The 1989 San Francisco earthquake, known as Loma Prieta and which occurred during that year’s World Series, forced a number of unexpected changes in Bay Area transport–many of which survive to this day. The most visible is the opened up San Francisco waterfront which now finds a streetcar running over cobbled streets in place of the ghostly, double-decked Embarcadero freeway. Other highways or portions thereof in the region were either never rebuilt or downsized. These changes happened slowly of course.
For example, how many travellers today are aware that the earthquake, which had knocked out Interstate 880 in Oakland, was solely responsible for the revival of the Oakland-SF ferry service? That particular ferry had been dormant for decades. Today it’s a fixture on the waterfront. Indeed, once the rusting shadow of the Embarcadero freeway disappeared, the ferry terminal complexes in San Francisco were improved not just to Oakland but to other parts of the bay.
The demand-shift response to the Quake of ’89 is actually a helpful narrative to understand larger demand-shifts now taking place in the global oil markets. And, the story also helps to clarify the primacy of supply, and how demand is only inelastic up to certain barriers. Yes, it’s true that Bay area drivers used many highways and roadways that were affected in the quake: right up until the time they collapsed.
The expense of replacing those highways however, and the opportunity for other transport solutions obviated a full resurrection in the years following the temblor. In the same way that this transportation demand was never fully rebuilt but shifted elsewhere to other solutions, the OECD bloc of Japan, Europe, and the United States have been downshifting their own demand for oil the past decade as oil prices have marched higher, shifting oil supply to other parts of the world. This ongoing earthquake, if you will, of relentlessly higher oil prices keeps removing tranches of oil demand from here in the OECD. And it’s never been rebuilt. This process has been underway for at least five years, and shows no sign of reversing.
The peak of oil demand in the OECD is of course misunderstood. Oil and gasoline users in the developed nations did not freely decide to change their habits. Instead, price has forced that change upon them. But this has not stopped groups like Cambridge Energy Research Associates or new-energy gurus like Amory Lovins from trying to spin the change as a broad, discretionary event. But it’s not discretionary and to portray it as such is just wrong. Instead, the demand-shift is best explained by two much more important, much more revealing phenomena that began to show up in the last decade. The first, of course, has been the inability of global crude oil production to exceed its annual peak of 73.781 mbpd (million barrels per day) set back in the year 2005. That fact alone, both simple and incontrovertible, has been powerfully deterministic in reducing OECD oil demand growth through the mechanism of price. But the more complex dynamic at play is that the older user of oil in the OECD runs into affordability barriers more easily than the new user of oil in the developed world. The reason is as follows: the old oil user historically consumes a lot of oil. The new user is coming online using much less.
The result is a supply shift–or if you insist a demand shift–of global oil supply from the OECD to the Non-OECD. Given present trends in this regard, I have made up a chart (click to enlarge) showing the likely outcome of this shift through 2015, as the slow-rolling “earthquake” of higher oil prices takes tranche after tranche of OECD users off oil, thus freeing supply to the developing world.
As you can see, OECD oil consumption in this projection slips below 50% and Non-OECD oil consumption rises above that level as oil supply shifts from the two billion older users of oil in the world to the five billion newer users of oil. There is no peak demand. Peak demand, as a discretionary choice, is a myth. Only from an OECD-centric point of view does there appear to be peak demand. As oil is the most energy-dense energy source, with its 5.8 million BTU hyper-packed into each liquid barrel, no economy would choose freely to get off oil. The amount of labor that can be performed by oil, even at current prices, is extraordinary. And this is precisely how the new user of oil is treating the resource, with a more sparing uptake process that distributes oil’s dense energy more widely.
It should come as no suprise that the developing world is on the threshold of using more oil. 2008 was a landmark year which saw the energy use from all sources in the OECD finally matched by the five billion people in the Non-OECD. What’s a little surprising is that some Americans would tell themselves and their eager audiences a comforting story: that we’re reducing our oil consumption because we feel like it. The example of Loma Prieta, however, shows that while we cannot control earthquakes, the geology of oil production, or the price of oil, we can indeed make other choices, and adapt. Given that the new user of oil in the developing world can afford much higher prices, however, we are best advised to get on with adapting, and adapting quickly. The price of oil will not wait, and will only continue higher.