Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
Stock Market Increasing Technical Weakness - 22nd July 19
What Could The Next Gold Rally Look Like? - 22nd July 19
Stock Markets Setting Up For A Volatility Explosion – Are You Ready? - 22nd July 19
Anatomy of an Impulse Move in Gold and Silver Precious Metals - 22nd July 19
What you Really need to Know about the Stock Market - 22nd July 19
Has Next UK Financial Crisis Just Started? Bank Accounts Being Frozen - 21st July 19
Silver to Continue Lagging Gold, Will Struggle to Overcome $17 - 21st July 19
What’s With all the Weird Weather?  - 21st July 19
Halifax Stopping Customers Withdrawing Funds Online - UK Brexit Banking Crisis Starting? - 21st July 19
US House Prices Trend Forecast 2019 to 2021 - 20th July 19
MICROSOFT Cortana, Azure AI Platform Machine Intelligence Stock Investing Video - 20th July 19
Africa Rising – Population Explosion, Geopolitical and Economic Consquences - 20th July 19
Gold Mining Stocks Q2’19 Results Analysis - 20th July 19
This Is Your Last Chance to Dump Netflix Stock - 19th July 19
Gold and US Stock Mid Term Election and Decade Cycles - 19th July 19
Precious Metals Big Picture, as Silver Gets on its Horse - 19th July 19
This Technology Everyone Laughed Off Is Quietly Changing the World - 19th July 19
Green Tech Stocks To Watch - 19th July 19
Double Top In Transportation and Metals Breakout Are Key Stock Market Topping Signals - 18th July 19
AI Machine Learning PC Custom Build Specs for £2,500 - Scan Computers 3SX - 18th July 19
The Best “Pick-and-Shovel” Play for the Online Grocery Boom - 18th July 19
Is the Stock Market Rally Floating on Thin Air? - 18th July 19
Biotech Stocks With Near Term Catalysts - 18th July 19
SPX Consolidating, GBP and CAD Could be in Focus - 18th July 19
UK House Building and Population Growth Analysis - 17th July 19
Financial Crisis Stocks Bear Market Is Scary Close - 17th July 19
Want to See What's Next for the US Economy? Try This. - 17th July 19
What to do if You Blow the Trading Account - 17th July 19
Bitcoin Is Far Too Risky for Most Investors - 17th July 19
Core Inflation Rises but Fed Is Going to Cut Rates. Will Gold Gain? - 17th July 19
Boost your Trading Results - FREE eBook - 17th July 19
This Needs To Happen Before Silver Really Takes Off - 17th July 19
NASDAQ Should Reach 8031 Before Topping - 17th July 19
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Crude Oil Demand Destruction Overdone?

Commodities / Crude Oil Aug 15, 2008 - 12:08 PM GMT

By: Andy_Sutton

Commodities

Best Financial Markets Analysis ArticleMuch ado has been made of ‘demand destruction', an economic term that refers to declining demand for a good due to high prices. The past month or so the mainstream US press has latched onto demand destruction as a reason for the decline in oil prices much in the same way they blamed speculators for high oil prices just a few weeks earlier.

Also, when talking about demand destruction, they will refer to US numbers only; conveniently forgetting the rest of the world. The mindset here is still that the US is the top dog and the rest of the globe is irrelevant. So let's indulge them in their narrow-mindedness for a minute and look only at US consumption as presented by the Energy Information Administration.


Overall oil consumption in the United States has actually been on the rise for the past 3 weeks during this period of unprecedented ‘demand destruction'. This is supported by the EIA's own numbers. (See Chart Below).

From the high of 5/23/2008 at 20.807 million barrels per day (bpd), there was a drop of 4.34% to 19.903 million bpd on 07/18/2008 . Since mid-July, usage has risen 2.36% to 20.372 million bpd.

While it will take some examination of the price and usage trends going forward, the data at this time point to demand destruction occurring somewhere in the $145/bbl range with usage picking up as prices fell back from those levels. If this is truly the correct analysis, deduction would tell us we should soon see usage return to spring levels. However, there are seasonal components involved as well. Gasoline usage typically falls as summer comes to an end. There are one or two ‘shoulder' months (August/September), then usage starts to switch over to heating. I would opine that much of Americans' driving is discretionary, in that we can willfully choose to cut back. I would counter that heating tends to be more non-discretionary. Sure, people can turn the thermostats back a few degrees, but traditionally heating demand has been more price inelastic than driving demand. This winter will prove interesting in terms of usage.

To look at a more long-term picture, I am including a chart that lists usage in the United States from the beginning of 2000. Since then, oil has risen nearly 10-fold, yet there has never been a sustained period of contraction in oil usage here in the US . This while overseas usage has literally exploded. Notice that the only two real decreases in oil consumption occurred at times when the US was either in or near a recession; NOT when the price of oil was spiking. This argues that petroleum usage is more a function of economic growth than of price; an assertion I have made for some time.

One must understand that there are many factors other than price and supply which drive demand. If we were seeing this price spike in a time of low debt load and overall economic prosperity, $4 gas wouldn't matter as much to people. Note the prior observation that usage appears to be more a function of growth than price. However, when people are relying on credit cards and other types of debt to make ends meet, and their wages lose ground each year to inflation, then $4 gas is suddenly more significant.

Much like the recent action in the Dollar, oil bears have feasted on the notion that the rest of the world will follow the US into a recession. (A recession that, by the way, our leaders still refuse to acknowledge exists). It is pretty telling that we're in such dire straits that we have to rely on bad things happening to others to continue our own fallacy of prosperity.

Changing of the guard?

In looking at the lines of demarcation, it is worth noting that it is the OECD countries that appear headed for recession and theoretical reduced oil consumption while the rest of the world appears to be relatively unscathed so far. Granted, with the credit infection that overspreads the globe, this could certainly change. From the International Energy Agency's numbers, we see the following with regard to world oil demand and supply:

2007 featured a 500,000 bpd shortfall or a yearly shortfall of 182.5 million barrels. Interestingly enough, 2008 shows a small surplus so far, but the size of that surplus dropped in the second quarter despite record high oil prices and the demand destruction parroted by the mainstream press

Lastly, the engines of oil consumption, China and OPEC are shown. While their petroleum usage is dwarfed by that of the US (for now), the trends are solid and distinct.

In conclusion, demand destruction certainly occurred here in the US earlier this summer. I argue this is more due to economic malaise as opposed to high prices. However, over the course of the past month, usage has increased as prices fell off their recent highs and Americans received stimulus checks. The reality of increased usage has been almost totally ignored by the press as they stick to ‘demand destruction'. In truth, nothing could be worse than the recent decline in oil prices coupled with economic ‘stimulus'. It will encourage people who had been conserving to return to life as usual. Political and economic incentives to develop alternative energy sources will disappear. Once again our energy independence could be delayed and we'll continue to rely on foreign oil. Real change is more than a political slogan; it is a long, painful process and I fear that our long term well-being has been sacrificed once again at the altar of political convenience.

By Andy Sutton
http://www.my2centsonline.com

Andy Sutton holds a MBA with Honors in Economics from Moravian College and is a member of Omicron Delta Epsilon International Honor Society in Economics. His firm, Sutton & Associates, LLC currently provides financial planning services to a growing book of clients using a conservative approach aimed at accumulating high quality, income producing assets while providing protection against a falling dollar. For more information visit www.suttonfinance.net

Andy Sutton Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

George
16 Aug 08, 11:35
Crude Oil Demand Destruction Overdone?
I don't want to say government statistics are intentionally faulty but just like the severely flawed CPI data which didn't accurately reflect the consumer impact of increased costs of corn, wheat, and oil, your stats are not telling the real story.

I can tell you first hand that since May '08 demand destruction was in effect on United States highways. I have traveled major highways in a large city for 17 years and I can tell you for a fact there has been at least a 30% reduction in traffic, and of the traffic on the road there has been at least a 30% increase in cars replacing SUV's, trucks, and vans. Regardless of what the status of other countries economic conditions are, US$4 / gallon gasoline will create enough demand desctruction and political action to decrease oil usage. Further, the US median income is in a better position to adjust to the increase in oil prices than the median income of India and Chinese citizens.

Lastly, if Asia is in the beginning of a an epic growth cycle, they are going to be in a better position to immediately adopt to alternate energy sources as their infrastructure in not yet complete.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules