Why is US Oil Consumption Lower? Better Gasoline Mileage?

United States oil consumption in 2012 will be about 4.7 million barrels a day, or 20%, lower than it would have been, if the pre-2005 trend in oil consumption growth of 1.5% per year had continued. This drop in consumption is no doubt related to a rise in oil prices starting about 2004.

Figure 1. Comparison of Actual US Oil Consumption, with that that would have been expected if prior growth trend held. Actual based on EIA data.

Figure 1. Comparison of Actual US Oil Consumption, with that that would have been expected if prior growth trend held. Actual based on EIA data.

Oil prices started rising rapidly in the 2004-2005 period (Figure 2, below). They reached a peak in 2008, then dipped in 2009. They are now again at a very high level.

Figure 2. US crude oil prices  (based on average prices paid by US refiners for all grades of oil based on EIA data) converted to 2012$ using CPI-Urban data from the US Bureau of Labor Statistics.

Figure 2. US crude oil prices (based on average prices paid by US refiners for all grades of oil based on EIA data) converted to 2012$ using CPI-Urban data from the US Bureau of Labor Statistics.

Given the timing of the drop off in oil consumption, we would expect that most of the drop off would be the result of “demand destruction” as the result of high oil prices. In this post, we will see more specifically where this decline in consumption occurred.

A small part of the decline in oil consumption comes from improved gasoline mileage. My analysis incidates that about 7% of the reduction in oil use was due to better automobile mileage. The amount of savings related to improved gasoline mileage between 2004 and 2012 brought gasoline consumption down by about 347,000 barrels a day. The annual savings due to mileage improvements would be about one-eighth of this, or 43,000 barrels a day.

Apart from improved gasoline mileage, the vast majority of the savings seem to come from (1) continued shrinkage of US industrial activity, (2) a reduction in vehicle miles traveled, and (3) recessionary influences (likely related to high oil prices) on businesses, leading to job layoffs and less fuel use.

Gasoline Savings from Better MPG, Fewer Miles Traveled 

Figure 3 below shows how the consumption of gasoline, distillate, and “All Other” oil products has changed since 1994. (Distillate is used mostly as diesel fuel, but some of it is used for industrial purposes, and some it is used for home heating.)

Figure 3. US Oil Products Consumption, based on EIA data

Figure 3. US Oil Products Consumption, based on EIA data. 2012 is based on partial year data.

Of the three product groupings shown, gasoline1 consumption is the flattest. Under “normal” circumstances, we would expect gasoline consumption to continue to rise, along with oil products in general, as shown in Figure 1 at the top of the post.

The amount of gasoline consumed reflects at least two different influences (1) the number of miles traveled, and (2) savings due to more fuel efficient cars. Based on data compiled by the US Department of Transportation, vehicle miles traveled (VMT) were rising by  2.2% per year prior to 2004, then suddenly flattened (Figure 4, below) about the time oil prices started to rise significantly.

Figure 4. US vehicle miles traveled, actual (based on Department of Transportation data) and expected based on prior trend.

Figure 4. US vehicle miles traveled, actual (based on Department of Transportation data) and expected based on prior trend. 2012 is based on partial year data.

The drop in vehicle miles traveled greatly affects gasoline sales.  If vehicle miles traveled had continued to rise as quickly as in the early period, we would expect automobile mileage to be 21% higher than my current projection for the full year 2012, and gasoline use would be equivalently higher.

How do changes in gasoline sales track with changes in VMT? Figure 5, below, shows that they track fairly closely. Annual changes in gasoline consumption are a little below changes in VMT (averaging about 0.4% below VMT) .

Figure 5. Three year average changes in vehicle miles traveled (based on DOT data) vs changes in gasoline consumption (based on EIA data).

Figure 5. Three year average changes in vehicle miles traveled (based on DOT data) vs changes in gasoline consumption (based on EIA data).

It is also possible to calculate implied VMT per gallon of gasoline (Figure 6, below). This is somewhat of an apples to oranges comparison because VMT includes travel by vehicles using fuels other than gasoline (usually diesel, but occasionally natural gas or electricity). As a result, the calculated mileage in Figure 6 is higher than the actual average MPG for gasoline powered vehicles. If the proportion of gasoline powered vehicles in the mix stays fairly constant, the annual percentage change should still be accurate, though.

Figure 6. Vehicles miles traveled per gallon of gasoline based on DOT data, with trend line fitted by author.

Figure 6. Vehicles miles traveled per gallon of gasoline based on DOT data, with trend line fitted by author.

If we apply the 2004 rate of fuel usage (or MPG) to 2012 VMT, we find that the improvement in fuel mileage between 2004 and 2012 reduced fuel usage by 347 thousand barrels a day over the eight year period, which is equivalent to a reduction of about 43 thousand barrels a day, per year.

The total reduction in gasoline use between 2004 and 2012, relative to what would have been expected, (based on the trend line in Figure 1, assuming the mix of products each retain their 2004 proportions) is about 1.49 million barrels a day. Thus, this calculation implies that about 23% of gasoline savings is from better mileage; the other 77% is from driving fewer miles.

One point of interest is the fact that US population has recently been growing by 1% per year. Because of the growing population, a person would expect VMT to grow by at least 1% per year, unless per capita miles driven is shrinking.  Since 2004, vehicle miles traveled have been growing less rapidly than population growth. As a result, mileage per person has been shrinking, recently by a little over 1% per year. Prior to 2004, vehicle miles traveled were growing at 2.2% a year while population was growing at 1.1% per year, implying that per capita miles traveled were increasing by 1.1% per year.

How do vehicle miles per person go from increasing to decreasing? There are a couple of possible ways. One is by a reduction in the number of drivers; the other is by decreasing the number of miles driven for individual drivers. My friends who are automobile insurance actuaries tell me that at least part of the change recently is that fewer young people are driving.  This is not too surprising–young people today have very high unemployment rates, so they are less able to afford the cost of a car.

Fuel Savings for Distillate and for Other Oil Products

Figure 7, below, shows the trend in fuel consumption since 1994 for the same fuels as shown in Figure 3. It is clear from Figure 7 that gasoline and distillate consumption have followed fairly similar patterns. It is the “All Other” category that has shrunk markedly.

Figure 7. Trend in United States Oil Products Consumption since 1994, based on EIA data.

Figure 7. Trend in United States Oil Products Consumption since 1994, based on EIA data.

At least part of the reason the “All Other” portion is shrinking is the fact that the All Other category includes quite a bit of oil products for industrial use, and the amount oil products used by the industrial sector shrank by 7.9%, comparing 2011 to 1994.

We can also look at the use of other energy products by sector, to see additional evidence that the Industrial Sector is shrinking, or at least, not growing nearly as much as the other sectors are growing. For example, if we look at electricity use by sector, residential use is up by 41% since 1994, commercial use (office and stores) is up by 44% since 1994, while industrial use is down by 3%.

Figure 8. Trend in electricity use since 1994 by sector, based on EIA data.

Figure 8. Trend in electricity use since 1994 by sector, based on EIA data.

Also, between 1994 and 2011, use of natural gas by the industrial sector declined by 8.5% further suggesting that the industrial sector that is shrinking. One factor in this shrinkage is likely increased competition from China, once they joined the World Trade Organization in December 2001.

Of course, part of the reason for the lower growth in oil products use by All Other could be greater industrial efficiency. Industrial users, and users such a big agriculture and aviation, are in a position to see ways to reduce oil use quickly. Such approaches would include “no till” farming (often substituting oil-based herbicides for oil-based tilling) and cutting back on unprofitable airline routes, saving fuel by grounding underutilized jets and laying off workers.

Part of the reduction in All Other use, too, could be that at the high oil prices available recently, refiners can make more greater profits by  “cracking” and refining the heavy portion of oil, rather than sell it as products such as asphalt or residual fuel oil.  Because of this, refiners are making less of the “All Other” products, and more Distillate and Gasoline. Users of heavy products are forced find substitutes, such as diesel or coal or concrete.

Another point of interest is the fact that the trend in gasoline and in distillate consumption both roughly follow the trend in the number of jobs available in the US economy.

Figure 9. Trend in number of US Jobs versus US gasoline and diesel consumption, based on EIA data.

Figure 9. Trend in number of US Jobs versus US gasoline and diesel consumption, based on EIA data.

There is a theoretical reason why gasoline consumption might rise and fall with employment. People who have jobs can afford to buy cars and drive them. People who don’t, often can’t afford to drive.

Distillate use tends to bounce around more, as if businesses (who tend to use diesel fuel) are more influenced by economic conditions than individual drivers driving gasoline powered cars. The overall trend still seems to follow employment, though. This would seem to suggest that if less fuel is used by vehicles, this is often accompianied by fewer workers–either fewer drivers for trucks, or fewer workers making the goods carried in the trucks. There may be gradual mileage efficiency gains, but in the short run, the big fuel savings come from operational changes that lead to using fewer vehicles and also fewer workers.

Summary of Where Oil Savings Comes From

As stated at the beginning of the post, United States oil consumption is about 4.7 million barrels a day lower in 2012 than would have been expected based on pre-2005 patterns. The way that this savings breaks out by product grouping is as follows:

Figure 10. Breakdown of US oil consumption saving, based on author's calculations.

Figure 10. Breakdown of US oil consumption saving, based on author’s calculations.

Decreased gasoline usage due to improved gasoline mileage amounts to 7% of the total, decreased gasoline usage because of fewer miles traveled amounts to 25% of the total, and a decrease in distillate use amounts to 17% of the savings. The majority of the decrease, 51%, comes from a decrease in the “All Other” category, which is most closely related to a decrease in industrialization.

The way the calculation is made is as follows:  The trend line forecast of 2012 consumption of oil products shown in Figure 1 is distributed to product based on the product’s share of 2004 US oil consumption. The year 2004 is used as a baseline because it approximately represents the situation before the big rise in oil prices took place. The savings is then the difference between (1) these forecasts of consumption by product and (2) my estimates of 2012 actual consumption by product. The latter estimates should be fairly “solid,” because they are based on actual consumption through October.

Going forward, fuel efficiency changes are likely to play a larger role in fuel savings, because CAFE (Corporate Average Fuel Efficiency) Standards have been unchanged for about 20 years. For model years 2012 to 2016, they are again increasing, so auto makers are again making more of an effort to improve mileage.

Actual fuel efficiency gains in the next several years for the US fleet of cars will depend partly on the mileage improvements incorporated by manufacturers, and partly on how many of these more efficient (but also more expensive) cars are purchased. I have recently forecast that we will be entering another very-long recession in 2013. The recently announced decline in US GDP in the fourth quarter of 2012 is another indication in this direction. In a recession, it will be difficult to sell as many of the new fuel-efficient vehicles.

Another factor that is likely to be important for future actual vehicle mileage is the condition of roads. Mileage estimates are based on having good paved roads. If local governments find their budgets stretched thin, road maintenance may not get proper funding. We may even see more gravel roads, if asphalt is increasingly unavailable, and concrete is too expensive. 


[1] Gasoline as used in this analysis includes any ethanol that is blended in. This has been an increasing percentage over time, and now is typically 10% by volume. The addition of ethanol tends to keep mileage down because ethanol only gets about two-thirds as many miles per gallon as gasoline. I have not attempted to adjust for this. The mileage gain would be somewhat better, if ethanol had not been added to the gasoline. An increase in the ethanol blend to 15% have been approved. As this is phased in, it will also tend to depress mileage gains.

About Gail Tverberg

My name is Gail Tverberg. I am an actuary interested in finite world issues - oil depletion, natural gas depletion, water shortages, and climate change. Oil limits look very different from what most expect, with high prices leading to recession, and low prices leading to financial problems for oil producers and for oil exporting countries. We are really dealing with a physics problem that affects many parts of the economy at once, including wages and the financial system. I try to look at the overall problem.
This entry was posted in Financial Implications, Oil Policy and tagged , , , , , , , , , , , , . Bookmark the permalink.

92 Responses to Why is US Oil Consumption Lower? Better Gasoline Mileage?

  1. BillT says:

    When we move from the current recession to the depression stage, then oil consumption will drop even more. Cars are being junked at a greater rate than they are being replaced and the existing cars are being driven fewer miles.. THAT is the drop in gasoline/diesel use related to cars.

  2. timl2k11 says:

    Gas prices and employment have both affected my driving habits. I once took a trip from Tampa to Atlanta just to climb Stone Mountain (a place I used to love as a kid), back when gas was about $1 a gallon or less. Now I wouldn’t even think of it. Over three times as expensive for the gas, and my income is about half what it used to be. The way I look at it, with a limited discretionary income, the miles I can travel has been cut in third (as gas is three times as expensive). Include the tightening on expenses due to decreased income and I would say I travel about as fourth as much as I used to (unfortunately I also have a less fuel efficient car for now, so make it about a fifth). Your milage may vary. :p

    • A lot of folks can’t afford the new fuel-efficient cars.

      Others, it is hard to make a good financial case for buying a new fuel-efficent car.

      I have an inexpensive older car that gets 27 mpg — not great, but not terrible. I don’t drive many miles a year–maybe 6,000 miles a year. My big expense is depreciation. I don’t need the many new gizmos, if I am just doing a few local errands in my car. I could save $350 a year in fuel expense by buying a Prius, but I have not felt myself compelled to go buy one.

      • In Norway, the sales of electrical cars are doubling every year and the Nissan Leaf is on the list of the 10 most sold cars here. The savings are substantial here, not only is the electricity to “fill up the car” very cheap due to massive hydro power, but there is no tax when you buy the car (to make them evenly competitive with petrol cars), there is hardly any yearly road tax, cheap insurance, free toll roads and even on car ferries you only pay for the passengers and not the car. Recently Nissan lowered their prices by 3000 Euros also as they will be moving manufacturing for the European market to UK. Obviously the transportation costs from Japan to Europe was substantial in the new 3xoil price era. Lets hope this is a signal that more manufacturing of goods are moving closer to Europe and stimulate to lower unemployment.

        My soon 15 year old BMW is costing me $3000 a year in maintenance costs now every year – so chances are that a Nissan Leaf will be our next car.

        • Norway has the hydro, so that it can afford to subsidize the Leaf. With less oil use, its oil exports will be higher, and its revenues will be higher. I still wouldn’t count on the same approach becoming popular too many other places, unless Nissan can bring the costs down.

      • Jan Steinman says:

        “A lot of folks can’t afford the new fuel-efficient cars.”

        But they could afford the old fuel-efficient cars!

        I have a 1991 diesel Jetta that gets over 40 mpg. The running gear is starting to need maintenance, but the engine will last forever if treated right.

        • This is a link to a page about the 1991 ECOdiesel. According to the page, Base price (MSRP): $11,230
          Destination charge: $340. Options included Air conditioning: $840; Cruise control: $235; Sunroof: $410; AM/FM stereo cassette radio: $325; Metallic paint: $180.

          Based on the CPI-Urban, costs are now 1.686 times as high as they were back then, so the base price would be equivalent to $18,934 today. It is less expensive than a lot of cars made today.

          • Les says:

            The 2013 Jetta TDI (which gets about the same mpg as the 1991 ECOdiesel) has a base price of $23,055. But that’s not bad, when you consider the base price includes air conditioning, cruise control, and a stereo system (an additional $1400 in 1991, which would bring it to $21,294 in today’s dollars) plus many other features not available in 1991. For example, the 2013 model has four wheel disk brakes standard, and of course meets 2013 emission standards. Overall, at least on paper, the 2013 Jetta TDI is quite competitive in price with the 1991 ECOdiesel.

            I say “on paper” because if you run through VW’s online vehicle configuration tool, and select the Jetta TDI base model with no options, you will find there is not a single vehicle available at any dealer in the U.S. which matches your configuration. The cheapest TDI Jetta currently available within fifty miles of my house is $23,955. The second cheapest is $24,820, and those are the only two under $25,000.

            • All of the options are killers, price-wise. It is simply assumed that everyone wants air conditioning, cruise control, and a bunch of interior upgrades. I am sure this helps the margins of the companies selling the cars.

  3. Travis says:

    Just because the engines become more fuel efficient does not mean we will use less. Jevon’s paradox.
    But it’s all about the price, absolutely love this blog!!!

    • The big attraction of the high mileage cars is to people who drive a lot of miles–the 20,000 miles a year people. They can continue to drive 20,000 miles a year, without having to cut back.

      Of course, there are a lot of others who buy fuel efficient cars too.

  4. I look forward to your post. I was somewhat surprise to the low gain on better mileage but then I noticed that folks in my circle of friends with long commutes have invested in higher gas mileages vehicles, while I have cut down significant on my number of miles traveled and have used alternate transportation because on live in the city. I wonder how you would factor in the addition costs of those folks which have purchased plug in vehicles and their overall energy use.

    • The way this calculation works is that it talks all vehicles miles driven (whether the vehicles are powered by gasoline, natural gas, diesel, or electricity) and divides by the amount of gasoline used. As I say in the post, this is somewhat of an apples to oranges comparison, but you are looking at changes over time, it sort of works. The vehicle miles of the all electric car gets counted, but no gasoline is used, so it help mileage, as it should.

  5. BC says:


    From the BLS link above, it is estimated that the typical household spends ~4-4.5% of after-tax income on gasoline and motor oil. For example, a 20-25% increase in the price of gasoline in a given year would reduce household spending for other items, all else equal, by ~1%.

    By this metric, US households have respectively 6-7% and 10-13% less after-tax income to spend since ’05 and ’90-’00 after accounting for the increase in the price of gasoline than otherwise would have occurred had the price of gasoline not risen by as much as it has.


    Wages and salaries have grown at a 2.9% rate since ’00 and 4.2% since ’90, whereas the rate of increase of the price of gasoline has been 8% and 4.6%. However, there has been no growth in employment for 13-14 years. The increase in the price of gasoline since ’00 has taken ~12-13% of the increase in wages before taxes or general price inflation.

    This is a back-of-the-envelope calculation, of course, and the effect of higher gasoline prices affects the bottom 50-80% disproportionately more as a share of their lower after-tax income at 20-50% of the income of the top 1-10% to 20%.

    Driving under the influence of poverty (DUP) is becoming increasingly common for the bottom 50% of US households.

  6. PeteTheBee says:

    Since Gail’s “recession in 2013” prediction dropped, the stock market has shot up on a wide variety of good economic news. You still stand by this prediction Gail? Or you want to push it back a few more years.

    • Still hanging in there. The folks who got their dividends early to avoid taxes are investing in the stock market. QE is probably helping somewhat too. Our financial mess still isn’t fixed, that I can see. Europe and Japan are in terrible shape.

      I don’t use the stock market as much of an indicator for anything.

      • PeteTheBee says:

        “I don’t use the stock market as much of an indicator for anything.” That’s just not honest. You used it as an indicator of “the world is tanking” in 2008/09.

        • Joe Clarkson says:

          Please justify your comment.

          I just re-read Gail’s forecasts for 2008 and 2009 as published by The Oil Drum. As far as I can see, her 2009 forecast does not mention stocks at all. Her 2008 forecast did project a stock market decline, but that projection was a minor aspect of the forecast, most of which dealt with credit and debt issues. If she used the stock market as an indicator elsewhere that “the world is tanking”, please let us know.

          As an aside… GDP and stock values are, if anything, negatively correlated over the long term. But since the negative correlation is slight, the stock market is not much of an indicator for GDP or vice versa.

        • Ikonoclast says:

          Pete, a tsunami of financial destruction and depression is coming and you want to argue about precise timing. Nobody can pick the random fluctuations in the stockmarket nor the precise timing of when it will finally be affected by fundamentals. However, serious fundamentals (resource shortages in this case) always kick in and affect the market sooner or later.

    • GermanStacker says:

      “On a wide variety of good economic news”?
      Rather were US-investors forced out of cash at the beginning of this year. From bloomberg:
      “Clients of the largest U.S. banks withdrew money market funds this month at the fastest weekly pace since the Sept. 11 attacks, as a Federal Deposit Insurance Corp. backstop ended in December, removing temporary unlimited insurance on non-interest bearing transactions accounts over the prior limit of $250,000.
      Net withdrawals at the 25 largest U.S. lenders totaled $114.1 billion just in the week ended Jan. 9, pushing deposits down to $5.37 trillion, according to Federal Reserve data.”
      This money has to go somewhere.
      Add to that the expectation for unlimited CB buying like in Japan right now, forcing investors further into “risk assets” in order to beat inflation.

  7. BC says:

    PeteTheBee, just for clarification, the S&P 500 today is priced at a 10-yr. avg. P/E of 22-23 (historical average of 13.8), the dividend is at an historical low of 2%, corporate profits after tax are at 10-11% of GDP (6% historical average and 4.5% at recessionary troughs), insiders are selling at near record high levels, margin debt is at or near a record as a share of GDP, and reported earnings are contracting yoy. There was not one such period going back 130 years of data when the stock market did not experience a bear market over the subsequent 12-18 to 24 months.

    Moreover, the largest stock market crashes in history occurred under the aforementioned conditions.

    Add to these conditions bullish sentiment and complacency data at EXTREMES one typical sees at cyclical tops.

    Also, non-financial corporate debt as a share of GDP is at a record high going back to 1929 and Japan in ’89-’95. Despite all the talk about “deleveraging”, only some households and the banking sector have modestly deleveraged over the past three to four years; however, there has been no systemic deleveraging as is characteristic of debt-deflationary regimes, which, of course, is what the banksters using the Fed’s printing press have so far avoided.

    Remember, cyclical tops occur when the news is good and mood is ebullient.

    One could hardly find a more comprehensive list of conditions that typically occur prior to a stock market crash than the conditions we have today.

    What is missing from the list of past conditions, of course, is the central bank printing $1 trillion in reserves this year to credit the largest primary dealer commercial banks’ balance sheets. Many claim that some of these digital credits are finding their way to the stock market; however, there exists no concrete evidence to demonstrate a direct, or indirect, flow mechanism or transmission channel via primary dealers. If such a phenomenon is occurring, it is happening via shadow banking, “dark pools”, or offshore pass-through conduits of one kind or another. Is this not what got the system into such trouble with the dot.bomb, unreal estate, MBS and CDO bubbles in the late ’90s and early to mid-’00s? Is that all our system is capable of producing, one bubble and crash after another? It would seem so.

    But if central bank printing is the primary reason to pile into equities after the S&P 500 is up 127% from it’s ’09 low, then none of these valuation metrics will mean anything to most people, especially those determined to get rich (or richer) speculating in the stock market.

    • PeteTheBee says:

      ” the dividend is at an historical low of 2%, ”

      sorry hard to read more after such flagrant dishonesty.

      a 2% yield is relatively high over the last 20 years.

    • PeteTheBee says:

      At any rate, I can only assume you are shorting the market. Good luck with that.

      Or, perhaps, you lack the courage of your convictions. Lots of doomers are that why. Duly noted.

      • BC says:

        Pete, are you serious? The average dividend yield for the S&P 500 historically is 4.4%, and 5.1% during secular bear markets. The past 20 years have been the most overvalued market in US history, thus the reason the real total return since ’07-’08 and ’00-’02 has been so poor. Your saying the dividend is high at 2% over the past 20 years only shows that you have been conditioned by the unprecedented overvaluation of equities for the past 20 years, assuming that they will remain so hereafter.

        The single-most important metric for determining the 5-, 10-, and 20-year real total return for the S&P 500 is the P/E at the starting point. The S&P 500 has NEVER had a positive real change over 5, 10, and even 20 years with the 10-yr. average P/E at 20 or higher; it’s 22-23 today. The average P/E is as higher or higher than every SECULAR BULL MARKET TOP in history, save for the top in ’00.

        There are an average of four to five cyclical bear markets during each secular bear market, and we’ve only had two cyclical bears to date; we’re due at least two more bear markets of 30-35% to 50%+.

        You really should study market history before sharing an opinion about something you want to be true rather than what is empirically supported by the historical precedents.

        Shorting the market?! What gave you that impression? Why is a reasoned historical analysis of equity market valuations a reason to short the stock market? Courage of convictions? Were you long in ’00-’01? ’07-’08? If you’re long again now, I’d strongly advise reducing equity allocation or hedging your longs.

        Secular bear markets end when the vast majority of equity market participants (1) give up on stocks and (2) grow too old to risk losing what they won’t live long enough to make back. We have one of the highest bullish sentiment and low implied volatility readings of any top on record. Secular bears don’t end with wildly bullish sentiment. The secular bear market is not over. This will not end well.

        Finally, to all who say that stocks are “cheap” because all other alternatives have low or no returns comparatively. When in history was that a justification for investing in overvalued equities? 10- to 30-year Treasury yields yield are ~2-3% versus a 2% S&P 500 dividend yield with a 35-50% cyclical drawdown risk. At a 2% dividend versus a 4-5% Aaa- and Baa-rated yield, the duration on the S&P 500 is 20-25 years, i.e., nearly that of a 30-year Treasury bond.

        IOW, you have to be willing to hold the S&P 500 for 20-25 years at the average 2% dividend while accepting the 35-50%+ cyclical drawdown risk in the meantime.

        Moreover, this means that, given the yields and durations of the 10- and 30-year Treasuries, the S&P 500 at the current valuations will underperform even the low yields no less than half the time over the next 20-25 years.

        Anyway, few listened in ’00 and ’07, so one should not delude oneself into imagining that anyone will listen today. Oh well. Live and learn, as it is said.

        • PeteTheBee says:

          I was short in 00 and somewhat long in 07 (although not catastrophically so, I simply waited for the rebound).

          I am now selling stock to buy real estate.

          So yes, I put my money where my mouth is, for better or for worse.

          My point is that with oil and gas booming in this country and total fossil fuel production almost sure to set another record in 13, Gails “deep recession” prediction will is almost a lock to look very, very silly.

        • TCA says:

          I understand that the data indicates that stock valuations are precarious and the economy seems to be in a fragile place, but what I don’t have is the palpable feeling of a bubble.

          It does not feel like the tech/.com bubble where valuations were out of control and companies built upon questionable foundations raised money with aplomb.

          It also does not feel like like the housing bubble where everyone was confident they could find a greater fool to buy their house and flipping was rampant.

          Perhaps I am not as in touch with the segment of the economy that is bubbling (it appears your argument is that central banking is bubbling), but I don’t see it. I guess a correction does not require an associated palpable bubble, but all the ones in my market watching / participating lifetime have had them.

          • Jan Steinman says:

            I think there are two ways of having a “bubble.” The first is if the price of something inflates beyond reason. But the second is if its value deflates, because the underlying structure has dissolved.

            Just about everything in the stock market is based on debt and interest and growth. What happens when growth is no longer possible? It once was that much of the value of a stock was the dividend it returned. One could imagine a company delivering a sustainable product to be able to return such a dividend. But it seems to me that value-through-dividend is considered a quaint idea these days, and most stocks are properly called “growth stocks” today.

            Do you disagree that “growth stocks” could be in trouble? Or were you perhaps only thinking of “income stocks” as ones not in a bubble?

          • I don’t think the economy is overheating now. It is more that the stock market is separating itself from the underlying world. Interest rates on bonds are now very low, so stocks look like they are a better choice. This pushes money toward stocks. Also, if interest rates should rise, bond values would decline, making them an even worse deal, and stocks better in comparison.

            There is also the issue of temporary unlimited insurance on bank accounts stopping at December 31, 2012. Businesses often have deposits over this amount, and some of the funds that are no longer being insured by the FDIC are being moved. Some end up in the stock market.

            Also, if people want to borrow money to invest in the stock market, interest rates are very low right now.

            I don’t think there is really underlying confidence, now. It is just that the other choices are worse.

      • dolph says:

        The negative tone of your comments is duly noted. Do you think it’s going to win you any friends here?

        More and more doomers are in fact acting, in a variety of ways, on their convictions. And no, “shorting the market” is not necessarily one of them as this is borrowing and financial speculation, and many doomers don’t think along those lines.

        Oh, and few questions…does the stock market always go to infinity? And if it goes to infinity, does it make us all rich superbeings who are going to live forever?

        If you can’t answer those questions, then you have to answer for your ignorance and failed assumptions.

    • The one reason I can think that people/businesses would pile into equities is the strange state of the bond market. Yields on bonds are so low that stocks look like they must be better. Also, the if interest rates rise at all (for example, if the Federal Reserve cuts back on buying debt), the sales price of the bonds will “tank.” Thus, anyone wanting to sell bonds will find their sales price much lower than when they bought the bonds. The Federal Reserve will also be caught with a bunch of bonds whose value is decreasing. Housing mortgage rates will rise at the same time, killing whatever rebound there is in the housing market.

      Hard to see a nice end to the current mess, especially when a person adds it to our need to get government income and spending back in line with each other.

      • GermanStacker says:

        Indeed. Bonds are more overvalued than equities. In the next 10-20 years, the high oil price syndrom and inflation should push some commodities up, and be a problem for most everything else.

        • PeteTheBee says:

          In the US natural gas is too cheap to allow for much inflation. We will probably see cheap gas and muted inflation for the next 10 years.

          • GermanStacker says:

            I give you that, the US seems to be in a good position in gas and even oil for the time being. Many analysts have been saying the Dollar will be the last man standing, and I begin to take that view also. Japan seems to go into open inflation or default first, then southern Europe (doing severe wage deflation right now, which is kind of the same). The BRICS get stuck somewhere in between, they are less indebted. But it will be messy for everyone, including the US.

  8. Don Stewart says:

    In the last article, I stated that if we begin from objectives and examine various ways of reaching the objectives, we get a different (and I think more interesting and useful) perspective than if we begin from current behavior.

    Shannon Hayes, a small scale farmer, wife, mother, child and author of Radical Homemaking, offers some more food for thought in her current article:

    The facts are that the model which we have mostly been using in this country doesn’t work very well any more, and will probably work even more poorly in the future. Elizabeth Gilbert in The Last American Man traced the violent nature of the relationship between fathers and sons in the frontier US. Daniel Boone’s father beat him, trying to make him plead for mercy, but Daniel was equally determined to show how tough he was. And that dynamic continues to work today. Possibly with less physical violence, but the process of family relationships is seldom smooth. So the ideal we have had is that every generation rapidly becomes independent and remains independent. When I moved, in 1965, from the Plains to New York City, one of the shocking things to me was the dependence relationships between generations which still survived in that part of the US. The ‘normal’ that I had grown up with was that children moved out as soon as they were able and moved on to new territory. I have no memory of the death of my grandparents, and seldom saw them after my own parents moved on to new territory.

    The late 20th century implications of that kind of thinking were the ‘old people retired to Florida’ and the ‘send the kids to college on borrowed money’ memes.

    But suppose that thinking simply isn’t going to work anymore. We can do several things in response. If we are Ben Bernanke, we can try to print enough money to get those memes in gear again. If we are normal people, we can spend a lot of time kicking against the traces and grieving and looking for scapegoats. But if we can become sensible about it, we can begin to try to figure out ways that multiple generations can work together more or less peaceably and productively.

    Shannon lays out the understandings which have held her family together in what is a tough business–small scale farming.

    I recommend reading and thinking and doing what you think best in your own circumstances.

    Don Stewart

    • Don Stewart says:

      Related to my writing, Charles Hugh Smith sends one of his ‘Musings’ today (subscription required) in which he points out that some things can’t be quantified–such as failures of imagination.

      ‘What does “A Failure of Imagination” describe? Most obviously, it describes the inability of those within industries and institutions to think outside existing conventions. ‘

      And then he identifies the systems which keep the cost of productive activity so high in the US:

      ‘The three most costly systems in the State (other than Social Security) are national defense, healthcare and education. Each is suffering from massive institutional failure of imagination, defense of failed systems and group-think.’

      And Shannon Hayes notions of Radical Homemaking address Social Security, Healthcare, and Education. Three out of four ain’t bad.

      Don Stewart

  9. Sylvia says:

    Commuting to work is one big reason for people to fill up their cars. So on top of all the reasons mentioned why gasoline consumption is dropping is that there has been an increase in telecommuting. I read somewhere that about 2.4% of employees telecommute.

    I can see the trend as I work in a tech friendly company and telecommute 100%. My colleagues are at about 20-30%. In a lot of jobs – with the latest in cloud- and meeting technologies – there is really no need to be in the office in person. Our company is run by “young” people, perhaps that helps.
    I know a lot of people in other companies who telecommute partial or full time. I wonder what the % of jobs is which can be done by telecommuting? It is not just that commuting costs a lot of money it is also really no fun to be in traffic, traffic jams and waste this precious time.

    • Yes, telecommuting does work for some jobs. We may see more of it, too. Obviously, it won’t work for hands-on kinds of jobs. Trusting that the employees are really working is an issue, too. Also, one aspect of the job is the sociability. Some people miss this if they are at home every day.

      • BC says:

        Telecommuting is a transitional phenomenon. As virtually all paid analytical, transactional, and decision-making work now done by humans will eventually be much more cost effectively done by the self-organizing intelligent-systems (of which the cloud is only a part) operating 24/7/365 at the speed of light in the dark, eliminating redundancies, latencies, and paid employees, telecommuting will be seen in retrospect as a transitional stage that enabled the elimination of the vast majority of paid jobs, income, and purchasing power.

        Look at what is occurring with Google, Chrome OS/Chromebook, Drive, and myriad Google apps in the cloud. We are seeing the evolution of decentralization away from the old IBM proprietary model (VM, time-sharing computing, etc.) and Wintel monopoly to accelerating recentralization via the open source distributed computing model to Google and the cloud.

        Google’s scale, interconnectivity, and computing power is creating conditions of rapidly diminishing returns to other competitors’ offerings, including VMware, Salesforce, IBM, Oracle, Amazon, Ebay, and brick-and-mortar and online retailing in general.

        “Googliscocast” is becoming the de facto monopoly standard and synaptic gray matter for the emerging worldwide intelligent-systems society/economy, and most of us are blissfully unaware of what is happening and the consequences for loss of paid employment, income, and purchasing power in the generation ahead.

        Rather than fussing about wasteful efforts at “job creation”, we should be focusing resources and expertise on a Manhattan Project- or Apollo-like effort to ELIMINATE jobs and reorganize the system of ownership of the means of production, income creation and distribution, work/service, “money”, and purpose, role, and funding of gov’t to accomplish the jobless, cashless, highly energy-efficient, ecologically symbiotic, techo-utopian society futurists have been predicting for a century or more.

        We need to radically redefine the social contract and eliminate the stigma of unemployment/underemployment/joblessness and fire most people and replace wages and salaries with profit sharing or dividends per capita from the intelligent-systems production and taxes on net energy per capita consumption, waste, etc.

        Naturally, with the subsistence social dividend will come obligations for citizens to “serve” in exchange for their stipends, which could entail “free education”, conservation and recycling, environmental remediation projects, community beautification, child and elder care, facilitating recreation and entertainment, and so on. A state-imposed check on reproduction and auto ownership would most likely be required as a means to reduce resource consumption per capita and encourage optimal resource efficiencies in the long run.


        UniComp is becoming a very real possibility with each passing week. Given Peak Oil, overshoot, and the accelerating automation of labor by emerging intelligent-systems, I suspect that “This Perfect Day” scenario, i.e., techno-utopian socialism or global corporate-statism, cashless society, few paid jobs, techno-scientific “programmers” as the ruling elite, citizen subsistence dividend, etc., functioning at a much lower (65-75% lower standard of material consumption per capita) is among the only viable options to avoid a zombie apocalypse and collapse of civilization.

        • There is some truth to what you are saying. But aren’t we likely to run into a problem of collapse somewhere along the line in trying to implement what you are saying can be done? The technology needs more and more energy. We will need more and more food. I think we end up with increased complexity, and no way to keep the system you propose going.

          • BC says:

            “But aren’t we likely to run into a problem of collapse somewhere along the line in trying to implement what you are saying can be done? The technology needs more and more energy. We will need more and more food.”

            Yes, indeed, the net energy and related constraints per capita pose the existential risk to civilization on which zombies thrive.

            I propose a caveat, however, that the COLOSSAL amount of waste per capita that characterizes affluent western civilization would shock us all were we to perform a total systems net energy per capita audit and recognize just how MASSIVE the waste is concentrated at the highest strata of the hierarchy of flows. If a household of avg. 2.59 persons at the median household income of $48,000/year has the luxury of 100-150 “energy slaves” per capita, or has many as ~400 per household, do the math to see how many “energy slaves” are owned by the top 1-10% receiving household incomes of $140,000-$250,000 and up; the latter household owns 1,000-2,000 equivalent “energy slaves” per capita at the same income/”slave”, with most of the “work” sitting idle most of the time and embedded in many costly autos, furniture, building materials, residential lot, wardrobe, jewelry, capped teeth, silicone boob jobs, kitchen appliances than are rarely used, etc. Talk about WASTE! The top 1-10% have access to the embedded net fossil fuel energy of work of the equivalent mid-sized corporation!

            Consider the net cost of getting rid of cars and commutes, taxes on labor, and most jobs, and reinvesting in turning streets, highways, freeways, and rivers into electric transport via trains, self-guided electric vehicles, and ferries. No debt service for autos, housing, and other consumer purchases taking up 50-60% of disposable income of the bottom 90% to support the parasitic financial services sector (45-50% of corporate profits to GDP today).

            We consume 18-19 million bbl of oil each day, requiring importing 10-11 million. We extract 6 million bbl and export the difference. We need to completely restructure the system of flows to live on 6 million bbl, and preferably fewer, requiring a two-thirds overall reduction in oil consumption per capita and 25% reduction per household. We need two-thirds fewer embedded net “energy slaves” sitting around idle and supporting the obscene waste associated with EXTREME wealth and income concentration to the top of the hierarchical system of flows.

            No business would purposefully operate with such inefficiency and hope to stay in business. No householder should consciously waste so much energy in the form of heat loss and electricity consumption. No organism worthy of adapting and evolving would be so inefficient.

            The overwhelming majority of humans are remarkably resilient and content with “enough”, if the majority of their peers receive the same. When a growing majority are at risk of losing “enough” while the few at the top receive orders of magnitude more times than “enough” with no accountability or social conditioning to share or reform the system to be more equitable, the system is pathologically dysfunctional and at risk of collapse.

            There are too many parasites and plunderers in control of the system and too few engineers, scientists, technicians, tinkerers, and systems thinkers not captured by the parasites and plunderers. Economists serve primarily the parasites and plunderers, so they are worse than worthless, i.e., dangerous.

            • For what it is worth, I would argue that quite a lot of the energy “slaves” are really what I called “energy employees” in How High Oil Prices Lead to Recession. These energy employees work for businesses around the world. Many of these are coal energy employees, working in China and India. A lot of them created the embedded energy in your house and car, the streets you drive on, the electric transmission lines bringing electricity to your home, and all of the “stuff” that you own. The number of energy employees that you personally have control over, that you can easily cut back on, is much, much smaller.

              Big ways you can cut back are not eating meat, getting rid of pet animals, earning a lower salary (so you have less to spend), and moving into in a small apartment with others, near your work.

              I would also argue that getting rid of energy consumption (even most of what you consider wasteful energy consumption) will get rid of someone’s job. This may not be a problem to you, but it is to the jobholder. There are people who make their living building and furnishing oversized houses, for example.

              I am not big on name-calling. I expect that even the economists honestly think they are right and are doing a service for the people they provide advice to. As long as universities keep teaching things that are pretty much nonsense, people are going to believe what they are taught. People in academia live in such “silos” with such emphasis on publishing more papers, that few take the time to think for themselves and figure out what is really going on.

        • Its always fun to discuss tech-utopian society, but I think Gail is onto something that technology has a tendency to just increase the energy consumption (and fossil fuels for mining minerals for the technology). But I also think the way we regard technology as a helper for us has just been wasted on expensive use. For example, you really dont need to buy a new phone or television every second year, although some do. The idea then is to regulate what people are allowed to spend on or what their sustainable “share of the wealth” is.

          So I agree that some sort of seriously regulated money-less society is a better way, where each person is basically treated as equals and it is expected a certain kind of input into the society, even if it only means a few hours of work every day due to the massive population. A lot of what people strive for today is a full time job in order to pay debts and to keep up a the high consumption rate of people around us. If stripped down to the bare bones of necessities (+a little extra so that we dont go completely bonkers) – people might find that this life isnt so bad when the pressure of “getting more and more” goes away (many people find this out for themselves as they get older).

          You say corporate-statism – I dont want “corporates” in this in the traditional way, it only means someone is owning it all – I’d rather turn it around and call it state-corporate with equal rights to all resources for its citizens. Its not socialism the way it has been traditionally implemented, but the ground ideas of equality is the essence here. If there is no room to strive for “being better”, the people are essentially stripped down to what they can do with their skills and how they can find their identity and feeling of self in the big population based on what they can do, and not how much they own. The state will provide each person with necessary food, health care, housing, etc, etc. – But you do have some influence ofc of what kind of function you want to educate yourself to, where you would like to live, voting for changes in all kinds of policies. So in some sense a democracy too but without the money and private corporations, but at the same time an expected function for each individual in the system.

          The question is if it is in human nature to accept such a society or whether we are all greedy by nature. I feel as a species evolving it really is “survival of the fittest” that has traditionally worked, and in some sense still do. The fact that money even exists, will naturally “evolve” our habits into thinking that the more money you have, the better off you are (both as a necessity to get a partner, but also social status). These seems like so essential parts of our fabric that I just cant see us push them away for the good of humanity… I guess that also makes me somewhat depressed as we all know the outcome of an “each fend for themselves” kind of world.

  10. Gail. Slightly off topic but I am not sure if you caught the report on resource constraints completed for the UK Institute and Faculty of Actuaries last month. The full report is pretty comprehensive.


    Thought this would be just up your street.

    • Thanks! Someone else sent me a link earlier. I have been debating if I should write a related post.

      Actuaries catch on to the ideas of limits, and how they might affect pension plans, pretty easily. If actuaries suddenly (or even not so suddenly) start taking this into account in their pension calcualtions, this will mean that pension promises must be reduced and/or funding must be higher. Needless to say, organizations with pensions will be very unhappy. So if actuaries want their jobs, they have a predicament regarding what to do.

      I don’t know if any recognition of this problem will take place. If it does, I expect it will be either (1) after it is obvious to absolutely everyone or (2) in a very, very slow manner, such as 1% chance of investments failing to grow as planned, recognized in funding.

Comments are closed.