Energy Prices Not Spurring Conservation
While soaring oil prices in the 1970s prompted major advances in the nation's energy efficiency, this year's surge in fuel costs has so far not sparked a new wave of conservation.
Economists, energy analysts and efficiency gurus say they expected petroleum demand growth to slow in 2004, given that total spending will rise by about $295 billion, or 27 percent. Instead, worldwide oil demand grew more than 3 percent, according to government data, or about twice as fast as the market had originally anticipated.
Some now say that conservation is unlikely to play a bigger role in the United States, which accounts for about a quarter of the world's oil consumption, unless predictions that the era of cheap oil is over come true.
Art Smith, chief executive of the energy research and consulting firm John S. Herold, said that while it it is unrealistic to expect fossil fuel consumption to plummet overnight after a price spike, "the remarkable thing has been the virtual lack of any demand response."
At the same time, he noted that "the U.S. has a tremendous opportunity to reduce consumption if it ever decided to."
Some obvious places to start, experts said, include improving automobile fuel-efficiency, plugging leaks where heat escapes from residential buildings, manufacturing appliances that use less energy when in standby mode and installing fluorescent lighting in commercial buildings.
Although global economic growth is expected to cool in 2005, the energy industry should have another stellar year, analysts predict, as demand for oil, natural gas and coal continues rise. Oil demand is projected to rise at a slower pace in 2005, but that merely reflects weakness in the industrial sector not a revitalization of the conservation movement, experts said.
The rising appetite for fuel, particularly in China and the United States, and market fears about potential supply disruptions in Iraq (news - web sites), is expected to keep oil prices well above recent historical norms. And with the industry careful about not pumping more than the market absolutely needs, supplies should remain relatively tight.
Mark D. Levine, the director of the environmental energy technologies division at Lawrence Berkeley National Laboratory in Berkeley, Calif., said he was "disappointed" though not entirely surprised by the inelasticity of oil demand over such a short period of time.
After all, the economy is roughly twice as efficient as it was 30 years ago, so the latest energy crunch didn't hit U.S. businesses or homeowners with as much punch. Moreover, even at $50 a barrel, the cost of oil was nowhere near the all-time high on an inflation-adjusted basis and soaring pump prices, which were also below the record highs reached 25 years ago when inflation is factored in, may prove to be short-lived.
For these reasons, the business-as-usual menality, for those who could afford it, was "a rational economic response," Levine said.
Jim Placke, a senior analyst at Cambridge Energy Research Associates in Washington, said he suspects that individual efforts to keep energy spending down are greatest among America's lower-income families, while those who earn more can afford to ride out $2-a-gallon gasoline prices without feeling the pinch.
But if energy prices were to stay high for another couple of years, experts believe many more homeowners and businesses will alter their behavior and buying habits.
For example, although hybrid gasoline-electric cars make up only a tiny percentage of global auto sales, some analysts believe they eventually could account for 5 percent to 15 percent. General Motors Corp. and DaimlerChrysler AG recently agreed to team up in developing fuel-saving hybrid engines in order to capture part of this expanding market now dominated by Toyota Motor Corp. (news - web sites) and Honda Motor Co. (news - web sites)
But the change could be gradual. Stephen P. Brown, an economist at the Federal Reserve (news - web sites) Bank in Dallas, said his research shows that it takes eight to ten years for demand to adjust to newer prices.
Bill Jewell, vice president for energy at Dow Chemical Co. in Houston, said the reaction time isn't necessarily that slow.
Jewell said there was a noticeable change at the company after natural gas prices jumped toward the end of a 10-year program that began in 1995 with the goal of improving energy efficiency by 20 percent.
"I'd say there was a lot more focus on energy efficiency in the last third of this program than there was in the first two-thirds," he said.
Other executives in charge of managing their companies' energy spending said the recent jump in energy prices has not altered their targets for becoming more efficient, though it may have facilitated getting financing for future programs.
Bill Tortoriello, who oversees energy management for pharmaceutical giant Merck & Co. Inc., said the drugmaker has improved the efficiency of its plants and research facilities by more than 20 percent since 2000, saving the company millions of dollars along the way.
"But when oil was at $50, nobody called me and said 'We better do more,' " Tortoriello said. "To tell you the truth, I never even looked at the price of oil from that standpoint ... because we're already doing more."
Merck was recognized this year as an industry leader in energy efficiency by the American Chemistry Council, a Washington-based trade group.
The council's chief economist, Kevin Swift, estimated that industrywide efficiency is increasing by more than 1 percent a year and that the rate isn't likely to change dramatically as a result of today's higher oil prices.
"The industry has improved its energy efficiency by 45 percent since the first oil shock," Swift said, adding that most of the "low-hanging fruit" has already been picked.
Levine of the Lawrence Berkeley lab said that kind of thinking is common, but wrong. He believes that as oil demand in China and other developing nations grows, and as oil producers eventually have trouble keeping up with demand, decision-makers in households, corporations and, most importantly, government, will rethink the way we consume energy.
"Remember when those huge monster cars went out of fashion? Well, that will happen again," he said.
The Energy Department predicted in a December report, however, that long-term higher prices — estimated at $31 a barrel in 2010 and $35 a barrel in 2025 — will not cause a big drop in demand, as economic growth offsets any gains in conservation and efficiency.
The agency said its outlook would be different if prices were significantly higher or if there were "policy changes that significantly increase energy efficiency."
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