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.