Perfect Oil Storm Brewing in the U.S.

Everyone talks mercilessly about Peak Oil, but is it time to introduce the concept of Peak Demand? At least in the United States? The Federal Highway Administration [FHWA], a part of the United States Department of Transportation [DOT], released its monthly "Traffic Volume Trends" report last Friday.

The report showed that estimated vehicle miles traveled [VMT] on all U.S. public roads for March 2008 fell 4.3 percent as compared with March 2007 travel. The report also said it was the first time March travel on public roads fell since 1979.

The 11 billion mile drop in March 2008 compared to March 2007 was the sharpest yearly drop for any month in FHWA history. This report was first issued in 1942, so there is 66 years of data.

The negative demand trends should continue in April and May since gasoline prices have moved up sharply from March.

Predictably the market ignored the report, and no doubt oil bulls spent all weekend mining the data for something to support the bull case.

The perfect storm seems to be brewing for Oil demand domestically right now. The main use of oil in the United States is for transport, and we are starting to see the effects of high gasoline prices on demand as people drive less. If that wasn't bad enough, ethanol production is starting to take market share from gasoline, leading to even less demand for oil.

We put forth our opinion on the fundamentals for oil in our previous post on May 12.

We still maintain that fundamentals don't support current prices for oil. Emerging economies don't matter. What matters is world wide supply and demand for the commodity, and as we stated earlier, a 5% drop in demand in the United States would translate to a decline in demand twice China's oil consumption growth last year.

Read the Press Release.

Comments

[800LB GORILLA]

As soon as prices come in some,people will up their demand.Whats your point?

[Eric Fox]

The point is that it is just not about supply but we must watch the demand side as well. You are right if prices come down then demand will not be impacted as much. I'm not sure what your point is.

[cjwirth]

Unfortunately there is no Peak Demand. Due to rapid economic development in the less developed countries (India and China) and oil producing nations (Mideast and Russia), demand will increase, while at the same supply is flat, and oil production will decline starting now and accelerating in January 2009. Global economic depression is on the horizon. See the free report that explains it all: www.peakoilassociates....

[Eric Fox]

cjwirth....interesting web site, I truly hope you are wrong about peak oil. I don't want to get into an argument with you about it, as I have found that even suggesting to a peak oil theorist that peak oil may not be true is the emotional equivalent of telling a fundamentalist Christian that Jesus does not exist.

[ship shape and bristol fashion]

eric

I am not one of those guys, who cries 'Mad Max ante portas!' all day long, but denying the Peak oil theory is simply illogic. Whether it happened 2005 or it happens in a 1000 years, one day there is going to be a maximum daily output and then a decline. That has nothing to do with emotions.

The best evidence for the problems the oil industry has maintaining daily output is the outstanding revenue growth of the oil service industry. One would assume, that oil output should grow nicely like their revenue, but it is not.

Consider: Even the IEA, usually behind the curve, is looking deeply into the 400 biggest fields. Should be an interesting report in November.

[BrucePile]

You should keep in mind that the comparison just released for miles traveled dropping 4.3% is between March '07 and now. Think back to March '07: oil had just come off a precipitous drop from $80 to $50 diffusing most drivers' fear of the gas pump. So you are comparing a 150% one year increase in the price of oil to a 4% pullback in motoring demand. This driving reduction probably came from fearless levels where every needless trip was gladly taken. The more reduction there is, the harder it is to accomplish.

[dontcallmeamarter]

There was recently an article in Barron's magazine "Who's behind the Commodities Boom," and a similar presentation given to congress by Michael Masters of Masters Capital addressing the current energy situation. The current boom in commodity prices in general has little to do with supply and demand. Why do you think Saudi Arabia and OPEC are talking about cutting production? The growth in China has been going for about 10 years now and India longer than that. So what's the deal? Read this report it explains it very succinctly we have an arbitrage because there is more capital rushing into the commodities market than it can support. This is being caused by a method of trading that circumvents the normal position limits, a large influx of capital and a federal government that is going to do little about it beyond grandstanding with the top oil executives. I don't know about you but if I am Rex Tillerson I will take an ass chewing as long as I get to keep raking in about $10 billion per quarter.

The pension funds and the ETF's do not have to deal with the same position limits as the companies actually trying to use commodities positions as a hedge for their business. There is such a disproportionate amount of the investment in commodities coming from speculators at this time that demand would have to come to a screeching halt before it would have any real impact to the price of commodities.

So why doesn't congress act? Currently the average consumer is getting hurt, not congress, not big oil, and thus far not big business. The farmer isn't going to protest because they are getting record prices for their crops. The big oil executives aren't going to stand up and tell Congress how to fix the problem when they are getting $130 per barrel and even though Congress knows what the cause of the crisis is they are not likely to act because the beneficiaries of this speculative bubble are also large political contributors.

Congress needs to act and all investors need to play by the same rules. Impose those same rules on pension funds and ETF's as other investors and we will have $50 oil and $2.50 gasoline within a month. Here is a link to Michael Masters presentation:

hsgac.senate.gov/publi...

You can also read the article on Barron’s if you have access:

online.barrons.com/art...

[MouseType]

<i>Emerging economies don't matter.</i>

I'd be interested to know how you've come to such a conclusion. The trading of 5% of the US's consumption for all of China's consumption growth doesn't prove your point.

Have you read any of Tom Whipple's assessments of how China's price caps are affecting the diesel market? I assume you're aware of how tight that market is, given that it's at about $4.50 per gallon here in the States? Where would you cut 5% of our diesel consumption? Trucks? Trains? Construction equipment? Emergency vehicles? Garbage trucks?

I also agree with Ship Shape that denying peak oil is irrational, and I will raise the ante by calling it an observable fact rather than a theory. Only as soon as it can be proved that (continental 48) US oil production did not fall from a high of just over 8.4 million barrels per day in 1970 to about 3.1 mbpd in 2001, can we discuss emotional dependancies. Domestic US production is in decline. Observable fact. Global production has been more or less flat since 2005. Observable fact.

Anyone is certainly free to maintain that fundamentals don't support current prices for oil for as long as they like, but long-term trends indicate otherwise.

[Thinking ahead]

If anybody is looking to make up their mind about the supply side of this question, take the time to actually read "Twilight in the Desert". I believe you will be convinced that surplus production from the mideast is a myth. And if so, where will the replacement oil come from? The Brazilian finds are giants, but not super-giants. One more tidbit I picked up from the book: whenever you see oil being pumped out of the ground (as opposed to naturally flowing), that oil field is almost exhausted.

[oilanalyzer]

While it is interesting to look at oil consumption (demand) changes in the US, oil is a global commodity that responds to the dynamics of supply and demand on a global scale. To properly understand oil pricing it is important to examine all of the significant elements in the equation, not just a select few.

[iThinkBig]

"I don't know about you but if I am Rex Tillerson I will take an ass chewing as long as I get to keep raking in about $10 billion per quarter."

Quote of the day award goes to Dontcallmeamarter! I think of history. America developed the Manhatten Project out of necessity to beat out the Germans before they developed the A bomb.

I had my fair share of fear and wild emotions about comments like 'where will the replacement oil come from?' It's called drilling offshore & ANWR. It's called building nuclear plants to replace diesel burning plants for electricity with biofuel and coal. It's called solar, wind, hydrogen. You think America won't do this and beat out the (insert Germany for China, Iran, Russia) to preserve our national security? Yes Congress and our new President are going to get hammered on until they do something. They haven't because inside information and no investment restrictions in Washington is dangerous for the American citizen. Not to mention, that pesky multi-trillion dollar public debt to pay down. But do something they will, because if the economy does collapse, you have 60 million gun owners. Did they have that many during the Great Depression? Nope, didn't think so. And if it does collapse, perhaps a restructuring of our government back to the simple times of the early 1900's may not be such a bad thing. I am getting a little tired of being concerned if I took a green *hit this morning or a brown one without being fined. If it collapses we will develop energy and create the next biggest bull market in world history.

So I stock up on some luxuries and eat wheat pasta and cheese for a year. So what?!?! I am glad, I have worked 14 hour days in business for the last 18 years! I will finally have a year off and can finally get in shape and spend time with that thing called a family. I would prefer it not happen and we go energy independent now, but thick, selfish heads in Washington prevail. They are more or less a reflection of all of and our national we-have-it-so-easy-we-... attitude.

Don't forget, we have lunar rovers on mars, particle accelerators, the biggest nuke stockpile on earth and the biggest population of innovators on any continent. We're all going to die crap is getting old to me. So is 'is this or that a bubble and when will it crash if it is'. It crashes three months from when the media hysteria begins. $75 oil by November.

[2-cents]

I wouldn't get into any argument with Eric. He's W.Street boy for God sake. Half of the current problem. ie. high oil price, is caused by these boys. They have never supported companies that invest for the future which could have negative cash flow in the near term. These guys are short-term-itis. Have a search to see what these buys said 6 months ago about natural gas or jackup drillers.

[David39910]

MouseType makes a good point - there is not a lot of room for demand destruction in diesel. And if you really think about it there may not be as much DD with gasoline as you think. Folks may be consolidating errands and such but are they really going to not drive on vacation when for instance - it's 220 miles for me to the SC coast which adds around $24 to my round trip drive comparing $4 to $2.50 a gallon and 28MPG. I can justify that $24 with the bargain I can get on a hotel room and such.
Wait and see what happens if we get a Cat 3-5 that goes through LA or TX or if Bush hits Iran before he leaves office - I'd be suprised if he doesn't.

[Eric Fox]

ship shape and bristol fashion...I don't deny peak oil. Obviously one day production will peak; I just haven't seen enough evidence to convince me that it is imminent. I was joking with Cjwirth about the ideological fanaticism of some peak oil theorists. The argument usually ends with name calling.

[Eric Fox]

Brucepile...you are data mining as I predicted in my article.

Mousetype...the point I was trying to make is that Oil is a global market and that a significant decline in U.S, demand will dwarf any growth in China demand. Emerging economies don’t matter in isolation but only in the context of global supply and demand as oil analyzer said in his post. I haven't read any Tom Whipple stuff...send me links…I have an open mind and will have to study this diesel issue in more depth.

[Eric Fox]

thinking ahead...I don't remember that section of the book so hard to comment. I do think that oil stops flowing naturally before secondary and tertiary methods are used to produce, so I would think that the field would not be exhausted.

[Eric Fox]

Oildriller...the argument I am making in this article and others is definitely not the Wall Street party line so don't lump me with them. If you read my blog I think you will realize that my scorn and contempt for Wall Street surprises even me sometimes.

David39910…there are many lower income people out there to whom the rise in gas prices is a significant added cost. It may not impact you but don’t assume everyone makes the same decisions you make.

[ship shape and bristol fashion]

Check this out:

Should shoot all oil bears.

online.wsj.com/article...

[Eric Fox]

ship shape....the data is lagging and is from 2007. Hey, maybe I am data mining now.

[Eric Fox]

ship shape...this article also appeared in the WSJ this morning:

Oil Prices Prompt Four-Day Week

A handful of small towns and community colleges are switching to four-day workweeks in an effort to help employees cope with the rising gasoline prices, and could soon be joined by some larger local governments.

Michigan's Oakland County and New York's Suffolk County are both considering putting public employees on four-day workweeks. In Oklahoma, a resolution has been introduced in the state house of representatives recommending all state and local public employers move to a shortened week to provide relief from the cost of commuting.

Some corporations are trying to help employees keep fuel costs down. Hewlett-Packard Co. is quadrupling its videoconferencing room by next year, hoping to eliminate about 20,000 employee plane trips annually


online.wsj.com/article...

[Emerald]

With all the comments above, on one has mentioned why pension funds and other are investing in oil and other commodities. Part of it is diversification and the balance is a hedge on a depreciating dollar that is eroding common stock investments and bonds. Speculators abound, but manywith good reason. Blame the governemt, not the speculators. Throw out all incumbents and ban K Street leeches!

[Eric Fox]

OK....I saw the inventory report this morning. Rip into me, go ahead.

Also, to Emerald....one reason Pension fund investors are piling into Commodities is because of the "herd instinct" common in the investing world. At the end of the fiscal year, the Pension fund investment team will examine the performance of every asset class in the previous quarter or year. Since Commodities are showing up as one of the best performing asset classes on a trailing basis then they will allocate more money here.

[oil baron]

By 2012 oil consumption will surpass 91mmbopd and by 2030 oil consumption will reach 130mmbopd. Worldwide production capacity now stands at 89mmbopd. India and China together will account for 70mmbopd by 2030.
We can talk and post why oil prices should be higher or lower but eventually $200-250 oil prices will become a reality.
The hope we have here in the US is nuclear. All the other alternative fuels wont amount to 3-4% of our energy needs.

[richandmer]

Eric, I understand the logic of your article, but have to wonder how low demand will drop before it stabilizes and then starts its journey ever higher?

I have heard that demand is 87m barrels vs 85m in supply. Can you give me an estimation of where you see demand in barrels going to in short and medium term?

[surgcare]

So what . Billions are waiting to get some kind of car or motor vehicle in China and India not to mention asia etc Another brilliant analysis .WHERE DO THESE PEOPLE COME FROM .

[wsigler]

How many of you read dontcallmea..'s posted link? :

hsgac.senate.gov/publi...

I'd like to hear a rebuttal to that testimony.

My take is that this is definitely a speculative bubble. It will burst - but I've not a clue as to when. I doubt Congress will take any action, but if they do....

Yes, demand does now, or will in the near future, outstrip supply - and that will drive prices higher - but the MAGNITUDE of the present level is not justified by the near-term demand/supply equation. I believe there's a severe correction in the cards...that will overshoot a justifiable price - followed by.....???

[paulk8756]

You guys will convince me about "Peak Oil" about the same time those Liberal Democrat women in the U.S. Senate start making sense to me on energy issues. They couldn't help their own kids with their Algebra I homework for Chr--sake!

But the so-called "Bubble" is over now... New polls show $4 gas has caused 2/3 of the public to want to drill for oil and gas in the onshore and offshore U.S. and ANWR! And 90% wouldn't pay a nickel for CO2 limits or carbon sequestration.

Watch the bigmouths in Congress crawfish now... The only thing they fear more than losing big money from their green friends is losing their next election!

I have to admit I was getting worried myself, but I gotta say, "God BLESS America!"

[paulk8756]

Oil Baron,

I believe you're right that worldwide oil demand will increase in the near term. Beyond that, I don't think so. Alternative technologies (...not this corn crap, but electric and nat. gas vehicles, solar processes, biodiesel from coal, possibly sugar based ethanol, etc., etc.) will all mature to help fill the gap. And that's not to mention the improvements in oil and gas exploration technology going on as we speak. HIGH PRICE is the key, and I believe it's caused us to finally awaken for real this time.

[Davo]

Remember that Peak Oil refers to a peak in the world's ability to extract, process and deliver oil. It does not suggest that the reserves are not half depleted. The price that the world is willing to pay for it will determine when we reach equilibrium. To emphasize the finite nature of anything is not operating in the real, immediate world. Making a buck today and tomorrow is not affected by "Peak Oil".

[paulk8756]

M. King Hubbert's sure having his day, isn't he. Actually, his theory of "Peak Oil" refers to the ability of a given oil well to continue its ability to produce over time. Obviously, this diminishes.

He wasn't inferring that we're running out of oil, only that a given well runs down. Other people have intoned that for him. And still others have expanded his idea to somehow include energy pricing.

Since 70% of the earth's surface is covered by water and modern oil exploration technology is improving, we're not anywhere near to running out of oil. But it will be more pricey!

Even more interesting is the possibility that oil isn't even a fossil fuel, but a naturally occurring substance in the earth's mantle. This could mean we will never run out of oil and gas!

[Eric Fox]

richandmer...I don't maintain my own supply and demand estimates for oil. My argument is that demand will eventually be impacted and the highway report was the first evidence to confirm. I heard Buffett repeat the 87mm demand and 85mm supply statement on TV and I hate to say it since it is blasphemous and sacrilegious but I think he is wrong.

[Eric Fox]

wsigler..."but the MAGNITUDE of the present level is not justified by the near-term demand/supply equation. I believe there's a severe correction in the cards...that will overshoot a justifiable price - followed by.....???'

this was my exact point in the first article I posted in mid May, that fundamentals do not support the run up in oil the last 2 months. Here is a link to it:

seekingalpha.com/artic...

[paulk8756]

Eric,

We'll see how severe the correction is. People are really scared this time... $4 for a gallon gas will do that to you. The real cost of extracting, refining and delivering oil is alot higher that it used to be, not to mention that global demand has increased significantly.

All this makes me think that while the present price is overdone, we won't see marked relief until significant new U.S. exploration, the best of the alternative technologies, and a reformed U.S. vehicle fleet all kick in.

This leads me to believe that oil services is still going to be an investment that outperforms in the near (3-5 years) term.

[paulk8756]

Wsigler,

My take is that the Congressional testimony you refer to is nothing but more obfuscation by the liberal D's in Congress... you don't appear before a Congressional committee without the chairman inviting you.

You'll notice they haven't invited any noteworthy economists to testify because they'd blow the whistle on their supply and demand game that puts 85% of U.S. offshore (...not to mention onshore!) exploration out of bounds to oil and gas producers.

But the people at home have finally caught on... Polls taken since gas went to $4 show 2/3 of us want U.S. onshore and offshore exploration and ANWR, and 90% of us think CO2 limits and carbon sequestration are nonsense.

Their fear of not being reelected will turn the tide, but it will still take time. They won't throw over their rich green friends without a fight, and that battle hasn't even commenced yet. You'll note all three presidential candidates have endorsed their radical energy agenda.

[galewhitaker]

The demand for oil in the US is important but think about this. Hundreds of millions of drivers in Asia are paying 45 cents a gallon for subsidized gasoline. The demand for oil is not going to come down as long as this continues no matter what happens in the US.

Oil is a "declining resource" exactly like gold and the price of oil will continue to increase for the rest of time, just like the price of gold.