Right now even modest steps taken to use less gasoline and diesel would have a big impact on prices.
With or without formal sanctions, oil buyers are shunning Russian crude, unwilling to buy from Russia even at a considerable discount. Russia is the world’s second biggest oil exporter, so any change in Russian production is a major disruption to the global crude oil market.
As a result, crude oil prices are above $110 per barrel, almost twice as high as one year ago. In the U.S., Canada, and elsewhere, producers are ramping up production, but it could take months for these new investments to come online.
Much has been written about the potential for electric vehicles to decrease global oil consumption. Over a longer time horizon, electric vehicles probably represent the best opportunity for substantial reductions in oil consumption. But in the short run, supply chain shortages and outrageous markups make it difficult to get your hands on a shiny new EV.
What we need right now are more immediate solutions. In today’s blog, I want to talk about some small actions that can be taken right now to decrease consumption of gasoline, diesel, and jet fuel. The global oil market is extremely tight right now, so even modest steps taken to reduce demand would have a big impact on the global supply-demand balance.
How Big is the Shock?
There is no question that Russia plays a major role in global oil markets. Before the crisis, Russia exported 5 million barrels per day. The IEA estimates that as much as 3 million barrels per day could be shut in as sanctions continue to take hold.
This is a large supply shock. According to a recent report from the Dallas Fed, this is “one of the largest supply shortfalls since the 1970s”. The report is pessimistic about the ability and willingness of other oil producers to increase output in the short-run, and points out that the U.S. Strategic Petroleum Reserve and other reserves are insufficient to compensate for a prolonged shortfall.
Essentially, the problem is that there is a short-run supply constraint. Given this lack of flexibility on the supply side, the demand side becomes much more important. Global oil demand is about 100 million barrels per day, so the lost barrels amount to about 3% of the global market. It won’t be easy, but what this means is that even a 1% or 2% decrease in global oil demand could substantially improve the current supply-demand imbalance.
Take driving speed for example. On the freeway, reducing your speed by 5 to 10 miles-per-hour can improve fuel economy by 7%-14%. The IEA calculates that slower driving in high-income countries could save 0.4 million barrels per day. The IEA envisions this happening through lower speed limits but, of course, voluntary restraint could play a big role too.
Even better, how about switching to public transportation, walking and cycling? Yes, I know, the classic joke about public transportation is that everyone is in favor of everyone else taking public transportation. But if there were ever a time to leave the private vehicle at home, it is now. The IEA calculates that short-term substitution toward greener transportation modes in high-income countries could save 0.3 million barrels per day.
While you’re at it, don’t forget about carpooling. The IEA calculates that a 50% increase in average vehicle occupancy across 1-in-10 trips in high-income countries, combined with regular tire pressure monitoring– which can improve fuel economy by up to 3% – could save 0.5 million barrels per day.
This is already 1.2 million barrels per day. And I haven’t said anything about taking *fewer* vehicle trips, or *fewer* flights, or *fewer* Amazon deliveries. If you are a household with multiple vehicles, you can also make sure the person driving more is using the more fuel-efficient vehicle.
The recent IEA report “A 10-Point Plan to Cut Oil Use”, describes ten ideas for immediate actions in advanced economies that, according to their estimates, could reduce global oil demand by 2.7 million barrels per day.
Putin’s war has reminded me how deeply connected we all are. Part of the connection is through energy markets, which affect and are affected by every part of the conflict. From the growing flows of natural gas to Europe, to surging European coal prices, to the global market for uranium, there are so many ways we are connected through energy.
The global oil market is a particularly stark example. Until greater supplies come online, there is basically a fixed amount of oil for the entire planet, so every gallon that we can save is another gallon that can be used to help the people most directly impacted by the conflict in Europe.
We can do this!
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Suggested citation: Davis, Lucas. “Small Actions Matter for Reducing Oil Consumption” Energy Institute Blog, UC Berkeley, March 28 2022, https://energyathaas.wordpress.com/2022/03/28/small-actions-matter-for-reducing-oil-consumption/
Lucas Davis is the Jeffrey A. Jacobs Distinguished Professor in Business and Technology at the Haas School of Business at the University of California, Berkeley. He is a Faculty Affiliate at the Energy Institute at Haas, a coeditor at the American Economic Journal: Economic Policy, and a Research Associate at the National Bureau of Economic Research. He received a BA from Amherst College and a PhD in Economics from the University of Wisconsin. His research focuses on energy and environmental markets, and in particular, on electricity and natural gas regulation, pricing in competitive and non-competitive markets, and the economic and business impacts of environmental policy.