The Oil Drum: Australia/New Zealand

CLZ09:

Even with oil at $120, large inefficient vehicles are still being sold and fleet efficiency is hardly budging.

This comment is, I feel, a little too pessimistic. What we need to do is look at the leading indicators and allow for lags. "Fleet efficiency", for example, is a function of all cars on the road. Given the way SUV sales were booming through the 90s & even until about 2005, we could expect fleet efficiency figures to be dropping as old, pre-SUV cars go to the wreckers. In these circumstances, having fleet efficiency being static is an indicator of how the graph is actually beginning to turn.

Second, sales of large inefficient vehicles are dropping. In Australia the local vehicle manufacturing industry is in hot water because it's based on making large 6 cylinder cars. Sales of 6 cylinder cars have been dropping markedly. Mistubishi has closed its factory. Ford & GM Holden have cut production and staffing. Ford has also announced plans to begin making four cylinder cars here - though it will probably take a couple of years for them to tool up.

Looking at the remaining buyers for 6 cylinder cars, they're mostly fleet buyers. If a car is sold to a households, it will be kept on the road for 20 years or more, probably going through 3 or 4 owners in that time. Fleet (note: this is a term used in the vehicle industry and is different from the usage of "fleet" above) vehicles, however, are usually run a lot harder and often are written off after about 3 years. At a certain price point for petrol, fleet buyers will shift away from the Falcons & Commodores en masse and the effect on average fuel consumption will be fairly rapid.

In Melbourne, the rising price of petrol has provoked a major switch towards public transport, to the extent that the sytem is now running at capacity. The newspapers are full of bitter complaints about over-crowded trains, so it is clear that even at present prices, there is considerable latent demand for a switch in travel modes. Invest in public transport and watch travellers fill the trains & trams as fast as you put them in service. As petrol prices increase, this will become an even greater pressure and will eventually overpower the road lobby.

Finally, the rising price of petrol is causing an increase in the geographic price gradient of real estate in major cities like Melbourne & Sydney. The first effect has been a reversal of the long-term trend for a decline in population density in the inner suburbs. This will accelerate. At a certain petrol price, people will decide that they are prepared to live in a shoe-box if that's what it takes to let them travel to where they need to be (e.g. work, study, essential services). While the outer suburbs will be full of McMansions that the owners can't give away, the city, the inner suburbs and certain other favoured locations will fill up with people rapidly:

* Luxury hotels which will go broke because of the collapse of the tourist trade will be converted to residential accommodation;

* People with large homes in inner suburbs but who are thrown out of their job through recession and/or Peak Oil undermining the economics of their industry will have rooms to rent. Before the inner suburbs became fashionable, there were many large houses which had been built 100 years ago as expensive homes for rich people, but had been converted during recessions to boarding houses. This phenomenon will return;

* High petrol prices will also bring about a resurgence in medium and high density development. Not only will demand skyrocket for good locations (as noted above), but fewer people will be able to afford to go up-market with renovations etc. The general level of maintenance of the housing stock will therefore decline and houses that come up for sale will therefore be a good deal more likely to be bought by developers.

There are some factors which will act as flies in the ointment, though. First, the Save Our Suburbs mob will do their level best to keep out the riff-raff by preventing medium-density development. Eventually their cries of NIMBY will be overwhelmed, but they'll be a drag on the inevitable adjustment process. Second, so much of the modern housing stock is based on open plan design, which assumes that energy is virtually free. Doors will come into fashion again when people find that they can only afford to heat one room in winter. This will be expensive, though, to retro-fit to all modern and renovated housing.

So, I'm not as big a doomer as many of the commentators here. People will adjust, though not without a lot of pain and even a substantial dose of bankruptcy. But adjust they will. If a couple have jobs that take them long distances in different commuting directions, one may decide to take a lower-paying job a lot closer to home because they'll come out ahead after transport costs are deducted. And so forth. People will have to adapt to a new lifestyle, but adapt they will.