The Decline and Fall of the Oil Age

Gas prices in the U.S. are at an all-time high for this time of year, and well above the previous high set in 2007. Why are prices so high? Well, mostly because oil prices are so high. And why are oil prices so high? The short answer is that there is a growing structural imbalance between supply and demand. To keep prices low we need more oil than is being produced. As Chevron acknowledged years ago in its shrewd but correct ad campaign: “the era of cheap oil is over.”

I’ve written many times previously about the threat of “peak oil” — the notion that we are at or near a peak in global oil supplies and may now be heading down the back side of the supply curve. I’m not going to rehash this discussion here. Rather, I’m going to focus on the good news with respect to non-petroleum transportation trends.

In the U.S., about 2/3 of our oil consumption is for transportation and the rest is used in making plastics and other industrial uses. The share used in transportation has steadily risen since the dawn of motorized transportation, rising from about 4 million barrels per day in 1950 to about 13 million today. We use about 19 million barrels per day for all uses, compared to about 89 million barrels for the entire world. Per day. We are indeed living in the Oil Age.

But not for much longer.

An exciting new shift is afoot, from using petroleum to move people and goods to using electricity. This future is still faint in detail, but clear enough to allow useful speculation about its eventual shape.

Electric cars are not new. In fact, the very first cars were electric. During the latter half of the 19^th Century, most cars were electric. It was only as advances in gasoline engines appeared that the convenience and power of gasoline overtook electric vehicles. That trend seems set to reverse direction again in the coming decades.

Before I delve further into the world of electric vehicles I’m going to discuss improvements in energy efficiency (better technology) and conservation (behavior change). Some of this information is the same as that which I highlighted in my essay, “The Good News: Why Climate Change Doesn’t Matter Anymore.” That piece focused on the renewable energy sector, however, so this essay extends my earlier arguments to the sector that uses the most petroleum: transportation.

There are three very promising trends supporting my argument that the end of the Oil Age is upon us: 1) substantial improvements in energy intensity (less energy required per unit of output); 2) price-induced conservation; 3) the growth in electric vehicle availability and some encouraging trends in early adoption. 

We’re becoming more efficient over time

The most promising trend in the transportation sector is the steady improvement in energy intensity, which is defined as units of energy required for each unit of GDP. It’s a relative measure. The Energy Information Administration projects that global energy intensity will improve by almost 100 percent by 2035 – an average improvement of 1.8% per year, with the developing world leading the way in large part because the developed world is already far more efficient in energy use.

This trend means that we will, as a globe, be able to produce goods and services with half as much energy by 2035. This trend will become real primarily through improvements in transportation, though we can’t ignore other sources of energy demand such as industrial consumption and (non-petroleum) electrical consumption.

The U.S. has been a great example in recent years of how improved energy intensity can make a real difference in emissions. U.S. greenhouse gas emissions actually fell 7.5 percent from 2008 to 2009 due in part to improved energy intensity. The recession was also a substantial factor, but only accounted for about 1/3 of the improvements, according to the EIA (Fig. 1 and 2). The other 2/3 came from improvements in energy intensity and carbon intensity (more renewables and natural gas, less coal). 

Figure 1. US greenhouse gas emissions (source: EIA). 

Figure 2. Sources of US greenhouse gas emissions reductions in 2009 (source: EIA). 

The trend reversed again in 2010, with the biggest annual jump, a 4% increase, since 1988 as the US economy bounced back from recession. The biggest factor in this jump was a rebound in manufacturing, which grew about 6% in terms of energy demand, and coal consumption, which also increased by 6%. However, the good news here is that much of the energy intensity improvements witnessed in 2009 have persisted in other sectors, including in transportation.            

Energy intensity is a relative measure, not an absolute measure. So even if we improve energy intensity dramatically, current global economic growth projections result in oil use and accompanying greenhouse gas emissions growing substantially by 2035, all else being equal. EIA projects that global petroleum consumption will rise from about 90 million barrels per day to 112 by 2035. 

Conservation is more than a “personal virtue”

This is where the next two trends can help a great deal. “Price-induced conservation” refers to the fact that as energy prices go up we often see remarkable changes in how much energy is used because people and businesses change their behavior to adjust to the high prices (conservation refers to behavior change, whereas efficiency refers to technology improvements).

A good example of price-induced conservation is reduction in U.S. gasoline consumption as prices approach or exceed $4/gallon. Since 2007, U.S. net gasoline consumption has declined, due to both the recession and price-induced conservation (which are closely related trends, of course, see Figure 3). A 2004 meta-analysis of studies on gasoline consumption elasticity found that a sustained 10 percent increase in gas prices leads to a 2.5-6 percent decline in consumption. Price does matter.