Demand for Oil Starts to Falter

As we discussed here, oil at these prices does not make for a good long-term investment, contrary to what alarmists will tell you. High oil prices cause a decrease in oil demand, and therefore a drop in the oil price, over time. Yes, demand is fairly sticky in the short-run, as it takes time for energy efficiencies to be implemented and for changes to occur in the make-up of the economy's fixed assets (e.g. a phasing out of SUVs in favour of smaller vehicles).

If this hypothesis is correct, over the next several years we should see a gradual decline in consumption take hold. This process has in fact already started. For example, June 2008 numbers for US motor vehicle miles driven were recently released, and 12-month rolling totals ending in June of every year since 1983 are depicted below:

On a long-term chart the drop in consumption may not look like much. However, as mentioned this is a gradual process and will continue to take place going forward. Further, this chart only measures miles driven, not the efficiency of those miles, which is also improving. And finally, these are 12-month totals, which don't fully capture recent drops in consumption which have been relatively larger than those of several months ago. For example, you have to go back to 2002 to find June numbers lower than those of 2008, suggesting 12-month rolling totals will continue to fall.

The bottom-line is, as demand falls and supplies catch up, the long-term oil price will fall, not rise as many expect it to.

Comments

[genco:]

I think you've hit it. The US is undergoing a structural change and that includes how we use energy.

If OPEC puts a $100 floor on oil, the alternatives will continue to be competitive and eventually cheaper. Then it will be oil's turn to compete. GA

2008 Sep 15 11:17 AM

[2-cents:]

Less milage means slower economy, a very rosy outlook. Idiot

2008 Sep 15 07:30 PM

[spoogeman:]

There may be a close correlation between miles driven and the unemployment rate. We are a commuter nation until further notice.

2008 Sep 15 07:50 PM

[whidbey:]

Good going Saj, your guesses are as good as any, but don't be shocked if you are correct. Recessions and depressions tend to slow down consumption markedly. I suppose this means the SWF may cease to be interested in assets in the West? It might get bleak, but I think the BRIC countries will absorb more of the energy and maybe things will work out for the best with the USA. Cheaper prices are so helpful during depressions, don't you think?

2008 Sep 15 09:15 PM

[upnorth:]

oil companies dont realize they are going to overprice themselves<barrel of oil>right out of business,with all the people changing their vehicles,and living habits with energy efficient items,and some that do not rely on fossil fuels anymore are not going to convert back,they lost their business forever,no more suvs,big trucks unless you absolutely need them.They are going to have an item no one needs,because of their greediness and gouging,if they dont lower the $/litre amt soon they too,will be unemployed

2008 Sep 15 09:59 PM

[mangolfer:]

The price still has a long ways to fall before demand stops decreasing and levels off.

2008 Sep 16 06:58 AM

[mangolfer:]

The price has a long way to fall before demand stops falling

2008 Sep 16 07:00 AM

[john s. gordon:]

yes high unemployment means fewer miles driven, especially when your house & former work are 60 miles apart.
> jack

2008 Sep 16 08:42 AM

[donb:]

Yes, demand is falling, however - production is falling faster! Depletion is the real issue. Also, as prices decline projects are canceled, exploration reduced and the cycle of higher prices resumes. Patience is required!

2008 Sep 16 09:10 AM

[casey00001:]

Do you want to get real. Do you think Americans are going to start taking the Bus?

2008 Sep 16 10:25 AM

[ohm:]

The Saudis aren't stupid prices will drop until the world abandons alternate fuel & conservation. Then get ready for more of the same.

2008 Sep 16 11:12 AM

[kebu77:]

"... these are 12-month totals, which don't fully capture recent drops in consumption which have been relatively larger than those of several months ago. For example, you have to go back to 2002 to find June numbers lower than those of 2008, suggesting 12-month rolling totals will continue to fall."

And the data for the summer discretionary driving period is not even in yet. When the Sept. data is in, plot this graph on the monthly data, vs. the 12-mo. avg., and you are likely to see a very substantial trend toward reduced driving.

2008 Sep 18 05:43 PM