– Has “peak gasoline” been and gone?

NYC fantasy subway map....oh, dear

One of the themes I’ve consistently emphasised when discussing looming threats like peak oil is that policy responses must take account of the adaptability of markets and consumers. Drivers will respond to higher petrol prices by, for example, travelling less, changing to smaller fuel-efficient cars and moving to more accessible locations. Manufacturers will respond by producing vehicles that use less fuel and/or alternative fuels.

One of Australia’s leading public intellectuals, left-leaning economist Professor John Quiggin, reckons that “peak gasoline” has in fact already happened. He points to the 8% decline in petrol consumption in the US since 2006 (per capita consumption declined by more than 10%) and, prospectively, to even tighter standards requiring a 40 per cent improvement in the average efficiency of new cars, relative to the existing fleet, by 2016. I’ve previously discussed how the rate of growth in per capita car travel has been slowing for some time in Australia (and other western countries) and has actually declined in recent years.

We know that motorists respond to price increases by reducing petrol consumption. One estimate of the elasticity of demand for petrol in Australia with respect to price is around -0.1 in the short term and -0.3 in the longer term i.e. a 10% increase in the pump price of petrol would initially reduce demand for petrol by 10% 1% and, in the longer run, by 30% 3%. Some of this reduction comes via higher public transport patronage but the vast bulk comes from car-related adaptations like more efficient trip-making and smaller, lighter and more fuel-efficient vehicle.

In the US, this review of hundreds of elasticity coefficients found that the in the short-run, “estimates for the demand for gasoline range from 0 to -1.36, averaging -0.26 with a median of -0.23 for the studies included here. Long-run price elasticity estimates range from 0 to -2.72, averaging -0.58 with a median of -0.43”. So in the longer term (more than a year), US drivers respond to a 10% increase in price by reducing their consumption of petrol, on average, by 58% 5.8%.

Professor Quiggin allows that the GFC has had an effect on travel behaviour in recent years (petrol consumption tends to rise and fall with income) but still thinks that estimates of elasticities for the US are conservative:

I suspect that the full long-run elasticity, including induced innovation, is near 1, meaning that if current real prices are sustained, consumption could fall as much as 70 per cent below the level that would be expected if prices had remained at the 2000 level.

For my money, where the “peak gasoline” hypothesis gets really interesting is his argument that per capita global oil production peaked in 1979, but per capita output of goods and services nevertheless increased substantially over the subsequent 30 years, with the fastest increases in the developed world. In other words, personal living standards increased while personal oil consumption declined. “That seems pretty conclusive as far as apocalyptic versions of the Peak Oil hypothesis are concerned”, he says.

He notes that per capita use of energy has increased since 1979 even while per capita oil use declined (although energy consumption still hasn’t risen as much as per capita income).

…..that information runs directly against the standard Peak Oil claim that oil (NOT energy) is centrally necessary to civilised life. Clearly, as the evidence of the last thirty years (shows), we can have both more income and more energy even as oil use declines. So far that’s mostly been done with gas and coal, but if we are prepared to pay for it, we can continue to enjoy increasing consumption of energy services from a combination of renewables and energy efficiency, while reducing and ultimately eliminating burning of fossil fuels.

That still leaves the issue of carbon emissions not fully resolved but peak oil, he says, is on the side of the good guys here — we should be grateful it’s already happened.

In my view, the important implication for urban policy is that cars will be around for a long time yet and accordingly need to be a key focus of policy. Petrol consumption, emissions and pollution will all improve, but other issues like traffic congestion are likely to get worse and need to be addressed. Policies that blindly assume cars are doomed and therefore focus solely on public transport and land use (as important as these areas are) will inevitably fail.

4 Comments on “– Has “peak gasoline” been and gone?”

  1. jack horner says:

    “One estimate of the elasticity of demand for petrol in Australia with respect to price is around -0.1 in the short term and -0.3 in the longer term i.e. a 10% increase in the pump price of petrol would initially reduce demand for petrol by 10% and, in the longer run, by 30%.”

    Actually “…1% and, in the longer run, by 3%” with the given elasticity of demand.

  2. TomD says:

    As a side issue, questions have been asked in relation to the oil industry of why the significance of the decline in petrol consumption in the US has not resulted in a decline in the price per gallon there, prices instead have kept rising.

    • Alan Davies says:

      The best explanation would be that oil prices are determined by global supply and demand and across all oil-using industries. I expect the US is a price taker.

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