Will American Changes in Energy Consumption Stick?

by: James Hamilton August 13, 2008    

James Hamilton

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American energy consumption is dropping. But will falling gasoline prices reverse that trend?

From yesterday's Wall Street Journal:

Source: WSJ.
wsj_oil_demand.gif

Consumers are buying fewer sport-utility vehicles and more energy-saving washing machines. Some trucking companies have rejiggered their engines to max out at lower speeds. Gridlock is easing in California. Americans drove 966 million fewer miles in May than they did a year earlier, a 3.7% decline, according to the Transportation Department.

With shipping costs surging, companies are rethinking overseas production, slimming down packaging and retooling distribution networks. Yogurt maker Stonyfield Farm is only sending out fully loaded delivery trucks. Procter & Gamble Co. (PG) is filling smaller bottles with more-powerful laundry detergent. Locally made products, from beets to beer, are becoming a more attractive choice.

"Four-dollar gas is the best marketing tool I have," says Betsy Kachmar, assistant general manager of Fort Wayne Public Transportation Corp. in Indiana. Bus ridership in that city was up 16% in the first half of this year, compared with the year-ago period. Mass-transit ridership nationwide rose 3.4% in the first quarter, according to the American Public Transportation Association.

Also yesterday the Energy Information Administration reported:

Preliminary data indicates that global consumption rose by roughly 500,000 barrels per day (bbl/d) during the first half of 2008 compared with year-earlier levels, as a 1.3-million bbl/d rise in consumption outside of the Organization for Economic Cooperation and Development [OECD] was partially countered by an 800,000 bbl/d drop in U.S. consumption compared with year-earlier levels. The decline in U.S. consumption in the first half of 2008, reflecting slower economic growth and the impact of high prices, was the largest half-year consumption decline in volume terms in the last 26 years, when, in the first half of 1982, consumption dropped by nearly 800,000 bbl/d....

During the first 5 months of 2008, [U.S.] petroleum consumption fell by an average of almost 900,000 bbl/d from the same period in 2007. During June and July, the year-over-year declines narrowed to just over 400,000 bbl/d.

 

U.S. average retail gasoline price. Source: NewJerseyGasPrices.com.
gas_price_aug_08.png

 

But with oil prices now coming down even faster than they went up, is that all going to be reversed? None of the changes above were easy for people to make, and I don't expect them to reverse those steps that easily either. Although the price of gasoline today is less than it was a few weeks ago, it's still much higher than it had been at the time you purchased your last car. As consumers replace older models, they're invariably going to continue to substitute into more fuel-efficient vehicles even if oil prices continue to decline.

In addition, there was a mentality in 2005 that what looked like high gasoline prices at the time ($3 a gallon) were only temporary. I expect an opposite perception could have set in today-- even if gasoline prices go lower for a few months, consumers know they could go back up and nobody wants to be permanently stuck owing the big gasoline bills they remember from this summer.

On top of which, that energy conservation was in my opinion one key cause of the most recent price declines. With demand from China booming and world production stagnant, the key question was how high did the price of oil have to rise to bring about a significant drop in U.S. consumption?

And now we know the answer.

 

Source: EIA.
region_oil_aug_08.gif

 

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This article has 7 comments:

  •  
    Aug 13 04:51 AM
    "key question was how high did the price of oil have to rise to bring about a significant drop in U.S. consumption" - I thought the price finding exercise implied in the recent oil price surge had more to do with finding out when China and much of SE/S-Asia would kill their oil products price subsidies, since marginal demand is over there, not in the US/OECD. And personally (unlike our clients) I wish I could be as confident as JH regarding the stickiness of US consumption moderation. Newly bought frugal cars will probably stick, but adjustments like only sending out fully loaded yogurt trucks and making washing powder more concentrated and then filling them into smaller bottles can be reversed fairly quickly. Also often the proximity of suppliers can also be adjusted rather quickly, so to speak, this is a characteristic of globalisation.
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  •  
    Aug 13 10:11 AM
    Edmunds says buyers interest in SUV's has already risen with gasoline down. In Pittsburgh, the station up the street from me is at $3.69 down from $4.19 high for regular. People are dizzy with excitement over the extra 10-15$ a week they have to spend again!

    The American Consumer/Public does not think and never has- if they had, homes would not have been mortgaged to continue to consume the last 10 yrs. So as soon as gas gets down to $2.99 for regular -and in Pittsburgh or Cleveland we get a few snow flakes- these SUVs will fly off the lots again.
    Prices may then stay in the 3-3.25 range for a while due to additional marginal supply coming on line from Canada/Saudi.
    - Try fitting 2 kids,dog, 2 adults in a morning commute into a hybrid Honda with Car Seats required by law, diaper bags, lunches/purse/briefcas... not easy.

    People love their SUV/Vans with DVD players to keep the kids happy during the commute to the daycare. Gasoline pricing will accomodate this for sure. Winter heating season will be the next big hurdle, major nat.gas increases and heating oil costs. A nice warm SUV/Minivan will keep people happy in the morning and on the way home at night when they have to keep the home thermostats at 65 to afford heat!

    It takes a charismatic leader and almost authoritarian regime to effect change. Brazil decided in the 70's they were not going to be hurt by OPEC and did something about it. Canada promoted the tar sands with huge subsidies and Trust tax subsidies. We sat by and enjoyed 99cent/1.99 oil thru the 80's, 90's and are paying thru the nose now. Maybe a democratic sweep in congress/presidency will get some Green items moving along but it will take a long time, not a few months.
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  •  
    Aug 13 10:20 AM
    I think you will find that within a few short weeks,that with gasoline below $4 again,US gasoline consumption will be back up to its old highs. Americans will not give up their current lifestyle unless they are forced to. The only way gasoline consumption will drop on a more permanent basis is to have high gas prices($5+) for years.
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  •  
    Aug 13 11:17 AM
    As Boone Pickens likes to say, "The LOWEST COST energy solution wins every time." So, as oil prices retreat, it is only logical that gasoline demand will increase once again.

    Besides, there are millions of gas guzzling SUV's out there whose owners are stuck with them, as they are now $10-15,000 "upside down" on their trade-ins. They have to fill up in any event.

    But, at the same time, I wouldn't worry about an uptick in new SUV sales. Their buyers got burned too badly. Scavengers will buy the used ones, though, just like they're picking over the bones of our previously inflated housing market.





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  •  
    Aug 13 07:00 PM
    I don't share Bea Baggage's enthusiasm for a Democratic Congress. We already have one and, when Nancy Pelosi took over, she offered a "common sense plan" to lower gasoline prices. Well, where is it? I agree we desperately need a comprehensive national energy plan but that bunch of clueless turkeys in Congress will only end up crippling domestic oil and gas producers and then wonder why foreign oil companies have us by the short hairs.
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  •  
    Aug 14 11:08 AM
    I maintain that the threshold of elasticity for oil is around 3.85 USD/gallon of 89 octane unleaded. As pump prices fall below that threshold we will see consumption increase. Oil will remain in the 112 to 124 a barrel range for quite some time as unleaded pump prices fluctuate between 3.65 and 3.99 a gallon over the course of the next six months.
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  •  
    Aug 14 11:08 AM
    Sorry, misspoke, threshold of elasticity for gas, oil prices 112 to 124-you know what I meant.
    Reply | Link to Comment
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