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Tuesday, August 16, 2005

Demand Destruction? Not Yet…

Demand destruction is a modern way of saying catastrophic recessions and shortages.

Most economists pull the 1970’s oil crisis out as an example of how rising prices eventually crimp demand and send prices lower. But let me give you a few reasons why we are not seeing a drop in oil consumption this time around—not yet, anyway:

• First off, China’s 9.5% annual growth rate with India trying to emulate…need I say more? Well, I will, though. If there were ever a government that should have been able to plan for traffic and transportation, it should be China with its legacy of central planning and its ability to execute massive projects without a lot of guff from the common people. But the plan for Shanghai traffic — plenty of new highways and an extensive new subway system — didn't work. The plan was predicated on reaching a threshold of 2 million cars by 2020; that level was reached last fall. The Chinese equate owning a car with "personal freedom, prestige and success." Go figure. Guess they watched too many Bonanza episodes.

• Second, easy money from the refi-ATM; tapping into the perceived wealth of “inflated” real estate values world-wide.

• Third, the massive increase in the use of credit cards for gas purchases. Seems less painful to use the plastic.

• Last and not least, we have become even more dependent upon the private automobile, especially the sport utility vehicles (SUV’s); 95 percent of personal vehicle miles traveled in the United States (2.6 trillion miles) are now done in personal motor vehicles, as opposed to public transportation of all types. SUV’s were designed and built to meet this “addiction.”

And frankly, that’s the real crux of the matter…we are addicted and we can’t get the monkey off our back...nor do we want to. The value of auto-mobility can be summed up in one sentence: Cars allow people to go wherever they want whenever they want. If you can’t get around at will, life becomes limited—or so we believe. Now, China has had a “taste.”

How high will oil and gas have to go before we see people checking into rehab centers to kick the monkey?

“When you need the gas, you need it.”

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