U.S. motorists drove less for a seventh consecutive month in May, as vehicle-miles traveled on all U.S. roads fell 3.7 percent during the month from a year earlier, the Federal Highway Administration said in a report July 28. The seven-month slide is the longest downward streak since 1979.
Demand for oil and petroleum products dropped 4.3 percent in May from a year earlier to 19.7 million barrels a day, according to Energy Department data released July 28. That's 889,000 barrels a day less for the first five months of the year, compared with the same period a year earlier...
``The key consideration in the market this week has been demand destruction,'' said Christopher Bellew, senior broker at Bache Commodities Ltd. in London. ``All the warning signs about the U.S. economy have prompted speculators to reduce their exposure, so that the next layer of support is at $117.''
I continue to hear the "demand destruction" argument from members of the media. I can't imagine why... If there was indeed demand destruction, inventories would be rising around the world, but the IEA and EIA data show that inventories are lower than one year ago.
"But oil prices are declining! Therefore there must be demand destruction!" July MIGHT be the first month (at the moment it is very close) where the average oil price declined month over month in over a year. Spikes and crashes don't really matter. The economic impact of the price of Oil depends on the AVERAGE price, not the high or low.
What is happening, in my humble opinion, is my friend Jeffery Brown's Export Land Model. The U.S. is receiving oil imports commensurate with its ability to compete for Oil in the export market. No more, no less. The price of Oil at any moment reflects that reality and the point of equilibrium. After all, the U.S. imports approximately 30% of what the exporting nations export.
I have been pounding the table on the impacts of declining total VMT in the U.S. The effects on retailers, auto manufacturers, gas stations and car repair, education, part time workers, law enforcement and fire safety, municipal budgets, etc... are going to leave folks in disbelief.
Forget the PRICE of Oil. Focus on the absolute AVAILABILITY of Oil. If total VMT declines by roughly 4% (or more) for the next several years (and it will), by 2013 there will no traffic in L.A. to fight with. Nobody at South Beach in Miami except the folks that live there. The parking lot at your city's airport will have plenty of spots. This is a simple X and Y graph, just plot the years on the horizon and continue the slope of the line. Ta Da!
Now let us continue this line of logic...
Because less and less Oil is making it to U.S. shores, prices will need to rise, and economic activity will need to fall in order to ration the remaining Oil based on the highest bidder doing the most useful things with it. So what does that mean? Agriculture will get the fuel it needs at the expense of somebody's (everybody's) lawnmower. Public safety will get the fuel it needs at the expense of your ability to avoid car pools. Public sanitation gets the fuel it needs at the expense of you heating, or cooling, your entire house. People will be FORCED to work from home, or closer to home, in order to eliminate redundancy in energy services for a home and work location, not to mention forced reduction in single car commuting.
As time goes on, the issues become far more profound. Let us look at the year 2018, and total vehicle miles driven ("VMT") in the U.S. is down something like 50% (the rate of decline in oil imports will not follow a straight line, but will likely accelerate over time). This is not the energy crisis of my youth. Those 2 each lasted less than 1 year. This energy decline will be permanent. What will the value of single family homes, far from public transportation, be in real terms? What will the value of your Liberal Arts education be to the market place? What is the value of the U.S. auto fleet? Does it even have a positive value, or is it just scrap and environmental liability? What is to be done with office parks and towers that people no longer commute to to work in? What about the banks that financed this stuff?
My older son, G-d willing, will be 3 years out of college in 2018. What will he be doing for a living? Will he even need a car, or a driver's license? Will law enforcement have enough fuel to effectively enforce traffic compliance? What about Ambulance service or road side repair and towing? After all, the money to pay them comes from PROPERTY TAXES, and I just pointed out the problems for that revenue stream.
This is not doomsday stuff. This is practical planning and proper husbanding of critical and scarce resources. Life will go on, business will go on, the economy will go on. Of course, we will adjust. But why plan for a future that does not exist?
Good Luck!
Mentatt (at) yahoo (d0t) com
11 comments:
(From the non-regulating bureaucrat):
I'm getting queasy about this drop in vehicle miles driven. There is NO reason not to walk to work, ride a bicycle, share a ride, etc. in this uneventful, relatively cool summer. I myself haven't bought a gallon of gasoline since I started using the E85/ethanol in my 1992 Buick (no one said I could). But now that we've cut out the easiest 5% of driving miles (you don't need to drive 500 feet to get your newpaper - you can walk), and the weather gets colder and wetter, and the people get older, does the reduction of miles driven continue? How much lower can we go? There is going to be a small backlash I bet, and the driving is going to go back up (the suburban people are trapped anyways). And when the Chinese start buying oil again after the Olympics, I think we'll be right back to where we were in 2007, buying as much gasoline as before -- just a prediction.
This was a great post Greg, and perhaps later I'll reply with regard to some of the rhetorical questions you posit in it.
For now, I'd like to address the excellent issue brought up by the non-regulating bureaucrat - relative elasticity of demand for liquid transport fuels.
US demand largely shrugged off the first 7-8 years of crude price rise (12/barrel in 1999 to 75+/barrel in 2007), but eventually something had to give.
The low hanging fruit, the discretionary driving, the summer vacations and extra trips to the mall and movie theater are gone now, and it's already showing up in the economic figures. The next part gets much, much harder.
Historically, VMT is a cyclical phenomenon, peaking during the summer (with a second peak near the holidays). It will be interesting to see how closely this phenomenon follows the historical trend, vs. year over year changes.
As a side note, down here in the Deep South we're having yet another hot, dry summer, it is 105 degrees every day (heat index), just sitting outside for 20 minutes is sufficient to leave you in a clearly visible pool of your own sweat.
E85 is 15% gasoline by volume, and 22% by energy content. I will make an assumption that are buying subsidized ethanol made from subsidized corn, yes?
If so, you do realize that is not a real solution, and you are actually paying more per vehicle mile traveled, issues Greg and many others have covered previously.
I can't see people backsliding on VMT without a drop in fuel prices either preceding or coinciding with it. Current prices occupy X% of total income, and will continue to do so absent the above or an increase in wages above and beyond inflation, which, again, I can't see occurring given rising inflationary pressures across the board in terms of daily use goods and services, declining asset valuations (homes, etc), and rising unemployment, business closures, layoffs, etc.
As we've discussed before, there is a direct link between VMT and GDP, as spatial activity correlates with economic activity. With a few years more of the same direction and magnitude, the US economy will be completely in the toilet even without any other 'issues'.
Greg, I would encourage your son to avoid the current college debt trap and acquire some old-fashioned, traditional knowledge instead, such as learning to grow food, butcher a hog, set a bone, repair a water pump, write a sonnet, etc. (yes, I'm paraphrasing Heinlein a bit).
Back to your rhetorical questions (and great ones, food for thought btw), I came across a few possible series of answers in the form of a "future life" series.
Not all link directly to the next, there are 44 so far.
(Yes, the bureaucrat is well aware there are fewer BTUs in ethanol versus gasoline. I was trying to get a new car out of the deal by blowing up my 1992 Buick running it on ethanol. Sadly, after 2.5 years of 100% E85, the damn thing still runs great!!! :) )
^_^
It's hard to kill an old Buick (3.8L V-6, right?).
(Yes)
My interpretation of the data is this:
The drop in VMT = the drop in aggregate supplies. Demand can NEVER exceed supply. Desire, maybe, but not demand.
Dear Greg:
This whole VMT down is a puzzler and possibly more complex than it seems. The press says demand destruction is happening but the inventories are not going up. Just because the inventories are not going up it doesn't mean that demand destruction is not taking place. People are impacted by higher prices and are driving less which is the definition of demand destruction. The inventories are going down but only slightly faster than demand destruction is taking place. Otherwise you would have spot shortages and lines at the gas stations. Given the current trend that is going to happen sometime this year. I have been studying the minimum inventories necessary just to keep the energy delivery system working (oil required just to fill the pipelines, refineries and tankers) and we are about to breach it. When that happens I will be one of the people who wished we bought more oil call options. There is not enough inventories in US NOW to have everyone fill up their tank full. Our system has only enough for 3/4 of a tank. If people panic and try to fill up all at once, US gas stations will be out of gas in two days and thereafter the system will have a devil of a time to find extra oil to bring in to make things work smoothly. We are looking at a couple of months of supply constraints at best. This is according to Matthew Simmons.
So the fragility of the entire system is quite obvious. From financial to food to energy markets. All these things are of course connected especially finance and energy. So there you are. Permanecer Sentados Por Favor and buckle up will ya.
Best regards,
Chuck H.
@ fallout11
That 105 deg heat isn’t a problem once you become acclimated to it; takes about two weeks. I turn the A/C up to 80 and spend some time outside between 3:00PM – 5:00PM enough to warm up but not until I sweat then of an evening when it cools off to 90 or so I can enjoy some time outside in comfort. As an added bonus it also saves me some loot.
Hi Greg
You may have seen this:
http://www.clingendael.nl/publications/2008/20080700_ciep_energy_jesse.pdf
Lots of it, but interesting analysis.
Donal.
Dan, I grew up right here, 38 years now, and I'm still not used to it!
Then again, even the old farmers say it is hotter here than it used to be, and the flora agrees.
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