The Oil Uproar That Isn’t

I’ve been meaning to point to NYT article — and an even better chart — from earlier this week:

"For Americans, oil shocks no longer seem so shocking.

The Arab oil embargo of 1973 and the Iranian revolution in 1978-79 exposed America’s vulnerability to powerful forces outside its control, forces that sent fuel prices to record levels, prompted anger over gas lines and led to bookend recessions that defined a decade of economic turmoil.

But the latest escalation in oil prices – to as much as $60 today from less than $30 a barrel a little more than two years ago – has produced a much more limited response. Energy legislation that President Bush is pressing Congress to pass this summer would bring little relief. And while Americans say in polls that they are deeply disturbed by high gasoline prices and looking for someone to blame, most people continue to drive just as avidly as before; purchases of gas-guzzling sport utility vehicles have slowed but there has been no significant shift to more fuel-efficient cars.

Furthermore, gasoline consumption has continued to rise, up 1 percent in May compared with the same month last year."

Whenever I hear a pundit say Oil is too expensive, my short answer is "Not if people are still buying it at these prices." Indeed, Oil will not be too expensive until people change their economic behaviors with respect to it. So far, we’ve only seen a small dip in mega-SUV sales — Hummers and Suburbans —  but hardly a wholesale move to smaller fuel efficient cars. Even the Prius — the hot selling, 2 year waiting list, Toyota Hybrid — predated $40 oil.

For certain, manufacturers are not idling plants because of Oil prices. We have yet to see significant alterations in consumer behavior. Politically, there’s been no proposals for a 50 cent or even a dollar gas tax, we hardly see a shift of travel plans or driving behaviors; There’s been no major outcry for alternative energy legislation. Even a Federal Tax credit for Solar roof tiles went nowhere.

Oil will become too expensive when it impinges upon people’s lifestyles and living standards.  The tipping point is probably another $20-30 per barrel away . . . 

Consider this factoid:

"[The] transportation sector, which now represents two-thirds of all oil demand in the United States and is solely accountable for the growth of the nation’s oil thirst over the last three decades. Each day, America’s fleet of more than 200 million cars guzzles 11 percent of the world’s daily oil output. Gasoline consumption has risen 35 percent since 1973, compared with a 19 percent increase in overall crude oil consumption.

What has been the driving factor in this increased demand for oil within the transportation sector? Take a wild guess:

"The growth comes mainly from light trucks, including sport utility vehicles, which account for almost half of all cars sold in the United States. For many consumers, the advantages of an S.U.V. – size, power and an increased [false] sense of security from driving a taller vehicle – largely overshadow one of their main drawbacks, higher fuel consumption."

My own personal pop pysch theory for the phenomon is this: the baby boomers were embarassed at the thought of becoming their stationwagon-driving suburban parents. So instead, they selected the heavier (and less safe), lower-fuel effeciency SUVs.   (Save your emails — I really don’t care that many of you have rationalized why you own a truck. If you are like the vast majority of the SUV owners in my neighborhood, I won’t believe most of your excuses explanations anyway).


Click for a HUGE chart:


Graphic courtesy of NYT


The Oil Uproar That Isn’t
Jad Mouawad And Matthew L. Wald
NY Times, July 12, 2005

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  1. spencer commented on Jul 16

    In the 1970s nominal spending on energy rose from 6% of total personal consumption expenditures to 9% — about a 50% rise.

    So far this cycle it has risen from about 4% to 5% —
    only a 25% rise and it is still lower then it was at the bottom in the 1970s.

    This ratio demonstrates the reduced reliance on oil much better then the oil to gdp that so many people quote.

  2. Barry Ritholtz commented on Jul 16

    Good point, percentage wise —

    although I suspect its less of a reduced reliance on Oil, and more of an increased consumption of categories that did not even exist in the 1970s: from PCs to wireless to internet to cell phones to Plasma screens to DVDs to Videogames to mobile messaging . . .

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