19 March 2010

Oil Demand Inflexible

Oil demand is far less responsive to increased prices than it used to be.

compare two decades in which the price of crude oil has quintupled: 1973-84 and 1998-2008. After the price increases of the 1970's, per-capita demand fell by 19% for the OECD and by 13% for the world as a whole. In the past decade, with oil price increases similar to those of the 1970's, per-capita demand fell only 3% in the OECD; worldwide it actually increased, by 4%.

Why Is Oil Demand More Inflexible?

Oil demand is less responsive to price than it used to be because in most situations where there is a good alternative to oil with current technology, the switch has already happened.

The factors most responsible for reducing demand since 1971 cannot be repeated. Almost all the low-hanging fruit has now been picked; it cannot be picked again. The OECD has already done the easy fuel-switching, away from oil used in electricity generation and space heating.

Non-transportation uses for oil has declined dramatically. Only Hawaii and Alaska use oil as a major source for electrical power generation. Home and business heating rarely use oil outside the Northeast, and this use is becoming increasingly rare there. Plastics and fertilizer have never been a big part of the total. Per the U.S. Energy Information Administration's 2008 data:

As of 2008, 42% of U.S. industrial energy consumption was petroleum, making up 23% of petroleum used. Residential energy consumption was 16% petroleum(fuel oil and propane), making up 5% of petroleum used. Yes, only 1% of power sector consumption was petroleum, and 95% of transportation was petroleum.

In theory, one can use biofuels, natural gas, and electricity to power vehicles, and can reduce oil demand with reduced vehicle use and a shift to more efficient vehicles.

In practice, alternative fuel vehicles aren't quite ready for prime time yet. There simply isn't the fueling infrastructure or industrial capacity to switch to them in numbers that have a big impact on our economy's demand for oil. There is some room to drive less and use more fuel efficient vehicles, but it isn't huge and any vehicle switch takes more than a decade to work its way through the existing stock of vehicles.

We are close to being able to make progress in reducing oil demand.

There are several firms developing plug in electric vehicles, and the several major automobile industry firms are looking into them as well. There is one firm, Smith Electric Vehicles that makes commercial trucks intended for use in fleets dispatched from a depo. There are viable short range prototypes and limited production vehicles in existence. My intuition is that the price range where it makes sense to switch from gasoline or diesel powered vehicles to electric vehicles on a purely economic basis with existing technology is in the vicinity of $8-$16 a gallon gasoline prices.

There is a niche industry of natural gas fueled vehicles out there. Natural gas is also a stop gap solution. Peak natural gas is more distant than peak oil, but not that much more distant. Demand for natural gas as a cleaner alternative to oil in many applications is straining supplies of this oil related resource, which trades in a market that is more regional, at least until new technologies for shipping it receive wider use.

There are many vehicles that can drive on ethanol or biodiesel, but there is little infrastructure to make these fuels available and a limited fuel capacity to use this infrastructure. Options like making oil substitutes out of coal also exist technologically, but the capacity to do so isn't in place right now and the environmental concerns are substantial.

There are also a variety of small more fuel efficient vehicles on the market, many using modern diesel engines or hybrid systems to increase fuel efficiency. But, the gains are fairly modest.

Interest in both freight rail and passenger rail as fuel efficient alternatives has spiked. Even buses, which receive far less attention than they should given the amazing fuel efficiency per passenger-mile, have gotten more attention.

Zoning laws and real estate trends are also increasingly sensitive to the virtues of density and reduced travel time.

Organic farming, which makes less intense use of oil resources than conventional farming, has gone mainstream with organic produce now making up a meaningful share of the produce sold in non-specialty grocery stores, and organic oriented grocery stores seeing their market share rise.

In industry, apparently: "Most of the petroleum consumed (still gas, etc) in the industrial sector is consumed in the refinery and chemical sectors to create process heat/steam." If so, there are good alternatives that aren't petroleum based, although coal as a replacement raises serious environmental concerns.

But, we aren't there yet. The changes left to be made take a considerable amount of time to implement, measured in decades, and an oil price spike may well hit before we have them in place.

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