Oil prices are at a record high. And profits are rolling in. But there’s an intriguing phenomenon in the oil industry called “demand destruction.” It means when prices get too high for too long, consumers invest in alternatives and don’t return. The arts have faced their own version of demand destruction when COVID shut down live performances. Is there anything to be learned from how the oil industry approaches what sounds like an existential threat?
Hi: I’m Doug McLennan, and you’re listening to ArtsJournal’s The Undertow, our new more-or-less weekly podcast exploring stories underneath the stories in the world of arts, culture and ideas. The premise of the podcast is that there are ideas percolating just under the culture that drive what you see and hear. Sometimes it’s easy to connect the dots. More often though, the context or connections are not so direct. And context is the great shaper of how culture evolves. This podcast is an ongoing attempt to try to make sense of some of them and see where things are going.
This week’s story begins outside the arts. Way outside, actually – in the oil industry. Despite record gas prices and record profits, the oil industry is obsessed with two existential threats: the first is “peak oil,” while the second is an intriguing concept called “demand destruction,” which I know sounds kind of apocalyptic, but an intriguing idea about the health of markets. What does this have to do with the arts? Stick around and find out.
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So the oil industry. Gas prices are at record highs, and you’d expect there’s nothing but sunshine and butterflies for the guys who work to pull it out of the ground and collect the profits. And sure, Exxon earned $6.1 billion in profits in the first quarter of 2022 alone.
But there’s a website I visit regularly – don’t ask why — that covers the oil industry. It’s called OilPrice.com and it covers what you’d expect with that name – the worldwide prices of fossil fuels. Did you know, for example, that the oil industry is a bit like the wine industry, full of exotic varietals wholly defined by the ground from which they’re sprung? Not all oil is the same. Brent crude from the North Sea above the UK and a little left of Norway, fetches one price – a premium in fact – because it is high quality and easy to refine, while oil taken from the dirty Alberta tar sands sells at a discount because it is “dirtier” or lower quality and more complicated to refine. But you’re probably wondering why I’m talking about oil prices in a podcast ostensibly about culture. Bear with me for a moment – I’ll get there.
Anyway – you would probably expect that the oil industry would be giddy with the meteoric rise in worldwide oil prices. Oil was going for about 60-70 dollars a barrel for most of 2021, and spiked to well over $120 as Russia went to war on Ukraine in February. Record profits began piling up. Currently, the WTI Crude price – which is the West Texas Crude benchmark — is hovering around $115-$118. And that translates into prices at the pump of well over $4 a gallon in most of the US. In some places on the West Coast, the price is over $6 a gallon.
But if you follow OilPrice.com, there’s a lot of handwringing about something called “demand destruction.” The idea goes something like this: The price of oil is determined by worldwide market demand, so that when there’s a disruption in production – like sanctions on sales of a major producer like Russia – the price shoots up. But if the price consumers pay goes up too much, those consumers start cutting back on their consumption and demand goes down, and along with it prices. This is normal fluctuation.
However. If the price inflates too much for too long, consumer habits start to change permanently. Maybe drivers switch to public transit and get rid of their cars. Or stop buying SUVs and buy electric cars instead. If it really goes on awhile, maybe producers of plastics will find a material to use other than petroleum. Once habits have changed and consumers have invested in new infrastructure, they don’t easily return to old habits, and it can take a long time to build demand again to former levels. The biggest recent example of this is the pandemic, where consumption of oil cratered in March 2020 as the world shut down. Two-and-a-half years later, we’re still not back to 2019 consumption.
The oil industry is particularly sensitive to demand destruction because of worries it will be the new normal, that we’ve reached something called “peak oil” another oil industry term that roughly translated means highest production ever before demand starts to permanently decline. With much of the world trying to get off fossil fuels for alternative renewable energy, it’s not an idle worry. This is particularly unsettling for the industry because oil production is a longterm thing – it takes time to find and develop and refine new sources – years rather than months. So elasticity in the supply depends on infrastructure for capacity that was planned for years before.
And true to form, the high prices at the pump are taking their toll – US demand for gas has declined for several weeks in a row. You can tell oil company insiders are aware of the longterm direction though – they’re busy selling stock in their own companies in expectation this is the peak. And this notion is reinforced by news that the big oil companies are scaling back rather than investing in new production. The CEO of Chevron said this week his company will never build another US refinery.
So yes – good times for the immediate shortterm in the oil industry. In the longterm, these spikes in prices are driving demand destruction and a transition away from fossil fuels. And despite the sticker shock at the gas pump, this dramatic boost in prices is good for fighting climate change. And don’t you feel better about that? Heh.
Enough about the oil industry. But I wonder if there’s something useful to take away from oil producers’ concept of ‘demand destruction.” There are some obvious dissimilarities with the arts, of course. Oil of course, is entirely driven by markets, and a global one at that. It’s also been an essential commodity, something the modern industrialized world can’t live without. Controlling access to oil has driven wars and politics. And while demand may rise and fall, the essential need for it has never been in doubt until now. And duh – it’s oil. And the arts aren’t.
The arts, on the other hand, aren’t essential. And they’re less market-driven. I know we can argue a case for the essentialness of art in creating culture, community and great nations. But the point is, art and creativity will still be around even if all our arts organizations went away tomorrow. People are innately creative, and no one’s going to stop playing music or making pictures, if arts institutions die.
But back to “demand destruction.” One could say that the arts have had their own demand destruction event in the past few years as COVID shut down live venues. In a list of industries most affected by the COVID shutdown, live arts and entertainment were right at the top of the list along with the hospitality industry. Employment was slashed in half, and for more than a year-and-a-half most live production shut down.
In the absence of the ability to pursue traditional arts habits, consumers went elsewhere. Just as sports club patrons went to Peloton and online workouts, and office workers migrated to Zoom… live arts consumers found YouTube, Netflix and Spotify. I’d argue we didn’t consume any less culture, it’s just that we shifted to different ways of getting it. And eventually – in following the “demand destruction” scenario – different culture.
Now, most of your hardcore audience will return. They missed going. There’s something essential about the experience for them. But don’t underestimate the power of habit. Years after America Online (AOL) essentially ceased to be, hundreds of thousands of its users kept their AOL email addresses, still visited the AOL website, and some even continued to pay a monthly fee, believe it or not. Like those WWII Japanese soldiers found on remote islands decades after the war had ended and still fighting for their cause, they continued out of habit. In any model that’s been around for a long time, habit is a significant driver of customers. How much of the arts experience is habit, tradition, familiarity? And what happens when those habits are broken, replaced with new ones offering different rewards?
So get out of the habit of going to the theatre. Decide the hassle of getting dressed up and going to the concert hall isn’t worth it. Weigh the cost of a monthly Netflix or Disney subscription against season tickets to the ballet. Just as the oil industry has realized that prolonged high prices at the pump force consumers to develop other habits, the COVID shutdown has done the same for some arts audiences.
Make gas prices cheap again, and many consumers will go back to their old ways. But not if they bought an electric car in the meantime. Flood the market with live arts events again, and many – lets’ say even most – arts consumers will return, even if cautiously. But not all. The choice to come back is weighed more carefully – and on a case-by-case basis rather than because it’s a habit.
But there’s another part to this. And that’s culture and the context surrounding that culture. Our world views are shaped by the experiences of our habits, the things that are observable and experienced. When those habits change, our world views evolve. What I mean is that the person who drove a gas car adopts new value systems when he switches to an electric one. Electric car owners are part of a different culture than they were when they drove gas. What they care about has evolved, and they both see the benefits of electric, but just as important, understand the drawbacks of gas. The decision to switch might have been prices at the pump, but once they did switch, they started to see the world from a different perspective.
Audiences used to being bombarded by content from every screen around them and having access to things they didn’t even imagine they wanted access to, think differently about the culture they want to consume than they did pre-COVID. And even the fact of all the choice has changed even the ways you decide what you want to see.
Overwhelming choice didn’t start with the COVID lockdown, but COVID changed the calculations of that choice. And there’s something else. Workers still haven’t returned to downtowns, and those who have aren’t there full time. It’s made the experience of coming into the city less vibrant, and again – the larger habit of going into the city is also broken.
Then there’s this idea: Critics have been warning for some time that “peak TV” – the fact that there are twice as many scripted shows in recent years as streaming companies ramped up production to fight it out for subscribers – might be upon us. And perhaps that’s true – Netflix recently reported its first quarter ever in which it lost subscribers, and CNN killed its streaming service before it was even properly launched. TV production is very market-driven, viewers are reaching their limits with the number of subscriptions they’ll pay for, and commercial production is quite sensitive to contraction and consolidation. It’s a normal cycle of business.
Not so the non-profit arts world, which never met a non-profit it didn’t want to heroically save. There are some 120,000 arts organizations in America, and the number has been steadily growing since the 1970s when there was a fraction of that many. I’ve heard funders in recent years wonder if we have too many arts organizations, if maybe some of those that continue on out of habit ought to be left to die. But it rarely happens.
I’m not at all arguing that we have too many arts organizations or that a goodly number of them should go out of business. The infrastructure that supports an arts organization – a symphony orchestra for example – takes years to build. It’s an investment by the community, and if it goes out of business, it’s very difficult to replace all that support.
But I see basically two things happening in the oil industry’s “demand destruction.” First, the market is forcing efficiency – we’ll use your product at one price, we’ll use less of it at a higher price, so figure out how to make it cheaper or we’ll force alternatives. And second, demand destruction is the way transition from one system to another happens. As more renewable energy comes online, we’ll use less fossil fuel energy because it carries undesirable baggage. It’s a net positive for the world.
Substitute out “price” for “attention,” which is the real currency of creativity, and you see how demand destruction works in the arts. Attention is largely driven by platforms that go seeking it. Demand destruction killed Blockbuster Video but replaced it with something better. Demand destruction killed vaudeville and phonograph records for something better. YouTube, Spotify and Zoom inflate supply, putting pressure on everything else to compete for attention. It was recently reported that something like 85 percent of all the music streamed on Spotify is “old” hits as opposed to new music. When that much attention is being sucked up by access to the past, the future has a harder time competing.
And true to form – that competition is stirring. Dance has actually done well during lockdown. TikTok has made dance cool again for millions. Choreographers are experimenting with video and projection, and virtual movement. New opera companies, new opera, new technology incorporated into visual and musical design. Orchestras are exploring a wider range of repertoire than we’ve seen in decades. And architecture and visual art is engaging with the world in more comprehensive and responsive ways. We’re not in routine anymore.
In one sense, the pandemic didn’t seem to change anything. As lockdowns eased, artists and arts organizations went back to doing what they do. In other, more pervasive ways, the pandemic changed everything. None of the old rules need be taken for granted. Or if they are, they’re immediately challenged. Experimentation and a hunger for new things with connections to what used to be familiar is the name of the game.
One of the hardest things about trying to change something is first clearing out the old things. The pandemic cleared out everything, so there’s room for the new. Demand destruction sounds like a terrible thing. But it might just have been essential to make way for reinvention.
I’m Doug McLennan. If you have any thoughts about today’s topic, I’d love to hear them. Write to me at TheUnderTow@artsjournal.com. And if you like what you heard, please subscribe to this podcast. We’re still figuring out how to do this, so stick around.