Must read CIBC report: $7 gas by 2010, 10 million cars off the road, 1970s style GDP growth

CIBC World Markets has just released a stunning yet detailed economic analysis of near-term oil prices and impacts. The PDF has some excellent figures I will convert to JPEGs.


The two key pieces are “Getting off the Road–Adjusting to $7 per Gallon Gas in America” and “Oil and Growth–That 70s show Re-Run“. Main points:

  • “That additional 200,000 barrels per day pledged from Saudi Arabia is a pittance compared to the four million barrels per day this year that depletion will hive off world production. What little increase in production Saudi is capable of will probably all be gobbled up by that country’s own voracious appetite for energy.”
  • China’s recent oil subsidy drop? Another yawner: “Most North Americans would gladly line up at the pumps for China’s now $3.25 a gallon gas.”
  • “The only supply response to date has been yet another round of cost overruns and lengthy project delays running the gamut from Canadian oil sands to deepwater Gulf of Mexico wells.”
  • “With the basic laws of supply and demand no longer operative in crude oil markets,” CIBC is”compelled to once again raise our target prices for oil” to “an average price of $200 per barrel by 2010.” That “should translate into a near-$7 per gallon pump price within two years, a 70% increase from today’s already record levels.”
  • “Higher oil prices spell stagflation for the US economy next year” and beyond. The report has a good analysis of why “The US economy has managed to avoid feeling the full brunt of oil prices over the last few years, but 2009 will be the year that its luck runs out.”

The analysis seems very solid and suggests the only thing that can “save” us from near-$7 gas by 2010 is a major global recession, but even that would only be a temporary respite. The implications for Detroit is staggering:


  • Over the next four years, we are likely to witness the greatest mass exodus of vehicles off America’s highways in history. By 2012, there should be some 10 million fewer vehicles on American roadways than there are today–a decline that dwarfs all previous adjustments including those during the two OPEC oil shocks.” The report has a very interesting analysis of vehicle scrappage trends versus new vehicle sales that I hadn’t seen before. This is going to be a double whammy on Detroit — lower overall vehicle sales, and plummeting SUV and light-truck sales.


It looks like plug-in hybrids will be introduced not a moment too soon. And certainly not soon enough to avoid a steady decline in vehicles miles, according to CIBC:


CIBC says we’re going to become like [shudder] Europeans and Canadians! [Although this particular production should probably be taken with a grain of salt, since the CIBC analysts are, after all, Canadians.]


This will ultimately require a major investment in public transit, an area that this country lags enormously behind Europe:


I do believe this country is going to be dramatically changed by our failure to plan ahead for the inevitable. As CIBC notes, this will be different from most previous oil shocks in that the duration of the price shock is likely to be much longer:

The longest running continuous oil spike in US history lasted seven quarters, while we expect oil prices, at least on a trend basis, to be headed higher right through 2012.

CIBC also points out another reason this oil shock will be different:

Moreover, one of the earlier arguments for why oil might matter less these days is rapidly disappearing. Until recently, it was commonplace to dismiss the oil shock by pointing to the fact that the US economy, with its shift into services, had become signifi cantly less energy intensive than it was in the 1970s, when oil shocks did so much damage. But although US crude oil expenditures currently make up only 4% of GDP, this share will grow to 9.5% over the next three years as crude prices hit an average of $200/bbl in 2010. In terms of oil’s share of spending, we’re right back where we started from.


I would also add that this is different from previous oil shocks in that in the 1970s many different sectors of the economy relied on oil, including industry and the power sector. Now it is primarily one sector of the economy, transportation, that is an oil monoculture — and that sector as had a much more difficult time transitioning to alternative fuels than other sectors.

One last note: The other industry that is going to be devastated by high oil prices are the airlines. I will blog on the likely changes in air travel later.

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25 Responses to Must read CIBC report: $7 gas by 2010, 10 million cars off the road, 1970s style GDP growth

  1. Dennis says:

    The best thing the US can do in the short term is a massive investment in public transit, everything from exurban neighborhood van programs to improving rail systems. It’s amazing what we could accomplish if we’d stop supporting our addiction to oil and invest in real ways to use less.

    Since the Reagan years, however, public transit has been viewed as a strictly local matter, and Federal funding has largely dried up. Yet since then the Federal government has continued to invest in oil — everything from drilling rights to two wars in the Middle East — and we still don’t have enough to keep the price down.

  2. charlie says:

    quoting market report that have a vested interest in higher oil prices is not very convincing.

    $7 gasoline / $200 would result is a major global recession — taking US and Chinese demand offline. $4 gas is already doing severe damage to the ability of Americans to spend. That isn’t hurting China yet, but it will. Also $7 gas would mean a much lower value for the dollar, which would destroy the Euro economies as well.

    Spending more on transit is great, but where will you get the money? You can only cut highway spending by such much. And in any case, transit spending is a long term fix — it would take 20-30 years to move 20% of american commuters into transit.

    [JR: Where is your evidence that they have a vested interest in higher oil prices? You might actually read the report and learn what they have to say about why transit is in part a short-term solution.

    Also, your analysis is weak and incomplete. The British have been living with eight dollars gasoline for years — didn’t destroy their economy. But in any case, if you had bothered to read my entire post, you would know that a worldwide recession is only a temporary fix.]

  3. Earl Killian says:

    Another way this is different from the 1973 oil shocks: that was political embargoes; this one is more fundamental. This one cannot be solved with troops or diplomacy. There is a slight similarity to the 1979 shock, since that was caused by the Iranian revolution, and certainly the Iraq situation has curtailed production there. However, even if Iraq were to return to full production, things don’t look like they’ll ever be like the 1990s, or even 2000-2005.

    I agree with Dennis that the US needs more public transit investment, but not any public transit. We should only invest in electric public transit.

  4. Wonhyo says:

    I’ve read the idea somewhere (probably here) that we should make public transportation free and fund it with higher gas taxes. This would provide immediate relief for the lowest income workers, but would also reduce the demand for gasoline. The reduced demand would at least partially offset the higher gas tax. In effect, let those who continue to consume gas in personal vehicles subsidize those who ride public transportation.

    Imagine every gallon of gas sold going to fund increases in electric-powered light-rail and subway service. Imagine PV panel roofs running the length of the rail system, providing power to the rails.

  5. Lou Grinzo says:

    For those who have been following the oil situation closely, there’s not much surprising in this report, except possibly the timing.

    This is why I constantly remind people over on the The Cost of Energy that we can’t focus on just peak oil or just global warming and consider the other to be non-existent or some minor event that the market will magically take care of. GW has blossomed into a true emergency, especially with all the data showing how much quicker the atmosphere is warming, and how serious the impacts already are.

    PO will demand its own set of policy responses, some complementary to GW efforts (less oil use = less CO2 from oil use), but there will be competition for scarce resources, including political will, that will greatly complicate both situations. (The PO crowd needs its own Al Gore, frankly.) A critical issue is preventing the free market from turning massive amounts of coal or oil sands into motor fuel, as those technologies produce a lot of CO2 in creating the fuel, far more than does extracting and refining conventional oil.

    One thing that drives me nuts is all the people concerned about GW who think peak oil is a good thing because it will force us to emit less CO2. This is dangerously naive, and it ignores how economies work–i.e. what do people think “force” means? It means $7 (and higher) gasoline and a radical, expensive transformation of the transportation sector, a forced march, just at a time when we would prefer to be solely focused on just one big threat, GW.

  6. Dennis says:

    Electric public transit is obviously preferred, but we are trying to vastly improve public transit in a very short space of time. The fastest way to do that is more urban and suburban bus routes, and a greater frequency of existing routes. That means more buses (and more bus drivers, fuel for the vehicles, planningn of the routes, etc.). Public transit systems will have to buy the buses from somewhere.

    I worked in public transit for 15 years and seriously doubt that there is enough manufacturing capacity in the short term to turn out enough buses of any technology to meet the level we will need. So in the short term we will be stuck with many new diesel buses.

  7. Earl Killian says:

    Dennis, but cities and towns will not be able to afford the diesel fuel for their buses. If they raise fares to pay for diesel, they will drive people back to their cars. Also, diesel powered public transit is not GHG friendly. For example, you also mentioned rail: Amtrak is 180g CO2/passenger-mi, whereas two people in a Prius is just 121g CO2/p-m. Electric rail is much cleaner.

  8. Earl Killian says:

    Lou, does it matter whether GW people think Peak Oil is a good thing or not? Why go nuts over it? it would certainly be better if the world had started to deal with global warming before Peak Oil (e.g. in the 1970s and 1980s when the science was already clear enough for the National Academy of Science). However, the reality is that the status quo only changes in response to crises. Since even 2005.08.29 was insufficient to catalyze GW action, I suspect it will be Peak Oil that drives GW solutions. As George Orwell put it: “We are all capable of believing things which we know to be untrue, and then, when we are finally proved wrong, impudently twisting the facts so as to show that we were right. Intellectually, it is possible to carry on this process for an indefinite time: the only check on it is that sooner or later a false belief bumps up against solid reality, usually on a battlefield. … In private life most people are fairly realistic. When one is making out one’s weekly budget, two and two invariably make four. Politics, on the other hand, is a sort of sub-atomic or non-Euclidean world where it is quite easy for the part to be greater than the whole or for two objects to be in the same place simultaneously. Hence the contradictions and absurdities I have chronicled above, all finally traceable to a secret belief that one’s political opinions, unlike the weekly budget, will not have to be tested against solid reality.” Despite being written in England in 1946, that seems to describe current U.S. politics well. (The weekly budget part is a bit dated: credit cards changed all that.)

  9. crf says:

    Is the “gas prices and driving” graphic y-axis Thousands of miles per year ?

  10. Dennis says:

    Re-read what I said: electric is preferred, but we don’t have a lot of time. Even in many places that already have electric rail in place, there’s no way to expand capacity in the short term because of the lead time needed to construct new rail cars. I’m all for making the investment in electric, non-GHG transit, but between now and when those systems become available, people need something to take the place of driving an automobile.

  11. Joe says:

    crf — it must be.

  12. hapa says:

    best cost options i see:

    * kei cars, like the suzuki wagon
    * variations on the hybrid bicycle
    * more passengers per vehicle; craigslist, texting, and carpooling are a heaven-made trio
    * electric and hybrid delivery trucks — better gumming program for this moment than promising expensive new cars
    * speed limits and massive teaching campaign on hypermiling
    * infill development in a jiffy

  13. Ronald says:

    There is a saying that timing is everything. Well, we know that’s not true or everything would be timing and we wouldn’t have room for anything else. What would that be like?

    But lets say that Congress would have passed a Cap and Trade bill in 2006 and Bush would have, although he wouldn’t have, but lets say that he signed it and Cap and Trade became law. All the recent oil price increases would have been blamed or at least Republicans would have attempted to blame it on the Cap and Trade bill just like they are attempting to blame high oil prices on not having off shore drilling.

    Cap and Trade dodged a bullet.

    That kind of thing wouldn’t go away either like Pres. Carter appointing Paul Volker to the Federal Reserve and his tight money which actually lowered inflation, but Pres. Reagan gets credit for reducing inflation.

    Do Democrats now want to increase the effective cost of oil with a Cap and Trade bill even after we have had so much price increases on oil? There should be a better way. When oil was 20 dollars a barrel or 50 dollars a barrel, but when we are over 130 dollars a barrel? We should be more creative than that.

    130 dolllars a barrel for oil should be enough of a market signal for now for people to reduce oil usage. We don’t need to be piling on. What we should do instead of starting up a Cap and Trade program is help with paying for energy efficiency improvements in areas that might not be afforded by business or the consumer otherwise.

    Once we have lived with 130 dollar oil for a few years and the price has worked its way thru the economy and there aren’t other oil price increases, then start up Cap and Trade. Timing is important.

  14. hapa says:

    re: scrapping. yay! heroic XUVs and land whales sacrificing themselves to make turbines!

  15. Dano says:

    Lou and Earl and Dennis:

    Societies and groups don’t move unless galvanized, motivated, and organized.

    PO may be one way to do that, but price signals do the galvanizing quite well, and the vested interests are doing quite well at maintaining the status quo.

    My suspicion is that there is insufficient political will in this country to fund R&D for alternative energy sources/carriers so $9/gal gas & $3.5K heating bills will do the galvanizing and motivating (building insulation is a big chunk of a wedge). Insufficient political will, that is, until the people lead and the leaders follow.



  16. hapa says:

    dano: we only need to build what we already have to get started. that could carry us all the way past coal by itself and make a big dent in oil dependency besides.

    the miracle needed now is to get the money set to see that coal and oil are a true menace to the future. the general population has nothing to lose in changing and is basically waiting to find out what we’re going to do about all this.

  17. Dano says:

    we only need to build what we already have to get started. that could carry us all the way past coal by itself and make a big dent in oil dependency besides.


    I thought the three I called out were on the right track, just pointing out the curve ahead. We don’t do everything at once, we need baby steps, then bigger steps. I think we’re getting toward galvanization, but vested interests are muddying the waters and we have a ton of sunk costs in autocentric infrastructure, so someone needs to effect change.



  18. Mauri Pelto says:

    Thought provoking reading. The only assumption that seems totally on faith is the increase in scrappage. All others seem quite plausible. This will be a good test of our ingenuity.

  19. Greg N says:

    Sorry to be negative, but people get used to high gas prices surprisingly quickly.

    As you say, in the UK we’ve had prices at nearly $8 a gallon for years. In 2000 there were big protests against what were then considered high prices, with refineries picketed and pumps running dry. Blair’s government went for cowardice and cancelled a planned tax increase.

    So for over 8 years we’ve had “high” prices (in fact it’s probably better to describe current prices as normal and previous prices as abnormally low).

    Yet in those 8 years sales of SUVs continued to grow. The average CO2 emissions of new cars has failed to decline as much as the car-makers modest (and voluntary!) targets Miles driven p.a. continued to increase. People – when in showrooms choosing a new car – forgot the pain of petrol prices because nearly $8 a gallon became routine.

    Now, of course, with petrol at $8.70 everyone’s complaining again. Most drivers will have changed their cars in the past 8 years so had an opportunity to aim for fuel efficiency, but they didn’t take it. The economy did well in those years, people felt richer, they spent more on cars.

    It’s hard to determine whether it’s general economic woes or high gas prices specifically that will have the most impact. In a year or two the world economy will improve, and perhaps oil prices will be more stable at a new higher trading range. If so, my guess is you’ll see:

    – the “miles driven p.a.” graph returning to its usual upwards slope
    – improvement in SUV sales
    – return to the usual increases in numbers of cars on the road
    – no-one caring about public transit

    High fuel prices aren’t enough. What’s needed is year-after-year of penal gas price rises, for perhaps a decade or more. My fear (and expectation) is that the current encouraging signs will evaporate the moment economic woes are behind us.

  20. Dano says:

    Most drivers will have changed their cars in the past 8 years so had an opportunity to aim for fuel efficiency, but they didn’t take it. The economy did well in those years, people felt richer, they spent more on cars.

    This is iconic, for me, of why I don’t trust solutions that rely solely on market mechanisms – humans really don’t think rationally all the time, esp when Madison Avenue is pounding the populace with marketing that says SUVs make you sexy.



  21. Greg N says:

    Agreed Dano – what’s needed is a bit of thinking outside the box.

    E.g. instead of car pool lanes, have fast lanes for low emission cars.

    Or “health warnings” on adverts for high polluters.

  22. hapa says:

    also remember the last few years for both USA and UK were aflood with housing bubble money. to some extent the increase in expensive carriages is due to temporary states of royalty among the middle-upper people. cinderella’s clock struck midnight about this time last year….

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