Thursday, June 29, 2006

The Demand for Oil

So once again today we were talking about the possibility that the market will take care of the peak oil problem, but today it seemed as though the issue boiled down to a single, empirical question: what is the demand elasticity for oil from the price of oil? "Demand elasticity" refers to how much people are willing to change their use of a product. Some products--like airline tickets, I'm told--have very elastic demands. Slight changes in price lead to large changes in demand. Other products, like health care, people seek out at almost any price.

If the demand for oil is very price elastic, then the free marketeers are completely right. As the price of oil goes up, the economy will adjust and people will find alternatives. If the demand for oil is not very price elastic, though, people will wreck the world rather than change their ways. People will, for instance, invent shitty pretexts about weapons of mass destruction in order to invade countries that have a lot of oil.

Interestingly, the environmental movement sends very mixed messages on the issue of demand elasticity due to price. On the one hand, peak oilers always say "Everything anyone does anywhere depends on oil. We can’t simply stop using oil. We need to prepare now for oil shortages.” On the other hand, people who promote conservation say, “There are so many simple things you can do that will save a lot of energy!” You’d think these messages are complementary, but if you are wondering if the market can fix the problem, they are in conflict. If reductions are easy, then people will make them as soon as the price goes up. The only reason to ask for changes beyond what the market will bring is if the changes are not easy.

In the seminar today, Richard Heinberg discussed the Oil Depletion Protocol, an international treaty which he is pushing. The bottom line is that all the nations of the world would agree to import 2.6% less oil every year. This means an exponential reduction in global oil consumption. Local people who work on energy conservation said that a 2.6% reduction would be easy. Richard agreed, saying gluttonous Americans could achieve ten years worth of energy reduction in a single year if they put their mind to it.

Well this sounds great, but Greg, our free market guy, pointed out that the 2.6% annual reduction in oil consumption essentially mirrors the decline in consumption that shrinking production is supposed to cause. Oil imports are going to shrink anyway, because there will be less oil to import. The Oil Depletion Protocol simply asks us to start shrinking imports before nature forces us to. The only reason we would want to do this is if the process were hard, and we would want extra time.

So here is the empirical question: What is the demand elasticity of oil based on price? As someone naturally skeptical of free market solutions, I instinctively think demand is not very elastic. But what evidence do I have? I asked Greg how one would go about investigating the issue, and he said you would have to “plot out the demand curve” (or something like that) which is very complicated and requires a lot of data.

So we are left with an empirical issue and a fuck of a lot of uncertainty (again). Honestly, at this point I simply fall back on unreliable personal experience. I personally find it very hard to use less oil. The phrase “addicted to oil” resonates with me. If this limited experience is at all representative, we should start trying to conserve *now,* before the price goes up, just to get ourselves used to dealing with less.

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