Thursday, August 21, 2008

A couple of new charts.

I can't remember if I had posted that one before or not, so here it is.

This is a graph of the US consumer confidence index from 1978 until May of 2008. As you can see, the market has spoken, and it's saying "We're screwed!"

Another way to title this chart would be "people we don't dare offend."

And finally, we have this:

Oil Demand Destruction & Brittle Systems
Posted by jeffvail on August 20, 2008 - 11:08am

I've seen a number of comments, both at TheOilDrum and elsewhere, suggesting that the US is now less susceptible to supply disruptions because we have reduced our demand for oil by several hundred thousand barrels per day over the past year. In general, I get the sense that people think we can insulate ourselves from supply disruptions, from our dependence on potentially unreliable foreign sources of oil, by improving our efficiency and eliminating "unnecessary" oil consumption. In my opinion, this is backward. In this post, I will argue that, because the demand that is destroyed first in a free market is the demand that is easiest to eliminate, the resulting consumptive system is more inelastic, more brittle, and more susceptible to systemic shock from supply disruption. I will approach this argument by outlining what makes a system either resilient or brittle and why market-driven demand destruction creates a more brittle system. I will conclude with a few thoughts on how we can increase the resiliency of our energy-driven economy in a future environment of declining energy supplies.

Figure 1: A hypothetical model of market-driven demand destruction illustrates the theory that the highest elasticity demand is destroyed first...

In other words, people are breathing a sigh of relief at the lowered consumption of gasoline this summer and the resulting temporary lowering of prices, saying to themselves, "See? we can adjust if we have to and have nothing to worry about." In fact, just the opposite is true - all of those who CAN easily arrange their lives to use less gasoline have already done so.

What is left is tiers of people for whom it is increasingly difficult to do so, and below those couple of tiers you have people who CANNOT decrease their usage of gasoline under their current location and economic conditions. What this means is that the easy, less painful adjustments have ALREADY been made, and as demand once again creeps up abroad and gasoline become less available to Americans, the next tier of reductions will be more painful (but still somewhat tolerable) followed by the extremely painful adjustments that must be made by the next tier of gasoline users. It means when an interruption, shortage, or increase in demand for petrol occurs, it will not be nearly as easy or painless as it has been so far (not that $3-$4 a gallon is painless as it is) to adjust to the new level of supply and demand.

And, as I have previously mentioned, the powers that be are going to bend over backwards to make sure everything looks nice, smoothe, and manageable prior to the elections this November. They don't want a reactionary public all voting independent or anything like that. So this period of calm is likely artificial in the extreme, and will not continue long after the elections or the inauguration. So enjoy and take advantage of this while you can, because it won't last - and the next round of demand destruction will be not as nice as this one was.

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