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High Oil Prices Drive Conservation [Carbonomics, Ch. 8]

December 25th, 2006 by Steven Stoft, Berkeley

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.

20080601_01_oil_consumption

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.

20080601_02_oil_responds

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.

Steve Stoft

These are excerpts from chapter 8 of my forthcoming book Carbonomics.

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4 Responses to “High Oil Prices Drive Conservation [Carbonomics, Ch. 8]”

  1. John Mashey Says:

    re: five years for supply to increase noticably

    Can you point at some data about the sources of the increase? Specifically, I’m curious about the relative lag times of:

    - exploration
    - drilling
    - building infrastructure

    between 1980s and now.

    In particular, how much of the new capacity was on land versus offshore, given the seeming current bottleneck in deepwater drill rigs? At least some lag times I’ve heard approach 10 years, unless one has a well-surveyed field and just accelerates planned drilling patterns.

  2. benard Says:

    The way oil products are used matters a lot: at the beginning of the seventies there were used for domestic space heating (better insulation was a quick and cheap answer to oil prices increases) and in the industry. (which switched to natural gas and electricity) Nowadays, they are predominantly used for transportation, with no quick technical possibility of demand reduction. So one would expect a quite slow change in oil demand. If you agree, could you give us an idea of how slowlier it is going to be?

  3. Shivam Goel Says:

    Hi
    Nice read ..But as mentioned I would like to see the numbers.
    Shivam

  4. SSD Says:

    well what do you know, it went to $140+ and now back to $50 all within 6 months

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