of oil in US is used for this purpose, including;
a. Personal Transport (cars)
b. Aggregate Transport (buses, planes)
c. Goods Transport: Long, medium, short haul (trucks, container ships, planes)
Primary Needs: Gasoline, Diesel

2. Heating
a. Home
b. Commercial
c. Industrial processes
Primary Needs: Heating oil

3. Petroleum-Based Products
a. Plastics
Primary Needs: Petroleum

4. Agriculture
a. Plowing, tilling, harrowing, harvesting, etc.
b. Greenhouse heating
c. Fertilizer (NG)
Primary Needs: Gasoline, NG

5. Electricity Production
Primary input: Coal


POTENTIAL DEMAND MODIFICATIONS

A. Reshaping Human Settlement Patterns
Focusing new growth and mass transit in urban areas
http://www.carfree.com
Major Demand Improvements: 1a, 1b, 2a, 2b (more shared walls)
Minor Demand Improvements: 1c

B. Increased energy efficiency
CAFE increase, higher standards for appliances, HVAC, industrial processes, etc
Major Demand Improvements: 1a (amplified when concurrent with A.), 1b, 1c, 2a, 2b, 2c, 4a,
Minor Demand Improvements: 4b

C. Alternate modes of transportation
Bikes, Buses, Mass Transit, Walking
Major Demand Improvements: 1a.
Minor Demand Improvements: 1c


SUSTAINABLE ENERGY SOURCES

(Note: if a source can generate electricity, that electricity can be used to charge batteries, run subways, drive HVAC systems, etc. it can also be be used to produce H2, hence the many potential improvements noted below)

D. Wind
Major Demand Improvements: 5 (if H2 gen, 1a, 1b, 1c, 2a, 2b, 2c, 4a)
Minor Demand Improvements: 4b

E. Solar PV
Major Demand Improvements: 5
(limited market penetration until costs are reduced)

F. Solar Thermal (including H2/electricity gen)
Major Demand Improvements: 1a, 1b, 1c, 2a, 2b, 2c, 4a, 4b, 5

G. Hydro Generation/Storage
Major Demand Improvements: 1a, 1b, 1c, 2a, 2b, 2c, 4a, 4b, 5

H. Tidal Power
Major Demand Improvements: 1a, 1b, 1c, 2a, 2b, 2c, 4a, 4b, 5

I. Wave Power
Major Demand Improvements: 1a, 1b, 1c, 2a, 2b, 2c, 4a, 4b, 5

J. Geothermal Power
Major Demand Improvements: 1a, 1b, 1c, 2a, 2b, 2c, 4a, 4b, 5


LIMITATIONS
The above raw assignments must be brought into context of existing infrastructure and inherent shortfalls. For example, all gasoline cars on the road today will not vanish overnight; infrastructure shifts will take time. And passenger planes will not fly on batteries. I will not endeavor to cover all limitations, but focus on some of the more meaningful.

I Transportation Safety.
Simply shifting a small percentage of commuters to bicycles will see a proportional drop in oil consumption. However, unless weather considerations are addressed via full fairings, the number will remain small during pre-peak. Conflicts between human powered vehicles and 4000 lb autos/trucks will limit the number of 'converts'.
http://www.velomobiles.net/

II Grid Stability
As one poster remarked. we cannot simply power our grid with simple renewable energy sources without consideration of baseload requirements and demand peaks, both seasonal and diurnal. To keep a grid stable, the dispatcher must have enough power to maintain daily minimum power supply (baseload) and be able to control dispatchable power, such as hydro or natural gas turbines. Many renewable sources are intermittent (solar, wind), available only as the weather allows. If the sun isn't shining and the wind isn't blowing, we can't simply shut down a whole country or continental region. Hydro storage may help, but a baseload provider is needed, which could be hydro generation and possibly nuclear for the interim, until fusion is developed.

Denmark is currently powering their over 20% of their grid capacity with wind power, so extensive use of a plentiful intermittent source is feasible.

Demand Side Management (DSM) can also be used to mitigate intermittent shortfalls; constrained spot pricing can be used as well.

Personal initiative could also be viewed as a limitation; how many people make major purchases with energy use as the primary consideration? Not many Americans, with some exceptions; our house is highly insulated, passive solar heated (also have woodstove), with photovoltaic panels powering energy efficient appliances/HVAC. I take a bus to work and drive a Honda Insight when I have errands that I can't bike to. The family car is a Prius. I would have preferred to live close to a subway location, but all the homeowner convenants restricted solar panels, and most existing homes would have required very extensive renovation. Simply noting the difficulties setting up a clothesline in California during their energy crisis calls out the impediments to personal initiative in these areas.


CONCLUSIONS

Our electric and fuel bills are about an order of magnitude less than those of our SUV driving neighbors. Such reductions are within relatively easy reach if energy efficiency ratings for automobiles/homes were signficantly improved, and options for renewable energy generation (PV primarily) were part of the sales options on homes.

So the primary changes that can bring about a transition to the establishment of sustainable energy sources as a our primary sources are by first lowering our high energy consumption levels through;

A. Reshaping Human Settlement Patterns
(includes localization of goods and food production, i.e., bringing back horse-powered family farms)

B. Increased energy efficiency

C. Shift to alternate modes of transportation

The above measure will allow us to then shift to sustainable energy sources. Please comment on areas missed, so that this can be updated to reflect your input.

[Aaron]

I think you left out the number of guns necessary to force everyone to comply with your plan....

There's probably a logarithm to describe the need for fewer & fewer guns as you kill off more & more people who don't comply.

[skyemoor]

$this->bbcode_second_pass_quote('Aaron', 'I') think you left out the number of guns necessary to force everyone to comply with your plan.....

[DantesPeak]

Even the major media admits that gasoline demand is almost inelastic, and it will take much higher prices to curb demand. Europe, I hope you still have some petrol left for us.

$this->bbcode_second_pass_quote('', 'G')asoline Demand Accelerates
As Katrina Price Surge Wanes

By THADDEUS HERRICK
Staff Reporter of THE WALL STREET JOURNAL
November 5, 2005

Americans are stepping on the gas again.

Though gasoline demand fell about 2% from a year earlier following hurricanes Katrina and Rita, use is ticking up again. This week, data compiled by the Energy Information Administration showed gasoline demand rising over the year-ago period for the second straight week to nine million barrels a day, bringing U.S. demand to its highest level since late August.

The rise in demand has come as the average U.S. gasoline price has fallen, to $2.48 a gallon last week from a high of $3.07 for the week ended Sept. 5. But it remains about 45 cents a gallon higher than this time a year ago, meaning many consumers are returning to their gas-thirsty ways despite higher prices. That could keep upward pressure on gasoline and oil prices in the coming weeks and months, at a time when some market observers are wondering whether lower demand could take some of the pressure off energy prices.

Unless Americans change their driving habits, the quickest way to significantly bring down gasoline prices is to make more gasoline. But tight world-wide oil supplies and a lack of refinery capacity, particularly in the U.S., make that unlikely.

Onlookers from economists to oil-industry executives to environmentalists have been watching to see whether September's price surge would temper America's thirst for gasoline, which helped bring the country to the edge of an energy crisis.

The initial decline in demand was a pronounced drop for gasoline, the lifeblood of the American transportation system. In Box Elder, Mont., Gary Skinner and his wife, Lorraine, parked their Toyota Four Runner in favor of their more fuel-efficient Suburu, and Mr. Skinner quit his job because his commute cost too much. "It wasn't worth it," he says.

Higher prices have also affected the auto industry. Sales of its largest, most fuel-inefficient sport-utility vehicles dropped in recent months.

But despite the change in the behavior of some, U.S. motorists have so far used just about as much gasoline as they did in 2004. Economists say that illustrates gasoline's "inelasticity," another way of saying that gasoline prices have little impact on how much people buy.

According to Global Insight, a 1% change in the price of gasoline results in just a 0.03% change in demand. The same 1% change in the price of women's clothing, by contrast, results in a far more significant 0.8% change in demand. "You can't get people off the roads," says Ms. Novak.

Such inelasticity is rooted in America's heavy reliance on the automobile for everything from work to leisure. In most cases, Americans have few good alternatives. Adelberta Benito, a Houston resident, says she would need to ride three different buses to get her child to school, which would more than double the time she spends making the trip by automobile.

[AirlinePilot]

The consumer these days has a very short memory. As the price has settled a bit to pre Katrina levels everyone seems to think it's back to business as usual. I had entertained the idea for the last few weeks that maybe, just maybe, we were seing the beginnings of some actual PO awareness. I thought it was possible that we might be buying some time over the next year or so but my intuition seems to be proving itself out. As soon as costs stabilize the sheeple settle right back into thier old ways BAM....ZOOM..we are right back where we were in late August and early September. I'm really worried once we start losing the gasoline imports and TPTB decide to put the Kibosh on any more depletion of the SPR.

[Colorado-Valley]

Probably the worst thing that could have happened after Katrina was artificially flooding the U.S. with imported fuel and with crude from the Strategic Petroleum Reserve. We had a chance to begin dealing with reality, but the government has temporarily kept us in a fantasy world.

I talked to a guy yesterday who just bought a new Navigator because it was on sale and gasoline prices have been going down.

He doesn't care anyway, he's old and rich and he wants his toy.

[lateStarter]

Some people just have to 'learn' the hard way. This short-sightedness will exact a high price down the road. Unfortunately, since this a one-shot event, nobody will actually 'learn' anything. I doubt, after the fact, most people will even acknowledge their own ignorance wrt this issue. There will just be lots of finger pointing and animosity. It's always someone else's fault...

[Revi]

When my wife and I shrunk our cars I thought the guys in the conference room would think it was a good idea. They didn't. It was like heresy. They feel that it's safer to drive their suv's and that it is admitting defeat to step down in energy use. No amount of fact will convince them that SUV's are in fact less safe and that there is no trade off at all with a smaller, and yet safer car.

[kmann]

I wanted to model gasoline demand destruction from the price increases. I thought a reasonable assumption would be that gasoline useage growth would be proportional to GDP growth (all other things being equal). Under this assumption any shortfall in gasoline consumption growth would be attributed to price increases. Data used are from GDP quarterly statistics from BEA (Bureau of Economic Analysis) and monthly gasoline prices and usage statistics from EIA (Energy Information Administration), for the period between 2003 and 2005.

The percentage change in demand of gasoline was determined for each month on yoy (year over year) basis, to adjust for seasonal usage, then determined the cost change for each month on yoy basis. Then the percent change in demand was subtracted from the percent GDP growth to get percent change in consumption due to price increase. The results were then averaged over the whole period.

Example: April 2005

consumption 4/04: 273,777 thousand bbl/month
consumption 4/05: 273,900 thousand bbl/month
% change in consumption: 0.0
ave. retail price 4/04: 183.9 cents/gal
ave. retail price 4/05: 212.0 cents/gal
price change: 44.5 cents/gal
GDP growth rate 2nd qtr. 05: 3.3%
% demand destruction: 3.3 - 0 = 3.3%
demand destruction/price change: 3.3/44.5 = 0.0731% per 1 cent change in cost

or 7.31% demand destruction per $1 increase

The average for the period 2004 - 2005 was 0.0667% or
6.67% demand destruction per $1 increase in price.

The results seem fairly reasonable to me, maybe a bit lower than I expected.

[Kingcoal]

The demand destruction will no doubt be non linear. Somewhere around 3-4 dollars per gallon should see demand drop dramatically.

[MrBill]

Excellent analysis. Good work!

However, because your assumptions were that demand would grow in-line with GDP growth you negated any past productivity changes (i.e. more output per unit of input) from better technology, or substituting energy for other inputs (land, labor, capital, etc.) when energy was too cheap. We have seen both factors at work.

In the short-run energy use is relatively inelastic, but over the long-term significant substitutions can be made at the margins. But as incremental growth is subject to diminishing returns it takes more inputs (including energy) to create the next unit of output.

Also, I feel that we are transitioning from a period of excess supply to a period of tight supply versus demand which is not slowing down (world growth +4% despite higher energy prices, and US GDP growth strongest in 2 1/2 years despite energy more than doubling in that period. Other factors at work?

But have to agree with the comment from King Coal that demand destruction will no doubt be non-linear. So you might have to under-estimate past demand destruction relative to GDP growth in the past, and going forward build in a progressive reduction in demand for each increase in price.

By the way, do you assume dollar for dollar increase or percentage? Just curious because $15 to $30 is 100%, but only $15. The move from $75 to say $100 will only be 33%, but $25 per barrel.

As most of the developed world, in Europe for example, has learned to live with gasoline/diesel that costs the equivalent of $5/6 per gallon, I think America has a way to go from $3 per gallon to real demand destruction, especially as alternatives are scarcer in America compared to most of Europe. Therefore, I foresee demand destruction coming mainly from what else we give up in order to keep driving? Fuel costs cutting into discretionary spending.

Thanks for the post. Nice to see some serious thinking going on. Cheers.

[kmann]

Thanks MrBill.

$this->bbcode_second_pass_quote('MrBill', '
')By the way, do you assume dollar for dollar increase or percentage? Just curious because $15 to $30 is 100%, but only $15. The move from $75 to say $100 will only be 33%, but $25 per barrel.

[pup55]

good work, kmann,

I will try to incorporate this into my gasoline inventory forecast.

A .7% decrease in gasoline consumption per 10 cent price increase should mean a decrease in nominal consumption of .07 mbpd (approximately) on the weekly consumption.

This being the case, over the last couple of weeks, with gas about 20 cents higher than it was, we should see maybe .14 decrease in consumption compared to the seasonally-adjusted "normal" amount for this time frame. So, instead of 10.2 mbpd, maybe it will only be 10.06 this week.

We are still into roundoff error territory, because the data is so bad that anything less than about .5 mbpd gets lost, as we have noted previeously, however, at some point in the day, this will matter.

When the nonlinearity hits, we should be able to note it from the weekly consumption data.

Good work!

[MonteQuest]

Since cutting transportation use will be first and foremost to address peak oil, at what point will you curb or drastically reduce your gasoline consumption?

How much are you willing to pay first, before conserving?

What will you cut to defray the increased cost in gasoline?

A option that I didn't include was: I'll pay whatever I have to to get to work. I think that will be the case for many.