« Update: the 2010-19 Impact of PPACA on Budget Balance | Main
University of Leeds Professor Joyce Dargay and New York University Professor Dermot Gately have a new research paper suggesting that projections from the DOE, IEA, and OPEC are underestimating the challenges ahead for meeting world oil demand.
Research by Baumeister and Peersman and Hughes, Knittel, and Sperling, among others, has documented that oil demand appears to have been much less responsive to price over the last decade than it had been in the 1970s. My recent study in the Brookings Papers on Economic Activity (published version here, working paper version here) concluded that this decrease in the elasticity is one of the key factors behind the oil-price run-up of 2007-2008. The surprise to markets in 2008 was that even $100 oil wouldn't be enough to prevent world demand from growing above 85 million barrels a day, and much more than 85 million barrels a day simply wasn't going to be produced at that time.
Dargay and Gately's new paper notes how different the recent experience was from the past:
compare two decades in which the price of crude oil has quintupled: 1973-84 and 1998-2008. After the price increases of the 1970's, per-capita demand fell by 19% for the OECD and by 13% for the world as a whole. In the past decade, with oil price increases similar to those of the 1970's, per-capita demand fell only 3% in the OECD; worldwide it actually increased, by 4%.
The authors note that the overall responsiveness of oil demand to the price increases of the 1970s masks some very different developments. While there were substantial reductions in OECD use of oil for non-transportation purposes, changes in transportation demand and demand outside the OECD were much more modest.
Those trends are even more dramatic when you look at the numbers in per capita terms.
Dargay and Gately conclude:
The factors most responsible for reducing demand since 1971 cannot be repeated. Almost all the low-hanging fruit has now been picked; it cannot be picked again. The OECD has already done the easy fuel-switching, away from oil used in electricity generation and space heating.
The authors' inference is not an optimistic one:
If annual per-capita oil demand growth rates to 2030 were assumed to be held zero in the OECD, 1% in the [former Soviet Union], and at its 1971-2008 historical rate (2.54% annually) in the rest of the world, total oil demand will be 138 mbd in 2030-- about 30 mbd greater than what is projected by DOE, IEA, and OPEC.
If you have a plan for how the world might produce 138 mbd, I'd like to hear it. If not, the challenges of 2007-2008 will return with a vengeance.
Transportation adjustments will be the key. Trying to make more use of natural gas as a transportation fuel should be a high priority for the United States.
Posted by James Hamilton at March 14, 2010 06:35 AM
Coal-To-Liquids is waiting in the wings. We'll simply have to make a choice between supplying world demand for motor fuels at affordable prices, but tolerating increased CO2 emissions, or living with crushing oil prices, with the resulting cash flows to unfriendly OPEC countries. There's also the "plug-in-hybrids" solution, but affordability there will likewise depend on increasing the supply of coal-burning electric power plants.
Question: When the option for affordable, plentiful, and domestically-produced (and domestically job-expanding) coal-to-liquids technology is presented in an political context where gas is +$4 a gallon for an extended duration, how long would any commitment to CO2 emissions control in the US survive? And in other coal-reserve nations? China? Canada? India? Russia? South Africa?
For a long-term bet, in a petroleum-constrained world, I'd have to go with higher coal utilization and higher CO2 levels.
Posted by: Indy at March 14, 2010 07:20 AM
Here's the Honda Civic GX. http://automobiles.honda.com/civic-gx/
Posted by: Cedric Regula at March 14, 2010 07:26 AM
There are plenty of unconventional sources left (see e.g. Rogner, 1997). Coal-to-liquids are profitable when oil price is above 30-35 USD/barrel. We'll run out of nature much before running out of oil.
Posted by: A.V. Suni at March 14, 2010 08:29 AM
This is not news to those who have followed the oil industry for years but maybe this series of papers will help educate those who believe that our energy intensive lifestyle can continue on the cheap.
Posted by: ronald at March 14, 2010 08:39 AM
Two new congestion pricing trials have reported, and transportation oil use seems to drop 10-15%.
I have a post linking to the trials in Stockholm and the Netherlands (above). London reports similar results.
Posted by: Mattyoung at March 14, 2010 08:46 AM
Correction, Mr. Hamilton, switching to natural gas should have been a priority for the US 10 years ago, at least--and at best, natural gas would have only served as a transition fuel while other infrastructure energy sources were implemented and developed. The time for that is long gone, and now we have a very rough and possibly catastrophic transition coming. It's not just oil for gas, but we use it for everything, everything.
However, to compound problems, the US would find a shortage in other resources needed (such as silver) for let's say a power grid derived from solar power (assuming the engineering becomes feasible in time)
Anyway, still happy to see more economists getting on board the coming oil crisis, even if it is a couple of decades late.
Next perhaps can be addressed the infinite growth paradigm that your profession of economics seems enraptured by.
Posted by: Brian at March 14, 2010 08:48 AM
Here's another analysis of the world oil production Reference Scenario in World Energy Outlook 2008:
http://www.tsl.uu.se/uhdsg/Publications/PeakOilAge.pdf
Abstract The assessment of future global oil production presented in the IEA‟s World Energy Outlook 2008 (WEO 2008) is divided into 6 fractions; four relate to crude oil, one to non-conventional oil and the final fraction is natural-gas-liquids (NGL). Using the production parameter, depletion- rate-of-recoverable-resources, we have analyzed the four crude oil fractions and found that the 75 Mb/d of crude oil production forecast for the year 2030 appears significantly overstated, and is more likely to be in the region of 55 Mb/d. Moreover, analysis of the other fractions strongly suggests lower than expected production levels. In total, our analysis points to a world oil supply in 2030 of 75 Mb/d, some 26 Mb/d lower than the IEA predicts. The connection between economic growth and energy use is fundamental in the IEA‟s present modelling approach. Since our forecast sees little chance of a significant increase in global oil production, our findings suggest that the "policy makers, investors and end users" to whom WEO 2008 is addressed should rethink their future plans for economic growth. The fact that global oil production has very probably passed its maximum implies that we have reached the Peak of the Oil Age.
Posted by: Peter at March 14, 2010 09:26 AM
"Transportation adjustments will be the key. Trying to make more use of natural gas as a transportation fuel should be a high priority for the United States."
I think this is the key. Right now, gas is at a 30+% discount to oil per BTU, and a gas price increase of just half that amount would bring all sorts of supply back online. A lot of wells were capped in 2009.
Posted by: Bob_in_MA at March 14, 2010 09:37 AM
Coal-to-liquids (CTL, Fischer-Tropsch) is probably dead due to high CO2 output of the production facility. Sasol has the largest operating facility in the world right now (in S.Africa) and it is the largest point source of CO2 in the entire world.
Some cost studies and projects started in the US. They were competitive with $60 oil, but when carbon capture and conversion cost was included, the price went to $100/barrel. And this technology is in its infant stages and may never prove out cost effective. Underground storage is another possibility, but no one has started anything there yet. (other than using CO2 to recover oil)
It will take CNG, hybrids, the more efficient clean diesel and electric cars to provide alternatives, and a steadily increasing CAFE mileage standard to force the gas guzzlers out of the showroom.
NG is great for power plants too, and we need 3rd generation nuclear plants as fast as we can build them.
Posted by: Cedric Regula at March 14, 2010 11:26 AM
This bodes ill for any attempt at mitigating the impending climate change problems with carbon taxes. Just as conservatives have been using the recession as an excuse that we can't afford health care reform, regardless of whether that argument makes any sense, conservatives will likewise use rapidly rising oil prices as an excuse for not doing anything about CO2 emissions, regardless of whether that argument makes any sense. The country has enormous problems facing it that can only be fixed by government intervention. Conservatives are preventing us from addressing those important problems.
Posted by: Joseph at March 14, 2010 12:16 PM
Oil and gas production offsets 270 billion man days of labor every day. We need to start thinking about this issue.
Posted by: Paul Cox at March 14, 2010 12:28 PM
Dr., do you have any insights on natural gas? it looks like the supply-demand equation is foundamentally changed against to crude oil.
Posted by: Anonymous at March 14, 2010 01:49 PM
Cedric,
Read Full Article »