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Energy Economics: Is Energy Consumption Pointing To A Recession?

Economic theory suggests that pricing for crude oil should be rational. Oil is a commodity in a competitive market. Therefore the supply and demand curves should intersect to attain a market equilibrium price reflecting the marginal cost supplied. Crude rarely follows this economic theory in the short term. As Dan Dicker of Mercbloc author of "Shale boom, shale bust" states: "It's always tough because the oil market has never really seen an equilibrium price - it's nothing but spikes up and spikes down and I think it will continue to do that."

Crude oil pricing in 2015 was down over 30%. Many analysts have argued this was driven by slowing demand, as opposed to excess supply. Energy consumption has always been used as an economic indicator of growth similar to the transportation sector in Dow Theory. Economic growth implies increasing factory production and subsequent transportation of goods and services. Energy consumption increases when factories are producing more goods. Energy consumption should also increase when more services are sold or deliveries are made. Debating Dow Theory is not the intent of this post so let's assume reduced energy consumption has predictive value when forecasting economic growth.

The first table shows the annual consumption of liquid fuels. The second table shows the growth or net change of annual consumption.

World Liquid Fuel Consumption

mBOPD US share China share Other share World
2007 20.68 23.8% 7.48 8.6% 58.56 67.5% 86.72
2008 19.50 22.7% 7.70 8.9% 58.85 68.4% 86.05
2009 18.77 22.1% 8.07 9.5% 58.13 68.4% 84.97
2010 19.18 21.8% 8.94 10.1% 60.03 68.1% 88.15
2011 18.88 21.2% 9.50 10.7% 60.71 68.1% 89.09
2012 18.49 20.5% 10.18 11.3% 61.66 68.3% 90.33
2013 18.96 20.8% 10.48 11.5% 61.84 67.7% 91.28
2014 19.11 20.7% 10.85 11.7% 62.49 67.6% 92.45
2015 fcst 19.40 20.7% 11.18 11.9% 63.24 67.4% 93.82
2016 fcst 19.56 20.5% 11.50 12.1% 64.16 67.4% 95.22

Annual Consumption Growth

mBOPD US Y/Y China Y/Y Other World Y/Y
2008 -1.18 -5.7% 0.22 2.9% 0.29 -0.68 -0.8%
2009 -0.73 -3.7% 0.37 4.8% -0.72 -1.07 -1.2%
2010 0.41 2.2% 0.87 10.8% 1.90 3.17 3.7%
2011 -0.30 -1.6% 0.57 6.3% 0.68 0.95 1.1%
2012 -0.39 -2.1% 0.67 7.1% 0.96 1.24 1.4%
2013 0.47 2.5% 0.31 3.0% 0.17 0.95 1.1%
2014 0.14 0.8% 0.37 3.5% 0.65 1.17 1.3%
2015 fcst 0.29 1.5% 0.33 3.0% 0.75 1.37 1.5%
2016 fcst 0.16 0.8% 0.32 2.8% 0.92 1.40 1.5%

Source: EIA Short-Term Energy Outlook, December 2015

mBOPD: millions of Barrels of Oil Per Day

Points worth when reviewing these tables:

  1. The impact of the financial crisis in 2008 clearly shows up in the consumption trends. US consumption declined in four out of five years beginning in 2008.
  2. World energy consumption recovered more quickly showing steady annual growth after 2009, primarily because of the strength of the China economy.
  3. The US is leading the world in the effort to reduce carbon emissions through reduced reliance on petro fuels. While this impact is relatively small in a one year optic, the impact over longer periods is considerable. Liquid fuels accounted for 40% and 36% of total US energy consumption in 1990 and 2013 respectively per the Department of Energy. They forecast this to continue to drop to 33% by 2040. This trend is rarely mentioned when analysts discuss the consumption trends as a tool for predicting GDP.

This table tells a pretty simple story. Liquid fuel consumption is growing in spite of the trend toward alternative energy. The 2015 domestic consumption growth of 1.5% was twice that of 2014. China consumption growth of liquid fuels slowed modestly but is still chugging along at a strong pace. The forecast for 2016 shows the government is projecting the US growth to slow next year to that of 2014 probably because of the start of the Federal Reserve interest rate policy. A recession in 2016? Only if these forecasts are way off. The years 2008 and 2009 is what a recession looks like and despite the doomsayers, there are currently no sign that this is in the cards in my view. The Federal Reserve has access to the most accurate information about economic trends and it appears highly unlikely that they would be less accommodating with interest rate policy if they saw signs of a recession.