Global Warming Is Real
Caused By Human Activity
We Have to Using Fossil Fuels

DOE estimates of changed oil production and consumption are given below, in millions of barrels a day.  The bold italics numbers are still estimates and explain why total world demand and supply in 2007 differ.

Where I have written Demand and Supply, DOE writes more accurately Production and Consumption /Disappearance. Production and Consumption cannot differ, and DOE will, I am sure, eventually reconcile its data to achieve balance.  In the mean time it is revealing to see that initial estimates suggest that demand exceeds supply by about 0.84 million barrels a day (mbd).  Looking at the figures we can see that US demand increased by 0.63 mbd, while production declined by 0.32 mbd, resulting in an increase in net demand of almost one mbd.  Other OECD managed to actually reduce demand (slightly) however, this was more than off-set by a decline in production (presumably mostly from the UK), resulting in a net demand increase of 1.2 mbd.  China, Russia, and Other Non-OECD all increased supply, but in China a much larger increase in demand led to a net demand increase of 1.66 mdb. In Other Non-OECD (mostly OPEC) a large increase in production was almost swallowed up by a 3 mbd increase in consumption. 

Looking at year by year oil supply we can see that supply has been flat to very mildly declining for the last two years.

Putting the last two tables together helps explain why the oil market has “gone wild”.  With essentially stable production and an annual growth in demand from China and OPEC consumers of about 1.25 mbd, the rest of the world is being asked to reduce consumption by about 1.25 mbd, or say about 3% a year for OECD countries if they bear the brunt of the adjustment.  Moreover this is not a one time adjustment we need to think of a 3% reduction in one year or 12% in four years.  What is more, there is no assurance that world oil production will be able to stabilize at 84.5 mbd, if production begins to decline the needed consumption adjustments will be even more severe.      

What are the price prospects if the US had to reduce consumption by 3% of its 2007 consumption year after year?  That is by 0.621 mbd per year. Then oil supply would be as shown in the second column below. Price would depend on the elasticity of demand. At the one extreme we might assume that the price elasticity is -1.00, as shown in the right hand column.  This is a “special” elasticity, corresponding to keeping total expenditure on the commodity unchanged even when the price changes. Thus in 2007 with a supply of 20.70 million barrels and a price (right hand column) of $66.40 per barrel expenditure $1.374 billion per day, in 2013 with a supply of 16.97 million barrels a day, but a price of $81.00 per barrel the expenditure is again $1.374 billion per day.   

Intermediate columns give the results for alternative guesses as to the elasticity of demand, with least elastic on the left.  The more inelastic (i.e. the closer to zero while remaining negative) the demand, the more consumers increase expenditure on the commodity when price rises, in an attempt to maintain consumption.

Price elasticity can change over time, also the adjustment to a sharp price rise that is expected to be short lived, will be less than the adjustment if the price rise is expected to be permanent.  Two tendencies affect longer term adjustments (elasticities). On the one hand, the longer the price rise the more fundamental the adjustments that can be made. For a price spike it may be sufficient to drive less, for a permanent price rise buying a more efficient vehicle, or adjusting to using public transport may be appropriate. These ”more fundamental” changes taken over a longer term, explain why the longer the time period, the greater (more negative number) the price elasticity is expected to be.

However, there is another tendency as prices continue to rise. It is the phenomena of “the low hanging fruit”, that is there are a number of changes that can be made relatively painlessly, driving less, ride-sharing, using public transport, cutting back on holiday travel, etc. but once these relatively painless adjustments have been made, subsequent adjustments may be increasingly painful, ceasing to own a car, cutting out holiday travel, as people become increasingly reluctant to “pluck these high hanging fruit” their demand becomes correspondingly inelastic.

Fee and Rebate: What does this discussion have to do with a carbon (or gas) tax?  Everything!  It has been argued that the days of mindless expansion seem to be over, and that we are now living in a resource (well at least oil) constrained world.  This may require the U.S. to cut its consumption of oil to say 18.84 mbd in 2010.  If we rely on the market and if elasticity is as low as -0.065 then the price will have to rise to about $220 a barrel, to hold back demand.  But note it does not matter how this price is arrived at. It could be $220 a barrel charged by the oil companies, or $60 a barrel charged by the oil companies, and $160 of tax:  Tax revenue that could be rebated to consumers, unrelated to their expenditure on gasoline. 

We now have $4.00 gasoline at the pump, almost all going to the oil companies.  Two years ago when we were paying $2.00 at the pump, we could have instituted a gas tax of $2.00 thus raising the pump price to $4.00 (and inducing a consumption cut back in the face of higher prices) but used the $2.00 of tax revenue to pay a per capita rebate to all citizens, irrespective of their expenditure on gas.

A politician with foresight would institute a $4.00 gas tax right now, raising pump prices to $8.00, inducing a reduction in consumption, and financing a rebate to all citizens on the basis of the $4.00 a gallon tax revenue.

Updated June 12, 2008

This table shows the Annual Average Crude Oil Price from 1946 to the present. Prices are adjusted for Inflation to April 2008 prices using the Consumer Price Index (CPI-U) as presented by the Bureau of Labor Statistics.

Note: Since these are ANNUAL Averages they will not show the absolute peak price and will differ slightly from the Monthly Averages in our Oil Price Data in Chart Form.

Also note that although the monthly peak occurred in December 1979 the annual peak didn't occur until 1980 since the average of all the monthly prices was higher in 1980.

Inflation adjusted prices reached an all-time low in 1998 (lower than the price in 1946)! And now just ten years later we are at the all time high for crude oil (above the 1979-1980 prices) in real inflation adjusted terms.

Prices are based on historical free market (stripper) prices of Illinois Crude as presented by IOGA . Price controlled prices were lower during the 1970's but resulted in artificially created gas lines and shortages and do not reflect the true free market price.

http://www.inflationdata.com/inflation/Inflation_Rate/Historical_Oil_Prices_Table.asp

http://www.eia.doe.gov/emeu/international/crude2.html  for daily NYMEX Light Sweet Crude Futures Contracts.

For DOE production and consumption estimates see Excel file 2008/080616.oilDemand