With oil prices threatening to hit new records (at least in nominal terms; adjusted for inflation, the price on July 3, 2008 was close to $190/barrel), it is hoped that lower demand will help bring the market back into balance. While it is likely to help, it won’t be on a level by itself that would offset the possible loss of 3-4 mb/d of Russian oil, depending on how sanctions play out. (It seems unlikely that Russian oil exports will be halted and the supply loss might not last behind 6-8 weeks, as Russia redirects supplies to countries that are not putting it under sanctions.)
Suggestions by environmental groups that the oil crisis should see more emphasis (translation: spending) on battery electric vehicles in California are apparently in response to California Governor Gavin Newsom’s announcement that the state had sold it’s one millionth BEV (which he incorrectly calls ZEVs) and “This milestone is a testament to the success of California’s nation-leading policies and investments to support our bold ZEV goals while driving down costs for all.” (Translation: we spent a bucketload of money).
Not surprisingly, the Twitterverse has derided this suggestion, comparing it to solving the homeless problem by telling them to buy expensive homes. It is worth noting that California also leads the nation in luxury car sales, estimated at 28% of the market; BEV sales were about 13% (and probably many BEVs sales were included in the luxury car sales data).
Theoretically, oil demand is easy to predict, given price and economic activity. Reality is a bit more different, especially for short-term demand changes. For one thing, the oil price should be back to ‘normal’ by summer, one way or another. Spending a lot for an electric vehicle—or other more efficient but expensive capital equipment—is not something most do, partly because there are numerous ways to cut consumption with minimal expenditure or effort.
Most Americans own two cars, often one that is smaller and used for commuting and short trips. Driving your Ford Fusion instead of your Ford Explorer improves your gasoline mileage from 18 mpg to 23 mpg in urban driving, or 21%. Except those mileage estimates tend to be overstated, and no one is going to switch all their driving to the second car, but it shows how the average person can cut their oil consumption by 5% in the short term.
There is some data to support this: the figure below compares the annual change in vehicle mileage for new car sales with the mileage that the operating fleet got. In 2008, when oil prices soared, new cars sold improved in mileage by 0.7%, while the operating fleet improved by 2.7%, translating into a savings of about 200 tb/d. A lot of SUVs were parked in 2008.
But the next year, the situation changed, partly because prices moderated but it is worth noting that consumer purchases shifted notably to more efficient vehicles, with an increase of 4.5%, one of the largest increases in history. 2008 represented conservation, while 2009 could be labelled ‘demand destruction,’ the term loved by many. At this point, it is not clear if the world will see demand destruction in the form of more biofuel production, more BEV sales, or replacement of oil burning plants with renewable (and gas burning plants, in all probability), but conservation should be expected.
For the near term, it seems likely that U.S. consumers will, as in the 2000s, revert to ‘staycations,’ that is, planning summer vacations that don’t involve long trips. This is the period when many are planning their summer travel and current soaring gasoline prices are likely to have a similar effect. The figure below shows the change, year-to-year, in summer gasoline consumption in the U.S. For 2008, summer gasoline demand dropped over 450 tb/d and that level of savings could easily be reached this year.
Other countries will not see the same impact, especially in Europe where gasoline taxes make crude prices increases lower in a relative sense. And some countries subsidize or control gasoline prices, which reduces conservation. Should a recession be triggered, that would also mean a significant reduction in oil demand: from 2007-2009, OECD oil demand dropped by 4 mb/d. While current problems could see a new recession, it would hopefully be milder than 2008/9, but still a global decline of over 1 mb/d should be expected this year.
Hardly enough to offset Russia’s 8 mb/d of oil exports, but then, that isn’t necessary. China is Russia’s biggest customer, at around 2 mb/d of purchases, and it could easily increase that amount, although not without some dislocation and price pressure (downward on Russian oil, upwards on everyone else).
But as with climate change, the point is to avoid focusing on a potential ‘silver bullet’ or Manhattan Project. A wide variety of changes in supply and demand should rebalance the market later this year, for instance, a nuclear agreement with Iran and easing of sanctions on Venezuelan oil, plus higher investment in the U.S. shale patch, and the current price levels are clearly unsustainable.
