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Energy Prices and Change in Consumer Behavior

Written by Vinod Dar

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July 3, 2008
by Vinod Dar
Managing Director, Dar & Company
The rate of change of oil prices rather than its present level of about $150/bbl has a greater influence on consumer behaviour. Consumers respond to the shock of the new , as they do when vanity or health are shocked and they start a new regimen of diet and exercise.

The shock generally abates and resolution erodes; most people are unable to maintain the new regimen of diet and exercise and they lapse; so with gasoline use. At present the shock of the new is causing people , some people, to drive less and some very small number to buy little cars. If oil prices stabilize at below $175/bbl or even fall back to $100/bbl the change in behavior will mostly reverse. It is not change in behavior but change in habit that matters if a long term reduction in liquids transport fuel use is sought.

The stylish little car phenomenon is largely confined to the rich suburbs of rich polities and to urban singles/students with rich parents.By itself it cannot make much difference to global gasoline/diesel fuel use. Worldwide, the vehicular fleet, on the net, is expanding by 35 million units, annually. The rate of fleet efficiency growth is swamped by the rate of fleet population growth and by the even faster rate of passenger or freight miles driven growth.

Auto use is impelled by a hierarchy of needs: convenience, safety, status and fashion. In poor countries the convenience and safety value added from a car or car like mobile unit is so great compared with the fuel costs that they overwhelm the rise in fuel costs. Add to that the fact that autos are becoming much more affordable in the third world ( e.g the new Nano in India will cost less than $3,000 delivered to the customer …taxes, tags, retailer mark up included…..) making such a car affordable to hundreds of millions of families and small commercial operations in the Third World, thus greatly expanding the world auto market, as families and small/micro businesses graduate from bicycles, tricycles and motorized 2 or 3 wheelers. In rich coutries , already sated w/convenience and safety, status and fashion impel auto use. People will often pay a lot for status and fashion.Hence worldwide gasoline/diesel use may see a modest decrease in the rate of growth: it will not see an absolute reduction in use.

Where we will see a measurable effect is in change of habit as frozen by a change in capital equipment:e.g conversion from oil heat to natural gas heat in the US Northeast , conversion from oil fired power generation to coal in several parts of the world. Again these changes in habit will reduce the rate of growth of use for heating and bunker oils but not cause an absolute reduction.In the near term the most visible impact of high oil prices will be an increase in the use of coal worldwide and in natural gas in a few parts of the world.The effective substitute for fossil energy is other fossil energy. The substitute for carbon is carbon.

The biggest cause of high oil prices in ascending order of significance; 1. Speculators(minor and getting smaller) 2. Very poor people becoming less poor in Asia, Latin America and Africa and most important 3. The US Congress, which prevents the US , doubtless the greatest hydrocarbon province in the world, from producing much more oil, gas and coal than it does at present.The U.S  has the resource base, the capital, technology and management capability to increase oil, gas and coal production by 15% within 5 years and by 50% within 10 years.Such an increase would   bring fossil energy and food prices down by a quarter to a third worldwide , greatly strengthen the dollar, create a boom in  good jobs, generate a tidal wave of federal, state and local revenues,propel the stock market to new highs, more than  restore housing prices, and substantially enhance national security.
 Congress is the the best friend of despots in Iran and Venezuela  and the worst enemy of consumers, globally. Its not the fault of the speculators or the Saudis or the Chinese that Congress so likes to blame but  of itself( i.e Congress) and of course, We the People who vote Congress into power. Oil at $175 will not be imposed by some Other on us; it will be freely willed by us as a sovereign people. We are responsible for the consequences of our choices.We may not like them but we cannot evade them nor shift the onus on the Other.There is no one to blame.

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