Conservation is the main way consumers respond to high market prices. When price goes up, consumption comes down—but it takes a while for the full price effect to play out.
Market-driven conservation is a slow process—slow to get going and even slower to stop. Looking at recent high oil prices, people noticed that gasoline use was slightly higher in 2006 than in 2005, and many concluded that higher prices were not working to curb gas consumption. People thought the same in 1974, when the price of oil tripled and world oil consumption fell only 1 percent.
Market-driven conservation starts slowly because the best way to conserve is to switch to better technology. People don’t buy cars and refrigerators until they need new ones, and companies take years to design new, more efficient models. It wasn’t until 1980 that changes in technology began to pay off. But then world oil use took an unprecedented four-year nosedive (see Figure 1). Figure 1 also shows that people kept conserving after the oil price collapse. In fact, changes made in 1980 are still saving us oil, otherwise the price of oil would have hit $100 a barrel years ago.
Figure 1. The top line is projected world oil use without OPEC. The line that branches off below it in 1974 is actual world oil use. The difference is the amount of oil conserved because of OPEC’s high prices. Notice that changes made because of OPEC—things like fuel-economy standards and better insulation—are still saving an enormous amount of energy worldwide.
Jorgenson and Peter J. Wilcoxen, two of the best applied economists in the US, intensively studied the impact of the two oil shocks on the United States. They concluded that “over the period 1972–1987 U.S. emissions of carbon dioxide were stabilized by price-induced energy conservation.” Although carbon dioxide emissions worldwide did not stop increasing as they did in the United States, global emissions increased more slowly during the crisis.
The power of price lies in its ability to act in a million ways at once, many unexpected. Even when price directly affects people, they don’t always recognize it. For example, consumers upset with high gas prices in 1975 lobbied for Corporate Average Fuel Economy (CAFE) standards, federal regulations that require improved fuel efficiency in vehicles. These mileage standards continue to affect car buyers to the present day, but few recognize the role of OPEC’s high prices in bringing about these energy-saving measures. Many people also failed to notice that the collapse of OPEC’s price caused the freeze in mileage standards from 1985 until 2007. Lawmakers have revived increases in mileage standards only because oil prices have again risen for several years running. Even the energy gurus of the physics camp, who now push for stricter standards and ignore energy prices, owe their careers to OPEC’s high prices. I say this not to belittle their work, but to point out how fundamental and varied the price effect is. Price changes everything. And the whole world responded to OPEC’s high prices.
Figure 2. High oil prices lead to more exploration for oil and a greater supply of oil from non-OPEC countries. This is the cause of the “bump” in the non-OPEC oil-supply line between 1976 and 1993. The extra supply shown here is much less than the supply saved by conservation, shown in Figure 1.
As Figure 2 shows, high prices also lead to increased supply. New oil supply generally requires new wells, and these take time to develop. As you can see in the graph, it took about five years after the first major price increase for supply to increase noticeably, and it took about seven years after prices declined, until 1993, for the extra supply to evaporate. The extra non-OPEC oil supply over the years did not total up to even one extra year of oil supply measured at the 2006 level. On the other hand, conservation provided us with the equivalent of eight or more years’ worth of extra oil (see Figure 1).
Conservation gave us ten times more bang for the OPEC buck than increased supply. Even today, the leftover conservation measures from the 1974 to 1985 OPEC crisis are doing more for us than the extra supply did at its peak in 1985.
These are excerpts from chapter 8 of my forthcoming book Carbonomics.