[JohnDenver]

This comes from another thread, but it's a really important point, so I think it deserves its own thread. The issue is whether conservation has a negative effect on the economy. My contention is that when people conserve oil, particularly at a time of scarcity and high prices, they save large sums of money and thus have extra money to spend. Hence conservation is good for the economy because it makes the savers richer.

dohboi and TonyPrep gave the most interesting objection to this idea. My rebuttal of their objection is given at the end.

But as MQ and others remind us if you save money by biking, you are going to spend it on something else that will require burning of oil. On average every dollar spent involves the burning of about a quart of oil somewhere along the line.

Conservation saves money and that money can be spent elsewhere. For example, the average commute in the US is 16 miles long. Now suppose Joe with a 16 mile commute stops driving and rides a bike instead. It's slightly more inconvenient, but hardly impossible or the end of the world.
Joe used to drive an SUV with 12mpg fuel efficiency, so at $3 gas he was spending $80 a month. Thus he now has $80 more money, per month, than he used to have. And that money can and will be spent on other things.

Indeed, thus negating the conservation.

This is an interesting objection, but it doesn't hold up to scrutiny. In a period of declining oil availability it is impossible to negate conservation by spending the money saved.

To see why this is so, let's assume that oil has peaked and is declining. Oil prices are going through the roof. So the entire US population switches to bicycles. (Of course I'm not suggesting that as a real scenario. Just using an extreme to illustrate the point.)

This saves a huge amount of oil (roughly 8mbd), and as a consequence, puts a vast sum of money (about $2 billion/day at $150/barrel oil) into the pockets of the bicycling population. That is, all the vast sums which the population previously spent on gasoline, and which mainly went out of the country, are now in the pockets of the population, ready for spending in the domestic economy.

Now, the claim of dohboi and Tony above is that, when this money is spent, it will result in an expenditure of oil equal to the amount which was saved by bicycling. But that's clearly impossible because we're assuming here that oil has peaked and oil availability is falling. In other words, if every act of saving oil results in an equal expenditure of oil (when the saved money is spent), then it is impossible for oil consumption to decline. But that's clearly absurd. Oil consumption has declined many times, for the world as a whole, and for individual countries. And we know for a fact that it will decline in the post-peak period. Therefore, there is something wrong with dohboi and Tony's argument.

My argument demonstrates two indisputable points about the post-peak period where oil availability is declining:
1) Conservation of oil will save money, and thus put money in people's pockets. That money will necessarily be spent or invested/saved, stimulating the economy.
2) Spending the saved money will NOT maintain or increase oil consumption, because it can't. Oil consumption is dropping due to peak oil.

[mlit]

It seems to me if it was forced conservation because of a lack of oil the damage to the economy in other ways would more than destroy the extra money people save because of not buying gasoline.

[TheDude]

To see why this is so, let's assume that oil has peaked and is declining. Oil prices are going through the roof. So the entire US population switches to bicycles. (Of course I'm not suggesting that as a real scenario. Just using an extreme to illustrate the point.)

This saves a huge amount of oil (roughly 8mbd), and as a consequence, puts a vast sum of money (about $2 billion/day at $150/barrel oil) into the pockets of the bicycling population. That is, all the vast sums which the population previously spent on gasoline, and which mainly went out of the country, are now in the pockets of the population, ready for spending in the domestic economy.

Much of which is good produced overseas, of course, but that's another story. Tourism could really take it on the chin in such a scenario, barring a switchover to utilizing rental vehicles for that purpose, or greater use of buses/planes, but air travel would be fantastically more expensive in such a scenario of shortages that many carriers would quickly go under, unless the government intervened to prop them up in the first few years of instability, possibly through your conservation measures curbing demand to such an extent the price could be mitigated.

How big a factor is tourism? From Wiki:

In the US, tourism is either the first, second or third largest employer in 29 states, employing 7.3 million in 2004, to take care of 1.19 billion trips tourists took in the US in 2005.

Those relying on tourism for their income would find themselves forced to cut back their activities severely, impacting GDP. They could find a better source of employment in the wake, of course, but with people being forced to resort to bicycling the prospects would likely be limited.

Another sector that would be under severe pressure is the fuel retail sector. Gas stations were barely making 10 cents on the gallon in 2005; haven't read what last July did for them, although reports from a few months back said they were on the mend. And of course Conoco Phillips and others closed large amounts of stations. The fewer options motorists have for fuel the higher the price, as dictated by basic economics. This leads to paradoxes like Bellingham Washington residents paying the 2nd highest prices in the state, despite having 4 refineries next door. Other parts of the state have alternative sources of supply who arbitrage the price regularly. Stations closing in droves would drive the price up for the survivors, cutting into what savings conservation would bring, bringing severe price pressure on those who have no option. And businesses going under means less revenue for the local economy, lower property taxes and fees for the city/county/state.

[frankthetank]

If thats the case these people have NO money because they have NO jobs... Screw the biking, they'll be robbing their neighbors and fire bombing subdivisions...

How about they buy NO gasoline and have NO money...therefore they have nothing to gain or lose

[JohnDenver]

Just to reiterate. This thread is NOT about the scenario where everyone suddenly starts riding bicycles. I just used that example to illustrate the concept.

This thread is about whether conservation of oil has a net negative effect on the economy.

Frank, if you want to do the doomer porn thing, please hang in one of the numerous doomer porn threads. This thread is meant to be a low-key economics discussion.

[IslandCrow]

I think a lot depends on what is conserved.

If it is a reduction in my use of energy then I think the effects could be like you said.

If it is a reduction in spending (such as going out to eat) then the effect on other people's jobs can be serious and that sort of personal saving will hit the local economy hard.


It also depends on where you spend the money saved. In my case, I replaced an oil furnace (oil coming from Russia) with a ground heat exchange (machine coming from Sweden), but using electricity generated in Finland. {Estimated pay back in 8-10 years - or less if I include the fact that the furnace was over 30 years old and needed replacing}. Now instead of most of the money going to Russia a chunk went to Sweden and the rest stays in Finland. Thus while my conserving may be a zero sum game on a world wide basis (within the first decade), it is clearly more beneficial to the national economy.

On a more localised scale, to suppliment the ground heat I have a wood burning stove in the kitchen (also good for when there are power cuts, and great for slow cooking the Christmas ham). Instead of the money going to a national electricity company, I buy wood from a local farmer (I don't have enough land to grow my own wood). So again while this may be a zero sum game on the national level, it clearly is of benefit to the local economy.

Against this local spending is the arguement on economy of scale. This is seem clearly in food processing, where at present if I were to cost my labour home made jams for example would be much more expensive than shop bought ones. Part of this is that despite transport costs there can be energy efficiency in scale. I am not sure how to feed all this into the economic equations.

Where am I going on all this? [apart from being rather confused on the overall picture] A deliberate spending of money saved from energy conservation, on local goods/supplies/services, can have a positive impact on the local economy. However, things are so intertwined nationally and globally I find it too hard to say what the overall impact would be.

[JohnDenver]

It also depends on where you spend the money saved. In my case, I replaced an oil furnace (oil coming from Russia) with a ground heat exchange (machine coming from Sweden), but using electricity generated in Finland. {Estimated pay back in 8-10 years - or less if I include the fact that the furnace was over 30 years old and needed replacing}. Now instead of most of the money going to Russia a chunk went to Sweden and the rest stays in Finland. Thus while my conserving may be a zero sum game on a world wide basis (within the first decade), it is clearly more beneficial to the national economy.

On a more localised scale, to suppliment the ground heat I have a wood burning stove in the kitchen (also good for when there are power cuts, and great for slow cooking the Christmas ham). Instead of the money going to a national electricity company, I buy wood from a local farmer (I don't have enough land to grow my own wood). So again while this may be a zero sum game on the national level, it clearly is of benefit to the local economy.

Good example. It is often said here at PO.com that oil conservation will crash the economy because our economic system is not designed for frugality. However, your example seems to be neutral with respect to the overall economy, even though you are structurally reducing oil demand. It's true that the Russian oil companies lose revenue, but that loss is balanced by your payments to the Swedish manufacturer, the Finnish electrical system, and your wood vendor neighbor. The flow of money changes, but the spending continues.

The question then is the degree to which your new system depends on oil. That is the claim of dohboi and TonyPrep -- that when you conserve oil and spend the money saved, your spending results in the consumption of as much oil as you saved.

The electricity used by your system has a very small dependence on oil since Finland generates less than 1% of its electricity from oil. Likewise, your ground heat pump was likely manufactured with very little oil, since most manufacturing processes are driven by electricity, gas and coal, and Sweden derives only about 1% of its electricity from oil. Transport of the system from Sweden to your home definitely consumed oil, but that was a one time event, and was probably very efficient. Certainly it didn't consume anything close to even one year's worth of heating oil for your home. Finally, there is the oil used by your farmer friend to harvest and transport your wood supply. That would seem to be the only significant source of oil consumption in your new setup. How much oil would you estimate is needed to cut and deliver your wood, compared to the amount of oil consumed by your previous furnace and the oil needed to get it to you from Russia? That is, how much has your overall oil demand been reduced?

More broadly, dohboi/Tony's claim depends very much on where you spend the money you save, as you said. If you reduce your oil consumption, and use the money buy something with very low oil intensity like an e-book, then oil consumption is greatly reduced. If you use the money to buy a flight to Tahiti, then oil consumption is reduced a lot less.

[KrellEnergySource]

If someone's conservation efforts are directed only at reducing their use of gasoline, or even only oil-based products and activities, then that's a strange form of conservation. Most people I know that in their heart-of-hearts believe in conservation (even if they don't practice it) have a broader desire to reduce/reuse/recycle. If they did effectively act out on their conscience's calling, they would not be replacing their reduced consumption of oil with increasing consumption of other goods and services.

Actually, the mixed messages regarding reduce/reuse/recycle and "stimulating the economy" are the clearest sign, to me, that our economic system is dysfunctional and riandoes not serve our long-term human interests. At all.


Brian

[JohnDenver]

Here, I'll continue examining the following mechanism mentioned by dohboi and Tony Prep.

Shadow consumption mechanism: If a person saves money by conserving oil, and then spends that money, that spending will cause oil to be consumed, and eliminate the effect of the original conservation.

Let's look at this from the perspective of oil intensity. "Oil intensity" is defined as the amount of oil which an economy burns in order to generate $1000 worth of GDP. IMF figures give 2007 world GDP as $54.5 trillion, and 2007 US GDP as $13.8 trillion. According to the 2008 BP Stat. Rev., 2007 oil consumption was 85.2mbd for the world, and 20.7mbd for the US. Therefore, oil intensity of the world was .57 barrels/$1000, and oil intensity of the US was .55 barrels/$1000. Other countries for comparison are:

Japan: .44
Germany: .27
China: .91

Now, let's suppose that Joe in the US saves $1000 by reducing his consumption of gasoline. Gasoline in the US is currently retailing for about $2/gallon, so Joe has conserved 500 gallons of gasoline. That will correspond to about 556 gallons of crude oil (because about 10% of crude is consumed by the refining process). Now, suppose Joe spends his $1000 on goods and services in the economy. On the average, the amount of oil needed to produce those goods and services is about .57 barrels (using the oil intensity for the world). A barrel contains 42 gallons, so the amount of oil needed to produce those goods and services is roughly 24 gallons. This means that the net savings of oil due to Joe's conservation is 556-24=532 gallons. On the average, the rebound effect due to the shadow consumption mechanism only reduces the original conservation by 4%.

If Joe spends his $1000 on goods from China, the rebound effect will be larger because China uses more oil to produce goods and services. The original consumption will be reduced by about 7%. Likewise, if Joe buys stuff from Germany, the rebound will only be 2% due to the greater oil efficiency of the German economy.

Now, suppose the price of gasoline triples to $6/gallon. If Joe saves $1000, he will save $167 gallons of gasoline, or 186 gallons of crude. Assuming that oil intensity stays the same, spending the $1000 will result in consumption of .57 barrels=24 gallons, so the rebound effect will be significantly larger (13%). However, it seems unlikely that oil intensity will remain the same when gasoline is at $6/gallon because prices at that level will drive further efficiency and fuel switching, and thereby reduce oil intensity.

[TonyPrep]

Now, the claim of dohboi and Tony above is that, when this money is spent, it will result in an expenditure of oil equal to the amount which was saved by bicycling. But that's clearly impossible because we're assuming here that oil has peaked and oil availability is falling.

Not quite right, JD. My ideas are more general than oil. If the money saved is spent (and it will be, one way or the other, at some time), then resources are consumed by that spending. So the overall resource savings and reduced environmental impact aren't as much as you might anticipate.

As for oil, in particular, you're also not quite right that conservation can't be negated by extra spending. As we've seen, it's possible for oil consumption to be greater than production. At least for a while, as stocks form part of supply. Therefore, conservation can be negated by spending the savings, reducing the effectiveness of the conservation. Of course, when the apparent conservation still leads to enforced scarcity (because stocks run down below minimum levels), then conservation will be forced, though monetary savings may not ensue because prices will be rocketing up. Also, there will be no leeway, in supply, to mount serious projects aimed at moving to alternative energy sources (if that is even possible, at the scales required).

[JohnDenver]

Now, the claim of dohboi and Tony above is that, when this money is spent, it will result in an expenditure of oil equal to the amount which was saved by bicycling. But that's clearly impossible because we're assuming here that oil has peaked and oil availability is falling.

Not quite right, JD. My ideas are more general than oil. If the money saved is spent (and it will be, one way or the other, at some time), then resources are consumed by that spending. So the overall resource savings and reduced environmental impact aren't as much as you might anticipate.

I agree with your last sentence, although, as a growth advocate, I disagree with your political position that overall consumption of resources should be reduced. I'm in the mainstream, and my aim is simply to mitigate peak oil via oil conservation + substitution, so we can resume growth based on growth-friendly resources like solar and nuclear.

As for oil, in particular, you're also not quite right that conservation can't be negated by extra spending. As we've seen, it's possible for oil consumption to be greater than production. At least for a while, as stocks form part of supply. Therefore, conservation can be negated by spending the savings, reducing the effectiveness of the conservation.

You're missing the thrust of my second argument above based on oil intensity. In the world at large, it takes (on the average) roughly 0.57 barrels of oil to produce $1000 of final products and services. So if I save $1000 worth of oil (25 barrels @ $40/barrel), spending the $1000 will only result (on the average) in additional consumption of 0.57 barrels of oil. There is a rebound effect of oil consumption when savings are spent, but the effect is small. So it's not clear how conservation will be negated by spending the savings. The only way it can truly be negated is to take the $1000 saved from conserving oil, and turn around and spend it directly on oil again. But that's pointless and extremely unlikely.

Of course, when the apparent conservation still leads to enforced scarcity (because stocks run down below minimum levels), then conservation will be forced, though monetary savings may not ensue because prices will be rocketing up.

This doesn't make sense to me. It seems to me that monetary savings will increase as price shoots up. If you switch from a 12mpg SUV to a 180mpg hybrid scooter, you're saving $0.16/mile at $2 gas, but you're saving $0.39/mile at $5 gas. Conservation puts even more money in your pocket with higher prices.

Also, there will be no leeway, in supply, to mount serious projects aimed at moving to alternative energy sources (if that is even possible, at the scales required).

The #1 serious project is conservation, and, by definition, it doesn't require any supply. Intensive car pooling, scooters, telecommuting, bicycles and rationing don't require any significant oil to implement, and will in fact free up oil for more important projects. Scale isn't much of a problem for conservation either because it primarily involves mobilization of organization, not physical resources.

[TonyPrep]

so we can resume growth based on growth-friendly resources like solar and nuclear.

It's like Professor Albert Bartlett said, smart growth is better than dumb growth but both damage the environment. If you are an advocate of growth then you are an advocate of unsustainability. Of course, you may have strong beliefs that humans can overcome all limits of nature or that they can commandeer resources from other worlds for more years than would concern you, but that is an entirely separate issue, because beliefs may not adhere to reality.

You're missing the thrust of my second argument above based on oil intensity. In the world at large, it takes (on the average) roughly 0.57 barrels of oil to produce $1000 of final products and services. So if I save $1000 worth of oil (25 barrels @ $40/barrel), spending the $1000 will only result (on the average) in additional consumption of 0.57 barrels of oil. There is a rebound effect of oil consumption when savings are spent, but the effect is small. So it's not clear how conservation will be negated by spending the savings. The only way it can truly be negated is to take the $1000 saved from conserving oil, and turn around and spend it directly on oil again. But that's pointless and extremely unlikely.

It depends on what that $1000 is spent on. You're assuming that the savings can be made in the way of your example (indeed, you're assuming that the $1000 is all saved from buying less oil) and that all of the subsequent spending is done in the same manner as average spending across the economy. I don't think those are valid assumptions so, again, any savings may be less than you imagine. However, it's also possible that some portion of those savings will go right back into buying more oil (the consumer now has more money to spend and will spend it however he or she wants - that may be to reverse some of the direct oil savings)

This doesn't make sense to me. It seems to me that monetary savings will increase as price shoots up. If you switch from a 12mpg SUV to a 180mpg hybrid scooter, you're saving $0.16/mile at $2 gas, but you're saving $0.39/mile at $5 gas. Conservation puts even more money in your pocket with higher prices.

Not necessarily. If you usually buy 25 gallons at $4 per gallon, then that costs you $100. If the conservation is enforced (which is the point you're replying to) then fuel is becoming scarcer and, therefore, prices are climbing. So you might conserve and manage with 20% less fuel, or 20 gallons. But if those gallons now cost $5 each, then you are saving nothing. Indeed, if prices climb higher than you can compensate for, by conservation, then the fuel will cost you more.

Also, there will be no leeway, in supply, to mount serious projects aimed at moving to alternative energy sources (if that is even possible, at the scales required).

The #1 serious project is conservation, and, by definition, it doesn't require any supply. Intensive car pooling, scooters, telecommuting, bicycles and rationing don't require any significant oil to implement, and will in fact free up oil for more important projects. Scale isn't much of a problem for conservation either because it primarily involves mobilization of organization, not physical resources.

But, as a growth advocate, I'm sure you realise that conservation can save resources for ever. At some point you have to start using different resources and doing this is what I was referring to. Of course, since sustainable growth is impossible, at some stage we have to think about how to arrange societies along sustainable lines. I suspect this would require some major infrastructure works and, possible, mass movement of people. To think of doing this when our primary and most flexible energy sources are in decline is scary.