Lurching along on $100/barrel oil

Why we're not conserving like it's 1980

Posted by Tom Philpott at 8:57 AM on 07 Nov 2007

Read more about: energy | oil | fuel efficiency

On Tuesday, the price of oil set yet another all-time nominal high, leaping above $97/barrel. More importantly, it has just about reached its all-time inflation-adjusted high, reached amid the turmoil of the Iran hostage situation way back in 1980, the Associated Press reports:

Crude prices are within the range of inflation-adjusted highs set in early 1980. Depending on the how the adjustment is calculated, $38 a barrel then would be worth $96 to $103 or more today.

Back in 1980, sky-high energy prices sparked a wave of efficiency measures within corporate America and in households. Today, not so much. Detroit even insists that significantly raising auto fuel efficiency standards would be an "economic disaster." How can that make any sense at all, given oil prices are at all-time highs? Isn't not taking serious efficiency measures the real economic disaster?

Meanwhile, U.S. consumers are shrugging off higher fares and flocking to airports, the Wall Street Journal reports. Why aren't sharply elevated oil prices sparking more changes in behavior?

A little more than a month ago -- when oil had just passed the $80/barrel level -- the Wall Street Journal ran a luminous front-page article called "How economy could survive oil at $100 a barrel."

I posted about it at the time, but it's worth revisiting now that the economy is facing $100/barrel oil. Here's the key paragraph:

For every extra dollar taken from drivers' pockets at the pump in the form of higher prices in recent years, low-cost exporters from China and elsewhere have put roughly $1.50 back in the form of cheaper retail goods. Even at today's near-record prices, U.S. households today spend less than 4% of their disposable income at the pump, vs. over 6% in 1980.

To me, this explains why everyone's not freaking out about oil now: Sure, it's at inflation-adjusted highs, but everything else is so much cheaper that it doesn't cause as much pain.

Let's do some (very rough) arithmetic. At $80 a barrel, people were spending about 4 percent of their income at the pump. That means for gas prices to cause the pain in today's economy that they did in 1980 and take up 6 percent of income, the price of oil would have to hit $120 (because 6 represents a 50 percent hike over 4, and $120 is 50 percent more than $80.) And until it does reach that level, people are likely to keep consuming like it's 1999, rather than conserving like it's 1980.

And why are consumer products so much cheaper now in real terms than they were back in '80? I wrote about that in the above-linked post, but it's worth repeating: We've essentially shuttered our domestic manufacturing base and availed ourselves of China's vast reserves of labor and coal to keep ourselves clothed and entertained on the cheap. And we've invested those dubiously won savings in filling up our SUVs, even as oil prices surge.

I haven't weighed in yet on the local vs. global debate raging on Gristmill, but I will say this: It's hard for me to see how this brand of globalization has done ourselves, the people of China, or the world as a whole any lasting favors.

Given the specter of climate change, neoliberal self-congratulation about "pulling people out of poverty" rings particularly hollow -- to speak nothing of the millions of Chinese and Indian farmers who have been plunged into poverty by those nations' own neoliberal policies.

And another thing: If oil prices do keep up and hit the magic $120 level, what does become of the U.S. economy? We've got a negative savings rate (see figure 1A at the bottom of this Fed report ), a mounting middle-class debt crisis, a wobbling dollar (which, if it goes into free fall, could spark devastating interest-rate hikes), a banking sector in the throes of historic losses, and no manufacturing base to speak of.

For story: Lurching along on $100/barrel oil
13 Comments | Post a Comment

No more 10 MPG land yachts.

As much as people malign SUVs, only the largest, most expensive, and most ridiculous of them equal the gas wastage of the typical 70's family car. Ever see one of those old land barges? The 1973 Buick Electra 225 (for example) weighed in at nearly three tons and had an engine with over eight liters' displacement. That thing was frickin' HUGE. My late German father in law used to joke that Americans put truck engines in their cars. Heck, even a more reasonable vehicle, like a Dodge Dart with the slant-six, got only around 17 MPG. That's it. They all guzzled gas by today's standards.

Our beat up '99 Accord, by contrast, gets around 28 MPG. Those three-dollar gallons of gas simply go farther than in the era of odd-even days and lines around the block.

by Steaming Pile at 9:13 AM on 07 Nov 2007

subtext

A humorous subtext for me is just how many values people calculate for 'inflation adjusted' oil and gasoline. Whenever we hit a record it seems, a new calculation moves it away again.

Now, the reality is that "inflation" as judged through prices and not money supply, has as one of its components energy prices (oil and gasoline).

So of course even the 'rational' calculations of 'inflation adjusted' oil and gas are a bit irrational.

More appropriate are the measures of oil and gas per household income & etc.

by odograph at 9:20 AM on 07 Nov 2007

discretion

If it wasn't clear, I largely agree with your post Tom. One other factor, fuzzing up the whole picture, is the extent to which energy expenditures are discretionary. People have had some time to adapt, and people who buy new SUVs certainly know what they are getting into. People who are price (or environmentally) sensitive have also had time to move to more efficient options.

Oil "shocks" are supposed to be about people getting caught flat-footed.

Maybe some significant fraction of the population in industrialized nations have their eyes open on this one.

(not to say a higher price could not "shock" us.)

by odograph at 9:26 AM on 07 Nov 2007

If Katrina didn't make Americans change ...

If Americans didn't cut their gas consumption when Katrina threatened to push prices to $4 a gallon, why would they change their habits now when prices are lower than that? Just this week, with allegedly ominous news on gas prices dominating the headlines, my best friend just bought a Honda Pilot SUV (18 city/24 highway). Not once in our conversation did he mention gas prices.

Join the discussion on global warming, recycling, and organic beer at The Green Miles!

by TheGreenMiles at 9:28 AM on 07 Nov 2007

response

It's not no response, it is just a split response:

US Consumers Shifting Away from Average Fuel Economy in Both Directions; Sales of Less-Efficient Vehicles Increasing as Well as Sales of More-Efficient Vehicles

by odograph at 9:39 AM on 07 Nov 2007

Sector considerations

Tom:

I agree on the % of income, but I think there is also another effect. Prior to the 70s/80s OPEC shocks, oil played a (small, but significant) role in our power generation, and also was used as a heating fuel. After the second OPEC price shock, we basically stopped making power from oil (making up the difference with coal and gas) and outside of New England, stopped using oil for heating. That leaves transportation, the costs of which are much more dominated by the cost of the vehicle than the cost of the fuel. (By contrast, the costs of power and heat are dominated by the fuel.) I'm not sure how to quantify this, but the effect is additive to the one you mention. And the downside of all this is that the Saudis & other oil rich nations have now learned empirically what theory used to say wasn't true: namely, US demand curves for oil are really inelastic. I'd be very surprised if the price fell much in light of that information...

by Sean Casten at 9:50 AM on 07 Nov 2007

Here's some interacting forces for you...

from The New York Times, since the Dow Jones is down about 200 points right now:

Investors were alarmed by a report that a top Chinese official said China will shift its foreign currency reserves away from the "weak" United States dollar, further eroding confidence in the currency and sending it to a new low against the Euro...That sent the price of crude oil futures up to another record, above $98...General Motors announced the largest quarterly loss in company history before the start of stock trading. The auto giant will write down $38.6 billion in future tax benefits...Investors are also wary that investment banks will announce more asset write-downs related to mortgage-backed securities.

So, we have a big car company, along with other US big car companies, losing it with gas guzzlers, the price of oil going up because of supply, demand, and weak dollar problems (partly caused by a decline of US manufacturing), a subprime meltdown, also related to oil because everybody wants their suburban dream, all reinforcing each other. So I think we are at the start of a "time of troubles" to use an old Russian phrase, with wild swings and great unpredictability.

by Jon Rynn at 10:18 AM on 07 Nov 2007

Interesting

It will be interesting (as in the old Chinese curse?) to see what happens this winter with fuel oil prices higher than ever. Here in Maine they are, I believe, about 68 cents more per gallon than last year, which is huge. While I know there's plenty of discretionary driving going on, for my part, and many of the people I know, there's only so much driving I can cut out. I drive to work (three days), which is necessary, and one weekly trip to do shopping and related chores. That's it. We keep our thermostat way low (55 at night, 60 to 62 during the day) - luckily we have a well-insulated house - and during the coldest days of winter we supplement with wood. We're spending the same amount of money on food, but getting less for it so are eating more soups and things to make it stretch farther. Luckily we still have basic vegetables (potatoes, carrots, garlic, beets, squash, some greens and brassicas) from the garden. A part of me wants the economy to finally falter so that we're forced to do things differently. But then folks like my sister and I and those worse off will be the ones to suffer most, so what am I wishing on myself?

by SMLowry at 11:58 AM on 07 Nov 2007

Life is a fantasy, make it a good one.

by sunflower at 12:30 PM on 07 Nov 2007

what could be wrong

Normally, the what original author wrote in his last paragraph would depress me. But with all the obesity problems we got in this country, there will be so many houses opening up in a few years they will all be cheap. I'll have a place to live I just can't heat it.

by trock at 5:33 PM on 07 Nov 2007

As mentioned on one of the blog posts

As mentioned on one of the blog posts around here somewhere on grist.

Expensive Oil can be a very good thing

But it can also be a very bad thing if it means a shift to oilsand, oilshale, and coal-to-liquids.

-David Ahlport

by GreyFlcn at 12:06 AM on 08 Nov 2007

Poverty reduction an ill-conceived?

"Given the specter of climate change, neoliberal self-congratulation about "pulling people out of poverty" rings particularly hollow -- to speak nothing of the millions of Chinese and Indian farmers who have been plunged into poverty by those nations' own neoliberal policies."

China and Vietnam (I know little of India)have both had remarkable sucess in poverty alleviation. I don't think you can reject it in such a glib manner. I am tryng to figure out the subtext, better a 35 year life span today? Yes of course climate change is as much an issue for these countries as elsewhere, but you cannot expect people to care about 50 or 100 years in the future when they are wondering how they will survive the year. One of the real challenges is finding a way of accomodating developing countries' need for economic growth while addressing climate change.

Also your jibe about neoliberal policies leading to farm poverty is misconcieved, rural households who have been forced off their land have been plunged into poverty, but this is beacuse of weak property rights, not strong property rights you would usually associate with neo-liberal policies.

By the way I am not Neo liberal.

by johnsawdon at 4:57 AM on 09 Nov 2007

Fuel farming benefits

Ethanol and biodiesel benefit from higher oil prices as well. McCain cited high oil prices as a reason he now supports ethanol.

The same old mega monopoies are poised to cash in on selling more liquid fuel from all sources to keep gas guzzling going as long as possible.

Shifting from collecting cash at the gas pump to collecting cash at an electric meter, for plugin hybrid recharging, is going to be a messy transition. With a fraction of the profit per mile driven, maybe 10% of profits on gas powered driving?

Another law passed in the middle of the night to let companies like halliburton buy up local power utility companies is in force right now. How many decades will that consolidation take? Will corporate monmopolists settle for 10% of their former profits? Or raise electric rates 20 fold to make up for it?

http://amazngdrx.blogharbor.com/blog John Schneider, Northern Wisconsin

by amazingdrx at 7:05 AM on 09 Nov 2007

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