| | | Jevons again...
What cheap gas and a 150-year-old paradox say about where oil prices are going
' “Not an issue now,” he said as he stopped and patted the fuel cap, a confident gesture referring to low fuel prices. “Besides, it gets better mileage than the last beast I had.” Those words will resonate all the way to Hampstead Cemetery in London, I thought. No doubt William Stanley Jevons, 19th century economist, would be smiling in his grave. His theories are being validated – yet again. “It is wholly a confusion of ideas,” Jevons wrote in 1865, “to suppose that the economical use of fuel is equivalent to a diminished consumption. The very contrary is the truth.”
Today’s data says it all.
Average fuel economy of sales-weighted new vehicles is up by 21% from the time when oil prices topped $147/B in 2008. Adding to already cheaper driving costs, U.S. retail gasoline prices are down by 30% since the oil markets collapsed. Yet as Jevons predicted, consumers are eating up their newfound energy windfall by upsizing their vehicles and driving more. In the parlance of energy economics, this is called the “rebound effect.”
~~~ This double cocktail of cheap fuel and better fuel economy is yet again a stimulus for gratuitous consumption that will contribute to another round of rising oil prices. Like watching a short YouTube video that keeps looping over and over again, the repetitiveness of this economic phenomenon we’re witnessing is nothing new. We saw it happen post both the 1973 and 1979 oil price shocks.
Although Jevons wrote of coal consumption and steam engine efficiency in his 1865 book The Coal Question, his dialog is fungible for oil and the machines that consume petroleum products: “It is the very economy of its use which leads to its extensive consumption. It has been so in the past, and it will be so in the future. Nor is it difficult to see how this paradox arises.” '
Jim |
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