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Saturday, May 10, 2008

Relax, fuel is cheap

Photo of my cat Cloud, for no particular reason (public domain)
As a proud Cornucopian I'm tired of baseless claims of neo-Malthusian peakniks that cheap oil is over and it's time to eat dirt and die.

If you think I'm exaggerating, and haven't been on the Internet for the last five years or so here's a typical example of a Peaknik Doomsdayer:

Peak Oil. It's bigger than terrorism, global warming or genocide. It's the end of your way of life. [...] Which means if you don't live by your farm, no food for you. There won't be much food anyway. [...] 4 billion people will not survive. [...] So what can you do to prevent peak oil? Nothing. Seriously, nothing.

Fortunately these claims don't withstand scrutiny. Fuel is much more affordable than anytime in the history except for 1990s where it was not only very affordable but insanely cheap.

I hereby present my Fuel Affordability Index, which compares fuel affordability to standard of 100.0 in 1975. Fuel affordability calculates how many miles you can go on average salary. To calculate it you multiply new car fuel efficiency in mpg, gdp per capita and divide by crude oil prices. We can dispute stuff like gdp per capita vs median household income, crude oil prices vs retail gas prices, new car vs average car fuel efficiency and so on but they don't fundamentally affect conclusions so I just took whatever was easiest to find. Data is for USA, mostly because I couldn't find historical fuel efficiencies for any other country. I guess the conclusion would be even stronger for EU as European cars are more energy efficient and strong euro makes crude oil cheaper than in US.

YearFuel AffordabilityGDP per capitaFuel efficiencyCrude oil prices

Notes: Crude oil prices adjusted to 2007 dollars. GDP per capita in 2000 dollars. Different basis doesn't affect the results as only ratio is taken. Fuel efficiency is combined urban+highway, for all cars except trucks (so if I understand it correctly without SUVs too).

As you can see fuel is much more affordable than in 1970s or early 1980s. So as the civilization in 1970s very much existed, it will continue at current fuel prices, or even at prices significantly higher than current. One thing I expect to start happening about now is further increase in average car fuel economy - as soon as fuel became cheap in mid 1980s cars stopped improving, but hybrids are much better than 23.4 - the popular Toyota Prius has combined mpg of 46 - almost double the current average.

Even if people keep buying the same cars and the economy stays stagnant fuel would have to become 2.44 times as expensive in order to bring fuel affordability back to 1970s level (which if you're old enough to remember, weren't end of civilization). If people start buying hybrids (and they will) and economy grows at 3% a year (and it will) for the next 10 years, even $420 barrel won't reduce fuel affordability to below-1970s level.

Relax, fuel is cheap.


Anonymous said...

Maybe cars are more fuel efficient but I am not sure food is.

Anonymous said...

Greetings from Finland: fuel is here over 1,40 euros a liter. That's over $2... a liter (your European price conclusion was a bit off).

Anonymous said...

Er, did you factor in the fact that oil will become scarce?

taw said...

Anonymous: Stop thinking in terms of amount of "oil". People don't need "oil" as such, they need car miles. By doubling fuel efficiency (by switching from average gas guzzler to hybrid) you're doubling number of miles your car can go on the same amount of oil, what's effectively equivalent to doubling amount of world's oil reserves. So even if peek oil happened today peek car miles is not going to happen anytime soon.

By the time in the future this "peek car miles" moment happens, most of our cars will probably be electric and powered by renewables, so nobody's going to care.

Anonymous said...

So you're hoping that cars will run on electricity/renewables before oil runs out? Tell me, is this before or after an AI passes the Turing test?

taw said...

Anonymous: It is already technically feasible to switch every single car to electricity, and to generate all electricity by renewable energy sources. The reason it's not being done is that oil and other fossil fuels are still very cheap, so it makes no economic sense to do so.

For the last two decades oil was so insanely cheap that there wasn't even much point in making cars more fuel-efficient. This is slowly changing, but even after the recent price increases fuel is still cheap enough that hybrids need heavy tax incentives to sell.

Pomyk said...

Now oil is around $120 and still rising so your index is getting closer to 100.

Anonymous said...

quite interesting - thanks.

you ought to graph those numbers so the trends are more apparent to the casual reader.

Anonymous said...

Fuel may be relatively cheap. However, the average American may drive many more miles than in the past.

Maybe you ought to aggregate the percentage of median household income spent on gasoline. Whether fuel is relatively cheap or not...if it used to consume 10% of my annual income and now consumes 20%, that is a big deal to the average person.

taw said...

I haven't included number of miles people travel, the index is supposed to show how many miles they can afford at the same level of spending. It would be interesting, do you have data how number of miles per year changed over time?

Meep said...

Also, wouldn't it be interesting to chart this by class somehow? The most problematic would be on how you would mark class distinction, but one simple way would be to chart what income level (or percentage of income) constituted poverty per year... sadly I have no numbers for you as this was more of an incomplete thought.

EntropyFails said...

Here is the info on US miles driven...

U.S. Vehicle-Miles from the Bureau

A breakdown by income.

The government already figured this out for you. ;)

But even at these relatively cheap prices, miles driven are starting to drop. And miles driven closely correlates with with US GDP.

The transition period has been estimated to be around 20 years (Hirsch Report). Current fuel prices combined with a slagging economy (your 3% number is blind faith) will cause some significant upheavals before that.

That doesn't mean doom, but it means we should look out.

taw said...

3% is a long term average so far. Predicting that the future will be similar to the last 30 years is much more robust than predicting that it will be similar to the last 2 years, and looking just at current GDP growth rates.

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