Reasons to be cheerful (Part 1): Peak gasoline

There are plenty of reasons to be gloomy about the prospects of stabilising the global climate. The failure at Copenhagen (partly, but far from wholly, redressed in the subsequent meeting at Cancun) means that a binding international agreement, let alone an effective international trading scheme, is a long way off. The political right, at least in English-speaking countries, has deepened its commitment to anti-science delusionism. And (regardless of views on its merits) the prospect of a significant contribution from nuclear power has pretty much disappeared, at least for the next decade or so, following Fukushima and the failure of the US ‘nuclear renaissance’.

But there’s also some striking good news. Most important is the arrival of ‘peak gasoline’ in the US. US gasoline consumption peaked in 2006 and was about 8 per cent below the peak in 2010. Consumption per person has fallen more than 10 per cent.

There are a couple of ways to look at this. One is in the standard economics terms of supply and demand. Given that oil production reached a plateau some time ago, and that demand from China and other developing countries is growing fast, equilibrium can only be reached if prices rise enough to limit the growth in Chinese consumption and generating an offsetting reduction in consumption elsewhere (I’m assuming little or no supply response, which seems consistent with the evidence).

We have of course seen oil prices rise substantially. The effect on demand depends on the percentage change in fuel prices and on the elasticity (a measure of responsiveness) of demand. Because the US has very low taxes on gasoline and other fuels a given change in oil prices produces a much larger percentage change in fuel price than in other developed countries. The US gasoline price rose, in real terms, by around 40 per cent between 2000 and 2010, and have risen by another 30 per cent or so since then, for a total increase of about 70 per cent. So, the US is the place to look for big price effects.

The big question is the elasticity of demand, that is the percentage change in demand arising from a 1 per cent change in price. In the short run, this elasticity is quite low, reflecting the fact that fuel is a small part of the running costs of a car. The short run elasticity (measured over periods less than a year) is relatively easy to estimate and is about -0.25, that is, a 1 per cent price increase will reduce demand by 0.25 per cent, and a 40 per cent increase will reduce demand by 10 per cent. That’s roughly in line with the observed outcome. However, given that factors such as income growth tend to raise demand, the observed reduction is a bit more than would have been expected with constant prices.

The long run elasticity is much higher, since in the long run people can change their driving habits, reduce their stock of cars, and choose more fuel-efficient cars The meta analysis cited here suggests values around -0.6, suggesting that the price increases we’ve already seen should reduce demand in the long term by around 40 per cent, relative to the trend with constant real prices.

In my view, even the long-run estimates are too low. A sustained upward trend in prices will induce the development of energy-saving innovations (the reverse is true – when energy is cheap and getting cheaper, people invent new ways to use more of it). I suspect that the full long-run elasticity, including induced innovation, is near 1, meaning that if current real prices are sustained, consumption could fall as much as 70 per cent below the level that would be expected if prices had remained at the 2000 level.

The alternative is the ‘bottom-up’ approach of looking at changes in driving habits, the car fleet and so on, then working back to total demand.

* The number of vehicle miles driven has peaked. This is partly a response to higher prices, but I suspect there may also be an element of saturation (Americans already spent far more time behind the wheel than people in any other country) and the emergence of substitution opportunities through IT and telecommunications, such as Internet shopping replacing trips to the mall (the construction of new malls has just about ceased).

* Cars are becoming more fuel efficient. That’s partly a market response, reflected in the demise of the Hummer, and partly the result of regulation. The US is tightening its fuel economy standards, and has finally blocked the loophole under which SUVs like the Hummer were treated as “light trucks” and counted separately from cars. The 2009 regulations require a 40 per cent improvement in the average efficiency of new cars, relative to the existing fleet, by 2016. That will take a decade or so to feed through (but efficiency standards for post-2016 cars can be increased further in that time).

* Car sales have been below previous peaks for some years. That’s partly a response to the Global Financial Crisis and the subsequent recession, but there’s evidence that the US car fleet is past its peak size.

In all of this, the GFC has had an effect, which is mostly temporary. So, we should expect some recovery in demand as the general economy recovers, but the peak gasoline phenomenon is real.

Finally, what does peak US gasoline imply about Peak Oil, which I’ll interpret as the point at which the current plateau in oil production turns into a clear, though gradual decline?

* First, we won’t really notice it happening (except as it’s manifested as a further increase in oil prices). Rather, we’ll have to look back at the stats to identify when the decline began

* Second, the adjustment will be a combination of many different processes (less travel altogether, less of that by car, more fuel-efficient cars) rather than one big shift

* Third, given that oil accounts for something like a third of all CO2 emissions, the sooner Peak Oil arrives, the better

43 thoughts on “Reasons to be cheerful (Part 1): Peak gasoline

  1. John,

    1) The long run economic growth story is one in which the main driver is a continuous decline in the cost of transport. (Smith 1776, others ad nauseam.) With the now-expected turn away from nuclear power, we don’t have a good substitute for liquid fuels as energy for transport.

    Global GDP may grow through dematerialization, but GDP is only a rough proxy for standard of living; and for five billion people, improvement means more material goods and more mobility.

    2) Substitution. You express hopes about innovation[1], but plain-vanilla substitution with existing alternatives is just as powerful a response to price rises. The most direct substitutes for oil as transport fuel are coal-to-liquids (gasification followed by Fischer-Tropsch) and biofuels. Both of these are more than profitable with current oil prices, and both are problematic from a global warming point of view.[2] A country with less regulator capture than the US could use CNG; that may happen even there.

    3) Rest-of-system effects. If the US halved its gasoline consumption overnight, the surplus would be “eaten up” by developing countries and by exporters’ own use in less than five years. China alone is increasing oil consumption by about a million barrels per day, each year. Saudi Arabia, by about 200,000 barrels/day yearly. Oil is just too useful.[3]

    So 4) peak gasoline in the US is more or less irrelevant to global warming.

    Yes, the price signal is getting through in the US.[4] But no, that won’t have much effect on global carbon emissions. It may make it more difficult to stop using coal, which, James Hansen tells us, it what we really need to do.

    footnote 1. Innovations don’t happen because we expect them. The US was supposed to produce 100 million gallons of commercial cellulosic ethanol last year. The actual was 0 gallons.

    Of course high prices will induce behavioural changes, but these are not innovations but reversions.

    footnote 2. Biofuels are more directly problematic, too. Converting all the world’s food to transport fuels would get us about an eighth of current oil consumption for transport in energy terms. Filling a bucket from a water glass.

    footnote 3. The production of oil is itself getting more “dirty”. High-sulphur and heavy metal-contaminated oils, deep-sea oil, tar sands, and shale oils all require the burning of more fossil fuels in their own production than did the oil produced in the 1980s and 1990s.

    footnote 4. Its operation is harsh, though. In the US, productivity has been growing at over 3%, and the population at 1%, compared to GDP growth at 1.8%. In addition, income increases are concentrated in the top 20%. For most people, there’s still a recession on. With gasoline, it may be that it’s not a matter of everyone using a bit less, but rather one of the bottom decile dropping out of the market altogether.

  2. Responding to Ikonoklast

    It’s true that energy use per person has increased since 1979, though not as much as income per person, even as oil use per person has declined.

    But that information runs directly against the standard Peak Oil claim that oil (NOT energy) is centrally necessary to civilised life. Clearly, as the evidence of the last thirty years, we can have both more income and more energy even as oil use declines. So far that’s mostly been done with gas and coal, but if we are prepared to pay for it, we can continue to enjoy increasing consumption of energy services from a combination of renewables and energy efficiency, while reducing and ultimately eliminating burning of fossil fules.

    That’s not to say there aren’t real constraints – CO2 being the most important. But, as the post says, Peak Oil is on the side of the good guys here. We should be grateful that it’s already happened.

  3. “peak gasoline in the US is more or less irrelevant to global warming. ”

    Broadly speaking this is right. What matters is the total supply of oil which, fortunately, seems to have plateaued and will hopefully decline in the future.

    Peak gasoline in the US is good news in that it shows that adjusting to a declining supply of oil is pretty much painless, even for a society as car-addicted as the US.

  4. I’ve done a spreadsheet 1970 to 2009 but already had problems posting it here. Therefore I will paste the headings and just two lines of 1970 and 2009.

    Year Pop.Billions Exajoules 2009US$.Trillions E/Billion.Pple $T/ Billn.Pple Inc.Eng.Ratio
    1970 3.70 227.00 18.50 61.35 5.00 81.50
    2009 6.68 474.00 73.24 71.01 10.97 154.51

    Figures from some sources will vary a little from mine but not too much. These numbers are quite indicative of basic ratios. Population has not quite doubled. Total energy use in Exajoules has slightly more than doubled (so total energy use per capita has risen from 61.35 exajoules per billion people to 71.01 exajoules per billion people. Total World Income has risen from 18.50 2009US$ Trillion to 73.24 2009US$ Trillion or about 3 times. $Trillions per Billion people has risen from 5.00 to 10.97 so world income per capita has about doubled. The income unit to energy unit “ratio” has risen from 81.50 units* to 154.51 units or almost double.

    Overall I am a Peak Energy “theorist” not a Peak Oil “theorist”. However, I do still see declining oil as an important factor as oil is especially suited to transport needs and petro-chemical production. The oil limit will become a factor when discretionary and wasteful oil use is mostly priced out of the market.

    JQ says; “…we can have both more income and more energy even as oil use declines. So far that’s mostly been done with gas and coal, but if we are prepared to pay for it, we can continue to enjoy increasing consumption of energy services from a combination of renewables and energy efficiency, while reducing and ultimately eliminating burning of fossil fuels.”

    That is an optimistic though not necessarily impossible scenario. It would take a massive changeover to solar power and other renewables and we are leaving it very late. World population growth will need to be halted in the next decade or so too. Can we do it, that’s the question? The challenges will certainly be great.

    * Don’t ask me what these rather arbitrary “units” are as they are of my own invention. The ratio of 81.5 to 154.51 is what counts.

  5. Pedantic Footnote: Oil and Gas are really one and the same family, namely hydrocarbons. Coal is the cousin; all carbon and no hydrrogen. It really makes more sense to talk about Peak Hydrocarbons (and at a stretch even Peak Fossils). In that light, Peak Oil theory is not quite so easily dismissed by the semantic separation of oil from gas.

  6. Footnote: Final attempt to post truncated spreadsheet. (I can’t help it, I like to experiment.)
    Pop is in billions. Energy in Exajoules. US$ in 2009 US$ equivalents. “Per capita” measures are per billion not per person.

    YEAR POP ENERGY US$T E/POP $T/POP INC to E Ratio

    1970 3.70 227.00 18.50 61.35 05.00 081.50
    2009 6.68 474.00 73.24 71.01 10.97 154.51

  7. @Ikonoclast

    So if I’ve got this correct, in 2009 the per-person kw power consumption is 2.3kw, or 2248.526w (based on 365.25 days in a year; I know, I’ve used unnecessary precision 🙂 ).

    Some of us are using one Hell of a lot of energy, in that case. By comparison with your 1970 numbers, the per-person power consumption then was 1.9kw, or 1944.107w. The ratio of 2009 power consumption to 1970 power consumption is approx 1.157, a 15.7% increase in power per person over a 40 year period. Therefore, there is a rise in power consumption on the per capita basis of a straight-line 0.4% per annum (can’t be bothered with the compounded growth figure, but at a guess it is around 0.36 to 0.37% p.a.).

    What the Hell do we need an extra 0.4% p.a. power for? The computer revolution perhaps? The extra car in the drive, maybe? Guess so.

    Sometimes it is interesting to look at power consumption in joule terms ie energy per day, or some other larger timeframe than the seconds implicit in a kw (I hate kw-h or the like, don’t know why). A person requires approximately 8MJ per day in order to survive, and 10MJ per day for a physically active individual of say 70kg. By Ikonoclast’s numbers and my calculation, we use energy for external purposes at a 2009 rate of 194MJ per day, or 19 to 20 times more energy than required to live. Guess that ducted air-con is popular!

  8. @Donald Oats

    Sounds about right. I think I read somewhere that the average world citizen has about 20 or 30 “energy slaves” working for him/her. Some have calculated that the average American has about 100 energy slaves. An “energy slave” is an imaginary human slave who produces the power you use. In these calculations I doubt they give energy slaves 8 hour workdays and 4 weeks paid leave per annum.

  9. Some disjointed comments:-

    1. Prospects for improvements in battery technology have never looked better. I don’t think it will be enough to make wind and solar viable (total cost still sucks) however I do expect an increasing electrification of cars (mostly as plug in hybrids). As this happens oil becomes less important. Oil is already too expensive to harvest as an energy source and is harvested because it is a good energy carrier.

    2. Nuclear is a price story, not safety. It will be built on mass as and when it is cheap relative to alternatives. The safety concerns are over blown and economics will decide.

    3. We may be headed for a gas bonanza due to new extraction techniques. Short term methane is a powerful greenhouse gas so I don’t envisage many short term benefits in terms of AGW. Atleast not if enough leaks during extraction.

  10. Our entire energy future is still murky to me but large parts are becoming clear. My own survey(of the literature available to the intelligent layperson) makes me think that;

    1. Peak Oil extraction has been reached.
    2. Peak Gas extraction will be reached by about 2015.
    3. Peak Coal energy production will also be reached by about 2015.
    4. Peak Coal tonnage does not equal peak energy from coal as much of the top grade coal has already been used.
    5. Batteries do not solve the energy supply crisis as they are energy stores not energy sources.
    6. Solar, wind and maybe wave and tidal energy are the best bets for renewables.
    7. I am not sure if solar and wind will return adequate EROEI (energy return on energy invested) to run a modern energy hungry civilization. That remains to be seen.
    8. Nuclear power is a price story, an EROEI story, a safety story, a technical limits story and a finite fuel resources story.*
    9. Methane clathrates fields are a resource which we better hope we never figure out how to use or we will definitely destroy the earth’s climate.

    * Despite my general anti-nuclear stance and my position that nuclear fuel is a finite resource, there are circumstances in which I would not be entirely against Australia using nuclear power. (I doubt it will actually happen though.)

    An Australian nuclear policy I could accept would be;

    1. Cease all uranium sales to countries not signatory to the non-proliferation treaty.
    2. Cease all uranium sales to countries declared (by Australian legislation) to be not geologically or politically stable enough to recieve uranium.
    3. Allow nuclear power stations to be built in the outback (probably the South Australian Outback) if private enterprise is prepared to fully fund them, fully insure them and obey strict fuel lifecyle rules right through to encasement of spent fuel in synrock and deep burial in the deepest outback in the most geologically stable rock on the Australian continent.

  11. TerjeP, there is no need for battery or other energy storage to improve to make wind or solar power viable. They can be viable just by being a price taker and selling electricity to the grid (or substituting for electricity bought from the grid) as they produce it. Here in South Australia we get 20% of our electricity from wind without any storage. And as electricity demand is higher during the day, storage is even less of an issue for solar. It would be handy to have a cheap form of energy storage, but it’s not necessary. At the moment the cheapest way to provide carbon neutral electricity on demand appears to be to burn biomass in a existing coal fire plant or burn natural gas and then use trees or other plants to capture the carbon released and sequester it. But the cost of flow batteries, solar thermal storage, and other energy storage is coming down, so they may become practical for large scale use.

  12. @TerjeP
    Terje says ” Nuclear is a price story, not safety.”

    Nuclear Plants? Safe as climbing Mount Everest with a thread instead of a rope and you are as truthful as man with a second hand car.

  13. This one is for Terje. If nuclear was not a safety story then why is the market hammering Tepco. Clearly the market thinks this nuclear plant is a nigtmare of no safety. Yes I guess people have the right to sue for loss of livelihoods from nuclear contamination. The market is speaking to you Terje but as usual you deny the risks of nuclear. Expect more disasters, gioven the nuclear industry’s dirty little secret habit of storing spent fuel rods onsite for cheap reasons.

    “Since the accident, Tepco shares have lost 83 percent of their value. They traded at 360 yen at 2:06 p.m. in Tokyo today compared with 2,153 yen on March 10.”

  14. Alice – we know why Tepco is getting hammered in the stock market. They had a nuclear accident after the big wave hit Japan. Of more relevance is the share price for other nuclear operators and nuclear construction companies in light of what happened to Tepco in Japan.

  15. Prof Quiggin makes a fair case that we may be witnessing peak gasoline in the US which could possibly be extended to some other western countries. But whether this applies worldwide is another matter. If you want some “balancing” pessimism, think about unconventional sources such as tar sands, coal to liquids, gas to liquids etc etc. Peak oilers tend to dismiss these, and often provide an argument centered around EROEI that basically says the increasing cost of the fossil fuel derived energy used for extraction/processing will make them uneconomic.

    There is a wildcard here which is the potential use of nuclear power to supply the process heat and other energy requirements and the EROEI argument is much weakened. Small modular reactors/nuclear batteries may well look quite attractive for such applications. There are a number of startups (and long established companies) in the US and substantial interest and work in Russia proceeding with the development of SMRs. It would not surprise me at all if they see applications in mining and fossil fuel extraction/processing as a principal market.

    This certainly would be an abuse of nuclear power, but if the demand is there, the price is right and the world absolutely cannot do without these liquid fossil fuels, then such applications of SMRs would seem more likely than not. The big oil companies wallowing in cash would surely have the capability to do this and I would be surprised if they have not already considered it in future scenarios.

  16. The Fukushima accident certainly hasn’t helped the case for nuclear power, but it is not really clear how much it has changed prospects. When the dust settles, the main “indicator” of it’s consequences is most likely to be seen to be the number of permanent relocations from contaminated areas. The extent of this is as yet unclear and likely to remain so at least until some time after the recovery effort begins in earnest after the reactors are brought to a state of cold shutdown which is said to be around the end of this year. Aside from the expense, what other indicators are there? The health consequences for plant workers is likely to be a projected number of cancers that could be counted on the fingers of one hand – with fingers left over. Purported effects on public health are likely to be unidentifiable.

    As for the US, the “nuclear renaissance” was not very strong to start with, which has probably got more to do with the price of natural gas than anything else. As far as I am aware the only cancellation of new nuclear build in the US as a consequence of the Fukushima accident is the NRG South Texas project which is due to the withdrawal of investment from Tepco for fairly obvious reasons.

    Japan aside, the UK will probably be the best immediate test of the effect on Fukushima on policy. 50% emissions reductions by 2025 looks really tough and even tougher without nuclear. Anybody interested in current thinking in the UK should read the Climate Change Committee’s “The Renewable Energy Report” and the associated reports it commissioned from outside consultancies. It may as well have been titled “The Renewables and Nuclear Report” because that is what it is. In all scenarios, large slices of demand is met by new nuclear build. Nuclear and on-shore wind are assessed has having comparable LCOE with a considerable range of uncertainty. All other rewnewables are assessed as more expensive right through to 2040.

    I will not post the links, cause links tend to get caught in moderation here, but it is easy enough to find. Unlike other grand plans, the CCCs reports to my thinking are more credible, if for no other reason than the CCC is accountable unlike sources such as Greenpeace, “green” industry lobby groups and such like.

  17. I recently read your Zombie economics. It was a good read.
    There is an issue that I am curious about. There does not seem to be any discussion of the impact of US deficits as a contributor to stagflation. As an opponent at the time of the Vietnam war I was always in two minds about Johnston, who achieved major social changes and aimed for the Great Society with its war, amongst other things, on poverty. It seems to me that this fight on two fronts could only be achieved through exporting a major portion of the cost to the rest of the world.
    There is usually a recognition of the importance of the oil shock. I remember UN statistics that disaggregated developmental aid to oil producing and non-oil producing nations showing that net of oil exports the former received negative aid.
    Is it conceivable that it was the combination of US excess and the oil shock that lead to ‘stagflation’ and the demise of Keynesianism?
    I also note that that demise came at a time when years of assiduous development had generated an ‘alternative’. Richard Cockett’s Thinking the unthinkable demonstrates how opponents of Keynes began even before his thought had become an ism. Their strategy was to capture the teaching of economics. Along the way they had an impact on Bretton Woods.
    It seems to me that there is a somewhat analogous situation with the somewhat more backward approach of the Bush legacy in which tax cuts at home and two wars in Afghanistan and Iraq are analogous to the great society and the Vietnam war.

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