Will American Changes in Energy Consumption Stick?

by: James Hamilton

American energy consumption is dropping. But will falling gasoline prices reverse that trend?

From yesterday's Wall Street Journal:

Source: WSJ.

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Consumers are buying fewer sport-utility vehicles and more energy-saving washing machines. Some trucking companies have rejiggered their engines to max out at lower speeds. Gridlock is easing in California. Americans drove 966 million fewer miles in May than they did a year earlier, a 3.7% decline, according to the Transportation Department.

With shipping costs surging, companies are rethinking overseas production, slimming down packaging and retooling distribution networks. Yogurt maker Stonyfield Farm is only sending out fully loaded delivery trucks. Procter & Gamble Co. (NYSE:PG) is filling smaller bottles with more-powerful laundry detergent. Locally made products, from beets to beer, are becoming a more attractive choice.

"Four-dollar gas is the best marketing tool I have," says Betsy Kachmar, assistant general manager of Fort Wayne Public Transportation Corp. in Indiana. Bus ridership in that city was up 16% in the first half of this year, compared with the year-ago period. Mass-transit ridership nationwide rose 3.4% in the first quarter, according to the American Public Transportation Association.

Also yesterday the Energy Information Administration reported:

Preliminary data indicates that global consumption rose by roughly 500,000 barrels per day (bbl/d) during the first half of 2008 compared with year-earlier levels, as a 1.3-million bbl/d rise in consumption outside of the Organization for Economic Cooperation and Development [OECD] was partially countered by an 800,000 bbl/d drop in U.S. consumption compared with year-earlier levels. The decline in U.S. consumption in the first half of 2008, reflecting slower economic growth and the impact of high prices, was the largest half-year consumption decline in volume terms in the last 26 years, when, in the first half of 1982, consumption dropped by nearly 800,000 bbl/d....

During the first 5 months of 2008, [U.S.] petroleum consumption fell by an average of almost 900,000 bbl/d from the same period in 2007. During June and July, the year-over-year declines narrowed to just over 400,000 bbl/d.

 

U.S. average retail gasoline price. Source: NewJerseyGasPrices.com.

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But with oil prices now coming down even faster than they went up, is that all going to be reversed? None of the changes above were easy for people to make, and I don't expect them to reverse those steps that easily either. Although the price of gasoline today is less than it was a few weeks ago, it's still much higher than it had been at the time you purchased your last car. As consumers replace older models, they're invariably going to continue to substitute into more fuel-efficient vehicles even if oil prices continue to decline.

In addition, there was a mentality in 2005 that what looked like high gasoline prices at the time ($3 a gallon) were only temporary. I expect an opposite perception could have set in today-- even if gasoline prices go lower for a few months, consumers know they could go back up and nobody wants to be permanently stuck owing the big gasoline bills they remember from this summer.

On top of which, that energy conservation was in my opinion one key cause of the most recent price declines. With demand from China booming and world production stagnant, the key question was how high did the price of oil have to rise to bring about a significant drop in U.S. consumption?

And now we know the answer.

 

Source: EIA.

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