Destroying demand

People keep asking me why the price of oil has fallen from its recent spike to nearly $150/barrel. Trust me, I’m not responsible for the price decrease. Or the preceding price increase, for that matter.
I’m surprised, too. I didn’t buy oil futures, and yet the price of oil fell.


I suspect the decline results from several factors, including a strengthened U.S. currency (although that’s probably more effect than cause), a mild climatic forecast for the northeastern U.S., a mild hurricane season, especially in the Gulf of Mexico, and — most importantly, in my opinion — demand destruction.
Americans finally stopped driving so much. Turns out we are capable of combining trips after all. We don’t need to make five separate trips when we drive to Wal-Mart, Sam’s Club, Costco, the post office, and the grocery store. Cash-strapped Americans have even discovered that they can buy more than one item at each location, thereby making fewer monthly trips to each destination. The collapse of the housing industry, and the associated inability of Americans to “trade up” to a larger suburban home, has exacerbated the destruction in demand.
I underestimated the impact of high gasoline prices on our behavior. I thought $5 gas would be necessary to produce the type of impact we’re seeing at only $4. Demand destruction is so severe it’s overwhelming events in the former Soviet Union, where chess-master Putin is spoiling U.S. attempts to extract oil by going around Russia. Along the way, Putin has demonstrated exactly how impotent the U.S. has become on the world stage.
Remember when $3 gas was a national outrage? Now it’s become our national goal.
I’m guessing oil and gasoline prices will remain “low” through early November. This country still consumes about a quarter of the world’s oil, largely in the transportation sector. The summer driving season is coming to a close, and it was a bust for most lower- and middle-income Americans because they could hardly afford to take a vacation. But China and India aren’t going away, and the world remains one disaster away from $200 oil (and the associated $6 or $8 gasoline, along with severe disruptions in supply). We might trigger the disaster (by talking smack in the Middle East, for example), or perhaps it will be a “natural” one (e.g., a tropical storm, the intensity of which undoubtedly has been influenced by our consumption of fossil fuels).
All bets are off after the “election.” For starters, the current administration will have no incentive to maintain the “status quo” in support of McCain’s candidacy. And, in the wake of his selection by Diebold, TPTB, or the Supreme Court, either candidate is likely to ratchet up the ongoing expression of increasingly stupid ideas about foreign policy, converting food to fuel, or similarly “bolstering” the “economy.” Any one of these events likely will cause the price of oil to rise, and I doubt only one of them occurs.
But I could be wrong. The ever-deepening, peak oil-induced recession just might keep destroying demand for a year or more. Such an event would stave off the Greatest Depression by a few months, maybe even years (if the economists are lucky … and the capitalists … and if the majority of cultures and species on planet Earth are correspondingly unlucky). Regardless how long we can keep the current game going, we’re squarely within the period of declining resources, and we’re all going to have to make other arrangements in the months and years ahead.
About those arrangements: In anticipation of Marguerite Daisy’s comment about reaching a larger audience, and in response to a friend’s constant harassment along the same lines, I submitted an essay to Orion magazine for consideration in their Making Other Arrangements section. It’s pasted below for your amusement. Call it a self-indulgent tragicomedy in 500 words, the limit imposed by Orion.
__________________________
Living in Two Worlds
by Guy R. McPherson
Living in two worlds is the most stressful thing I’ve ever done. During the week, I occupy the fantasy world of American Empire, teaching classes at a major research university and conducting research on fire ecology and conservation biology. On weekends, I strive to learn skills that will serve me and my community well during the coming post-petroleum era.
As an ecologist, I have been thinking and writing about limits to growth for my entire career. After careful study, I have concluded that the expensive energy associated with passing the world oil peak spells the end of civilization. I strongly suspect the next U.S. president will preside over the smoldering ashes of the world economy. As a conservation biologist and compassionate human being, I understand that this is truly good news: Peak oil will save thousands of species and hundreds of cultures from extinction at the hand of western civilization. In addition, peak oil might save our own species from extinction by forcing us, finally, to reduce carbon emissions and therefore stop us from frying the planet beyond the point of human habitation. In case it doesn’t, my post-carbon landing pad is located in the mountainous area deemed by climate-change scientists least likely to be negatively impacted by regional climate change.
When I set aside my academic hat and return to myself as a selfish human animal — the community to which we all belong, as guaranteed by natural selection — I am terrified about the potential for chaos to descend upon my community. I am scared about my inability to grow my own food, secure my own water, and maintain my sense of humor when my bank fails and my car is permanently out of gas. I am scared, in other words, about the unimaginable suffering likely to result from increasingly scarce supplies of cheap oil, the lifeblood of civilization. Daily reminders let me know that life in the ivory tower is damned poor preparation for post-carbon living.
I remain hopeful we will power down with the tranquility of Buddhist monks. But I’ve studied enough anthropology to know the odds are not in our favor. So my post-carbon community is small, rural, and isolated, a far cry from the million-strong city I inhabit during the week. Nearly everybody in the community is aware of the looming threats of peak oil and runaway climate change, and most have been making other arrangements for years. Many have adopted off-the-grid living, and have cashed out of the American monetary system. They grow their food cooperatively, hunt and gather other sources of nutrition, barter for other goods, and work to build durable structures and a durable community.
I’ve no doubt these arrangements are necessary. Will they prove sufficient, for my community and me? Although deep doubt overwhelms my optimistic nature in the darkness of most nights, I believe we must act as if they will be sufficient.
Acting and living “as if” is a powerful approach to improving the human condition. It enables quick identification of the obstacles to improvement. It is the route to social change often espoused by contrarians and social critics (not to mention Buddhists). Rosa Parks sat on the bus “as if” doing so were right. And, of course, it was. The example provides inspiration, hope, and a way forward.

Comments 11

  • I don’t see any particular reason that the graph of crude oil prices needs to be linear and always upward during this period of time. We may have hit Hubbert’s Peak in 2005, but the short term graph is more like a plateau with a series of relatively shallow peaks and drops than a steep peak followed by a steep dive. Worldwide petroleum consumption continues onwards and eventually we will find ourselves on an irreversible downward graph, which itself may have short-term ups and downs.
    My expectation is that Thanksgiving this year will be a traumatic time for many Americans due to heating oil cost increases and increasing of electrical brownouts and blackouts. I think this Christmas will be the most stressful in living memory and New Year’s 2009 will see far less rejoicing than we have ever seen for a New Year’s in our lifetimes. I think the Summer of 2008 will probably be the last “normal” summer of our lives in the current paradigm and this month will be remembered as “the good old days” by young people.
    I hope I am wrong, but right now feels like the calm before the catastrophic storm. The Olympics might have something to do with it. I feel great mischief by Bush/Cheney is still due to occur and that our current view of the forthcoming presidential elections may very likely be radically changed before November 3.
    It was truly amazing to see a gas station today with gasoline priced under four dollars per gallon and to think that gas has gotten “cheap” again. I think that the petroleum retailers have formulated a strategy of pain thresholds and they often jack up the price of gasoline higher than their profit margins require so that they can eventually lower it to the level of outrageous profits and the new lower (but still higher) prices be thought of as relief.
    We certainly are not out of the woods. We have barely even begun to enter the woods and I see the path ahead as dark and dangerous.
    Stan Moore
    Petaluma, CA

  • Just because it hasn’t happened yet doesn’t mean it won’t happen.
    The trend is certainly not back to the same ol’ same ol’. Right now, it is more of a lull–or at least that’s the way we see it in this household.
    The economy has gone to Hell, people are struggling, and anyone with eyes and a chance to read the news knows the world has gone nuts.
    No, we’re in decline–a la Rome. Only, Rome had a longer run. And this time the Visigoths have nukes.

  • Good one about the Visigoths Charlene, but I might add that they’ve also got a great way to deploy them now too with Iran’s new ability to launch satellites.
    Though it’s not really a huge deal that they can get junk, and I mean “junk” quite literally, like the dummy satellite they put in orbit, it opens the door to far more nefarious possibilities! Imagine what would happen if Iran (Or any other crackpot regime) decided on a whim to launch a satellite full of ball bearings into orbit and let them loose and untracked.
    Factor in that slow in orbit is several thousand miles per hour, and that a piece of rock the size of a grain of sand sounded like someone bashed the ISS with a steamroller, and you’ve got a recipe for disaster. Any “Over the Horizon” communication ends, as does GPS etc, and especially Spy Satellites. We’d find the world to be a very dark place.
    Guy, though the price of oil has gone down rather dramatically through demand destruction, we’ve got to remember that the #2 oil consumer has almost ceased consumption during these Olympics.As soon as they’re over, it’s going back up again. Further people are getting to believe that $3 a gallon gas and well over $100 oil are normal. Now that it’s going back down to that level demand’s going to pick right back up. We’ll see a new rise in price at teh pump as soon as the gas stations recoup their losses.

  • Hey Turboguy,I can offer one bright spot: solar/crank poweredshort wave radios are avaliable at a very reasonable price.Generous benefactors have supplied millions of poor Africans,and other with crank radios,so today,even if people don’t have enough to eat they get the news.Short Wave has been favored medium for national and international communications for some time,for most of the world’s populations and governments.So Professor Guy can easily keep in touch with the rest of the world in his mud hut.Don’t know if that is good or bad–probably good.Also English is the favored Lingua Franca for people and governments all over the world.Looks like communication won’t be a problem in the Post-carbon era.Today all the major governments of the world broadcast in unaccented English from all parts of the world to all parts of the world.They also broadcast in all the other major languages from everywhere to everywhere.I’ve had many bizarre and astounding experiences with this,such as hearing Radio Japan(their government radio)broadcasting in Swedish from Africa to Europe.During the Tiananmen Square student uprising in 1989,I heard a very courageous man from China’s English service give a vehement anti-government description of the events,of course in perfect unaccented American English before they cut him off.Needless to say he was never heard from again.I get North Korea’s English service here in the mornings loud and clear on my short wave receivers.Interseting and fascinating stuff.

  • Memo to Stan:
    The chart pattern on the NYMEX front month crude oil contract looks bullish.

  • Yeah Frank, I also have a military background and have worked with HF/Shortwave radios. I was always astounded that I could basically call home with the radio in the airplane.
    I don’t have extensive background in the civilian area, but with a crank setup you can produce enough Wattage to transmit? Amazing! I’d have to see it to believe it, but the ones I worked with on C130’s have enough power to call home from Iraq and smoke you dead if you touched the antenna while keying the mike. I just can’t imagine that a crank or solar setup would be able to get you up to that level of “Oomph” to transmit unless they’re doing it at the terminator.
    Cool stuff.

  • Memo to Turboguy,
    I should have made it clear that when I talked about radios I only meant receivers not transmitters.My experience is as a DXer only,although I’ve had contacts with and have heard many Hams.But you raised an interesting point:at what point will national broadcasters such as Voice of America,BBC,Deutsche Welle,to name 3 of the most prominent ones,discontinue to broadcast? Will it be possible to transmit with other power sources? Don’t know.
    Talking about smoking you dead if you touch the antenna while keying the mike,I was staying at a friend’s condo in Manzanillo,Mexico,where one of the owners was a ham.While he was away,the condo manager dismantled his antenna.The next time he tried to broadcast his equipment was immediately fried–was he angry!!
    I just receive with various random wires and whips,but am able to get the world.The North Korean national anthem is beautiful,as is their Interval Signal,”Song of General Kim II Sung”.I’ve logged over 140 countries,and have heard a lot of amazing stuff.Sometimes I’ll submit my loggings to various DX organizations,which in turn are picked up by other foreign DX clubs.I Googled myself recently and found one was printed in a Russian DX club magazine–you have no more privacy today. Everything you print or put on a computer ends up on Google,including our blogs on this site.

  • I found an article on EnergyBulletin.Net to be of great interest today. The specific focus was on net exports by the world’s top five exporters, and the news was that all five of the world’s top petroleum exporters are providing reduced net exports to the marketplace.
    This can relate to expanding economies in the producing nations themselves. For instance, the United Arab Emirates are on a building and expansion spree that acts almost as if there is no tomorrow. This means that even if production remains high for now, less petroleum is available for export. This can be different than depletion, though some countries, perhaps Russia are producing less because of depletion. Norway and its North Sea fields are on the downhill slope, I believe.
    If you take all of this and stack it up against the concept of demand destruction in the U.S. it will ultimately mean that reduced net supply to the world (including U.S.) market will offset local demand destruction and prices will surely rebound to the upwards trajectory that Americans and everyone else are learning to fear.
    This also inhibits an orderly transition to a post-carbon economy because the transition needed to be done when oil was still abundant and cheap and before the access to oil on the world market became a zero sum game.
    We are nearing check mate for our civilization and the real suffering has not even begun to reveal itself.
    I think that before 2008 is over months will begin to feel like years…
    Stan Moore
    Petaluma, CA

  • My information is that the British/Norwegian North Sea
    oil fields are being rapidly depleted,and North Sea production is way down.The mood in both Aberdeen,Scotland and Stavanger,Norway;the petroleum capitals of the UK and Norway,is decidedly gloomy.

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