Reader Michael forwarded the current issue of The Energy Report by Phil Flynn at Alaron. It contends that demand destruction is proceeding at a rapid pace. It also highlights an issue discussed in a recent research report by Deutsche Bank, that energy demand forecasts by recognized bodies such as the EIA have been high, and by a considerable degree.
From The Energy Report:
It seems like Mother Nature is the only thing supporting this market as demand destruction might have more long term impact on the market than anything Gustav can throw at us. Even after Katrina oil demand dropped and so too did prices….
Take for example the news from the Energy Information Agency that revised downward its June oil demand by a stunning number. The EIA said that US oil demand in June was 793,000 barrels a day less than previously reported. That is down a whopping 1.17 million barrels a day from the same period a year ago and the lowest level for any June since 1998. That comes out to be 5.6% less than a year ago….
What is becoming clear to the market is the demand pullback in the US is rising to the level of historic proportions. Even the EIA is now saying that the drop in demand should send oil below $100 a barrel. The Chief of the EIA, Guy Caruso, said that prices could fall below $100 a barrel on slowing global demand and rising production in the US, Brazil and Canada, and from OPEC states such as Saudi Arabia and Angola. While Caruso said “most of the risk is on the upside,” and that it was not the official EIA prediction but added that a scenario of falling oil prices is “now closer to 50-50” if worldwide spare production capacity continues to increase from the current 1.5 million barrels per day (b/d) to 3-4 million b/d while global oil demand softens. Caruso then says that that scenario is now more realistic than any time in the past five years.
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my 1 cent opinion…
even with sub-$100 oil and lower food prices, US demand will not flip back on. I think that non-US downward wage pressures, US consumer debt and tighter credit has structurally reduced discretionary income for the next couple of years.
No mathematical models to support my assertion….it just “feels” that way. Hell when people are cutting back at the Olive Garden, people are seriously cutting corners to make ends meet.
This type of demand shift is starting to make people think about new paradigms. Yeterday, the FT had a piece citing a study by Booz & Co that said:
"The US could become a net exporter of gasoline by 2010, given shifts in demand, biofuel mandates and growth in alternative vehicle technology…Longer term, the consultancy notes that new auto technologies, such as plug-in hybrids, may mark “the end of the hydrocarbon era as we know it and usher in the era of electrified transportation’’
imo, this can't happen fast enough!
Someone needs to tell McCain that drilling for oil in Alaska is off the table, along with drilling on the outer shelf and all the other places his oil lobby wants to tap into ASAP!
I also agree with the previous post, which I think implies food costs and inflation will not follow oil down, and thus sustained consumer inflation will continue to undercut any growth that may surface.
I highly doubt there will be wheat, rice and corn wars which will find us going to the store and stocking up on super cheap food, and then waiting a few weeks to see if prices will keep dropping on groceries.
“It seems like Mother Nature is the only thing supporting this market as demand destruction might have more long term impact on the market than anything Gustav can throw at us”
Isn’t the reverse also true?
“It seems like demand destruction is the only thing keeping oil prices [sorta] low…”
I’ll never make a prediction on the short-term price of oil. Whatever I’d predict, it’d be wrong. Too many moving parts.
However, over the very long-term (20 years), population dynamics alone has me expecting much, much higher prices. Albert Bartlett has an interesting lecture on population dynamics.
And how much more are the OPEC countries consuming versus last year.
Europe
BRIC
NA (N. America)
Emerging
Need to look at the demand and supply figures in aggregate of these regions. This is the problem with so much analysis of this issue these days. US centric thinking/data is no longer sufficient and leads to false conclusions.
stuart,
I agree with your conclusion, but there is going to be a sharp worldwide slowdown. For now, we can still be somewhat US centric.
The decoupling thesis isn’t wrong, its proponents were just stating it wrong. There was no way the first go round that a sharp US slowdown wouldn’t affect the rest of the world, especially the BRIC’s. They will decouple after the fact, and emerge out economic malaise much faster than us, and hopefully help to bring us out of what is shaping up to be a long, deep recession.
I, for one, am bullish on US manufacturing and exports. Maybe not tomorrow, but in the next few years.
Stuart,
Let’s consider that, through globalization of production, distribution, finance, national economies have become very interpenetrated, i.e. no longer national but a fusion of national and transnational. This does not mean all are the same, only that – in uneven fashion – processes in one or more affect all others. There are economic and institutional reasons why the now more globally integrated BRIC and other EMs cannot be immune to recession in the U.S. Slowing in E. and SE Asia has already become evident just as it has in Europe — a globally synchronizing recession is underway; ‘decoupling’ never had any real basis.
So how did world consumption of crude oil play out during the early 1980s’ double slump:
Table 11.10 World Petroleum Consumption, 1960-2006 (Million Barrels per Day)
1979,,,65.22
1980,,,63.11
1981,,,60.94
1982,,,59.54
1983,,,58.78
1984,,,59.82
The 1979 level of consumption was not surpassed until 1989.
(http://www.eia.doe.gov/emeu/aer/txt/ptb1110.html)
Will this repeat? No. I expect it to be somewhat more severe or, depending upon perspective, beneficial.
I hope we don’t forget that the dollars we send over there, come back here in reinvestment, everything from real estate and (gasp) failing banks, to Bonds and Treasuries. As our debt increases, and capital is destroyed, don’t we kind of need oil to steadily increase so the ones with the money (THEM) have some to buy more debt (OURS)???? And don’t most come here to buy their dollars to initiate the purchase of oil ???
Don’t think we need any more USD in the system, and we definitely need the cash coming back in, cause we don’t have any money, honey.
anon,
true enough, the petrodollar recycle and its part in perpetuating what Michael Hudson call ‘the Treasury-bill standard’ is often overlooked these days.
Heck of a contradiction when very high priced oil may be required to support to one part of the system even though the same high price weakens others.
By the end of 2007, GCC Sovereign Wealth Funds (SWFs) will manage over $1 trillion.
GCC central banks – counting the non-reserve foreign assets of the Saudi Arabian Monetary Agency (SAMA) — will manage another $460 billion. Their combined portfolio will thus approach China’s $1.7-1.8 trillion portfolio in size. Adding McKinsey’s estimate for the “private assets” of major Gulf investors, including those of the ruling families, total Gulf investment abroad would far exceed $2 trillion. (Setser, December 2007)
Of course total for all oil exporters is higher, and substantial portion has recycled into Treasury paper, Agencies, et cetera.
Demand in usa is decreasing at fast pace,right, however what the explanation is to see lower inventories almost every month? supply is decreasing not increasing should be the answer and it is almost a year since that trend started to level off inventories to demand
This is consistent with my scenario of a WORLDWIDE collapse in consumer demand, not just the USA and Europe….
That consumer demand in the USA will collapse should not be in serious debate in my view. The cost of credit is soaring, its availability is diminishing as the Feds recent comprehensive nationwide survey of top lending officers showed…
And the hit to the wealth effect from the housing price collapse amplifies more deeply than other wealth effects; Mishkin’s recent paper made that pretty clear to this reader at least.
And it’s a pretty basic fact that stock markets are a leading indicator….not a coincident one and not a lagging one.
And the bourses in China and India BOTH are down more than 50%…. plunges in their consumer demand will surely follow. Anecdotally we know that non-industrial gold purchases are down over 40% in India (think of Indian women spending discretionary income on gold…)
These are but a few of the key indicators pointing to the implosion.
The problem is that the Fed is OVERLY restrictive, they are fighting the last war.
We are running a rapidly growing tail risk of HYPERDEFLATION. Flight to Treasuries is but another example of this scenario, in hyperdeflation, the smart money goes to the highest quality bonds.
I know this is a minority view, but I’m sticking to it.
Matt Dubuque
> And it's a pretty basic fact that stock markets are a leading indicator….not a coincident one and not a lagging one.
Recently the stock markets in the developed nations have been a lagging indicator.
anon 9:58 PM,
Appears that the U.S. has been exporting increasing quantities of crude and distillates, which may effect commercial inventories?:
Chart-
http://tonto.eia.doe.gov/dnav/pet/hist_chart/MTTEXUS1m.jpg
Yves,
I would expect much, much better from you. Guy Caruso is a joke, some sort of a bureaucratic clown. He has no idea what he is talking about and expects higher private investment to save the day(really, that his game plan).
http://www.youtube.com/watch?v=y13dNHFqeLM
Demand destruction is here to stay. As others upthread observed, when people stop going to the Olive Garden, you know times are tough.
Everyone I know has slowed spending. Even the ones with stable jobs and a good income. “Frugal is the new Cool” is real, and it’s here to stay. Dave Ramsey is becoming popular with people outside the churches, who simply want to be free of the debt yoke we’ve all been hauling around for two decades.
It’ll be a couple of years of consumer retrenching, for sure. It’s going to be harder going for foreign countries who have depended upon selling tons of crap here to drive their economies because people are, and will continue, to buy less of that crap.
Wow, lower oil prices amid a global economic slowdown. Big deal.
If it takes a global meltdown to bring down oil prices, we better hope the world stays weak until alternative energies comes online in commercially available quantities.
The Saudi’s have a few projects coming online in the next couple years. This should add a sustainable 1 million barrels per day. The can go higher, but it would lead to faster field depletion rates.
Also, OPEC may decide to cut production at existing fields to support prices. So whatever Americans have sacrificed by consuming less may be negated by OPEC action.
So the world must get much weaker, consume less, and stay in a depression-like condition to delay the onset of “peak oil”
Sad that we are getting excited about why oil prices are falling. Not due to surging supplies, rather falling demand.
Not good for global growth, global stock markets, and global employment.
No surprise here that U.S treasuries get a constant bid.
Oil demand is not some amorphous quantity which can just scale back in linear fashion. There is “froth” (elastic) demand which can be destructed easily. SUV usage, unnecessary journeys. There is also a base-load of inelastic demand – heating oil in northern states, aircraft etc.
Demand desatruction will look amazing when it first happens – but then it wil lhit a wall and each percentage of reduced oil usage wil lbe painful to the public and the economy. Oil prices could still be near $100 when demand is mostly inelastic.
My first question is why the EIA had to do a stunning revision to its earlier estimates.
Where did the inaccurate data come from that informed its earlier numbers?
Who fudged what?
And, why?
To those who predict a dampening effect on this reduction trend due to structural factors:
there are yet additional iterations of each of the financial, credit, economic factors in the economy to play out.
Each of these iterations will produce another downward plateau in demand.
Remember the US’ energy input to economic output largesse.
We have a long ways to go.
Oil Price. It’s a coming down, it’s a coming down, it’s a coming down, it’s a coming DOWN.
Seventy Bucks and holding.
My hooptie rollin’, tailpipe draggin’
Heat don’t work an’ my girl keeps naggin’
Six-nine Buick, deuce keeps rollin’
One hubcap ’cause three got stolen
Bumper shook loose, chrome keeps scrapin’
Mis-matched tires, and my white walls flakin’
Hit mickey-d’s, Maharaji starts to bug
He ate a quarter-pounder, threw the pickles on my rug
Runnin’, movin’ tabs expired
Girlies tryin’ to dis ‘n say my car looks tired
Hit my brakes, out slid skittles
Tinted back window with a bubble in the middle
Who’s car is it? Posse won’t say
We all play it off when you look our way
Rollin’ four deep, tires smoke up the block
Gotta roll this bucket, ’cause my Benz is in the shop
now, let’s ban plastic bags, plastic single use water bottles and all that wrap used for products and knock that consumption down even more.
wintermute,
what interfuel substitutions are you allowing for over what periods. other variables might be relations between primary, wholesale, retail, then as well, efficiency changes in cap goods — sure elasticities are not linear but neither are they particularly predictive and if we’re talking prices of oils, we’re talking prices which are only indirectly related to physical supply/demand.
anon 4:42,
latest monthly at tod indicates that production has been, if not ‘surging’, definitely rising. saudi production rates are not exactly known but if i had been in their shoes i’d not have increased earlier and would be cutting by now. looks like the same old lags between production/consumption which have given us gluts before.
Let me reduce the whole oil argument to simplicity. We, in the US, no longer control the supply side; on the demand side we may have a small influence but no more than that. Do I need to expand the argument any further?