High oil prices will reduce oil demand

As oil prices threaten to hit new highs (at least in nominal terms; adjusted for inflation, the price as of July 3, 2008 was close to $190 a barrel), it is hoped that lower demand will help to rebalance the market. While it is likely to help, it alone will not be at a level that would offset the possible loss of 3-4 mb/d of Russian oil, depending on how the sanctions play out. (It seems unlikely that Russian oil exports will be halted and the loss of supply may not last 6-8 weeks as Russia redirects its supplies to countries that do not subject it to sanctions.)

Suggestions by environmental groups that the oil crisis should put more emphasis (translation: spending) on ​​battery electric vehicles in California are apparently in response to California Governor Gavin Newsom’s announcement that the state had sold its one-millionth BEV (which it incorrectly calls ZEV) and “This milestone is a testament to the success of California’s industry-leading policies and investments to support our bold ZEV goals while lowering costs for all.” (Translation: we spent a bucket full of money).

Unsurprisingly, the Twitterverse derided the suggestion, likening it to solving homelessness by telling them to buy expensive homes. It should be noted that California also leads the country in luxury car sales, estimated at 28% of the market; BEV sales were around 13% (and probably many BEV sales were included in the luxury car sales data).

Theoretically, oil demand is easy to predict, given prices and economic activity. The reality is a bit more different, especially for short-term demand swings. On the one hand, the price of oil should be back to “normal” by the summer, one way or another. Spending big on an electric vehicle – or other more efficient but expensive capital equipment – ​​is not something most people do, in part because there are so many ways to reduce consumption with minimal expense or effort.

Most Americans own two cars, often a smaller one used for commuting and short trips. Driving your Ford Fusion instead of your Ford Explorer improves your gas mileage by 18 mpg to 23 mpg in city driving, or 21%. Except those mileage estimates tend to be overstated, and no one is going to spend all their driving on the second car, but it shows how the average person can cut their oil consumption by 5% in the short term.

There is supporting data: the figure below compares the annual change in vehicle mileage for new car sales with the mileage achieved by the operating fleet. In 2008, when oil prices soared, new cars sold improved their mileage by 0.7%, while the fleet in operation improved by 2.7%, resulting in a saving of around 200 tb/d. Lots of SUVs were parked in 2008.

But the following year, the situation changed, partly because prices moderated, but it should be noted that consumer purchases shifted in particular towards more efficient vehicles, with an increase of 4.5%, one of the largest increases in history. 2008 represented conservation, while 2009 could be called “demand destruction”, the term loved by many. At this point, it is unclear whether the world will see demand destruction in the form of increased biofuel production, increased BEV sales, or the replacement of oil-fired power plants with renewable power plants ( and gas-fired plants, in all likelihood), but conservation should be expected.

In the short term, it seems likely that US consumers will revert, as in the 2000s, to “stayaways,” that is, planning summer vacations that don’t involve long trips. This is when many are planning their summer trips and the current spike in gas prices will likely have a similar effect. The figure below shows the year-over-year trend in summer gasoline consumption in the United States. In 2008, summer gasoline demand fell by more than 450 tb/d and this level of savings could easily be achieved this year.

Other countries won’t see the same impact, especially in Europe where gasoline taxes are driving down crude prices in a relative sense. And some countries subsidize or control gasoline prices, which reduce conservation. If a recession were to hit, it would also mean a significant reduction in oil demand: from 2007 to 2009, OECD oil demand fell by 4 mb/d. While the current problems could see another recession, it would hopefully be milder than in 2008/9, but an overall decline of more than 1mb/d should still be expected this year.

Barely enough to offset Russia’s 8mb/d of oil exports, but that’s not necessary. China is Russia’s largest customer, with about 2 Mb/d of purchases, and it could easily increase this amount, not without upheaval and pressure on prices (down for Russian oil, up for all the others).

But as with climate change, this is to avoid focusing on a potential “quick fix” or the Manhattan Project. A wide variety of supply and demand shifts are expected to rebalance the market later this year, for example, a nuclear deal with Iran and the easing of sanctions on Venezuelan oil, as well as higher investment in the US shale patch, and current price levels are clearly unsustainable.


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Felix J. Dixon