Economic downtown

Here’s what the US Energy Information Administration said today in This Week In Petroleum about the impact of the economic downturn and oil prices on petroleum demand:

U.S. consumption of oil, which has fallen by about 1 million barrels per day (bbl/d) in 2008 relative to 2007, is expected to fall again by a smaller amount in 2009. In contrast to 2008, where skyrocketing prices drove consumption lower, the 2009 decline will be driven by reduced economic activity and will likely be mitigated by substantially lower average oil prices in 2009 compared to 2008.

They are revising their analysis of global oil consumption, production capacity, and exploration and production investment and revised forecasts will be issued in the next Short-Term Energy Outlook (STEO), to be released on November 12.

On October 30th, The US Bureau of Economic Analysis (BEA) said:

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — decreased at an annual rate of 0.3 percent in the third quarter of 2008, (that is, from the second quarter to the third quarter), according to advance estimates released by the Bureau of Economic Analysis.  In the second quarter, real GDP increased 2.8 percent.

Will US demand for petroleum recover?

I’ve been watching US demand for petroleum since July when I first posted on the subject. Demand continued to decline over the summer reaching a low of 18.3 at the beginning of October – well below the peak of 22 million barrels a day in February 2007. The last time petroleum consumption was this low was in 2001.

Now demand has turned the corner and is starting to pick up again. Lower prices for petroleum products are presumably driving this. The question is how much of demand will be recovered? A lot will depend on the state of the economy. But how many consumers may have permanently changed their driving behaviour, or purchased fuel-efficient vehicles? How many have developed an aversion to petroleum products after being stung by the high prices?

Related news article:

• U.S. oil demand down 2 million bpd: BP, Globe and Mail, November 3, 2008

Can we trust governments to manage resources?

This job posting at the provincial government of British Columbia contains quite frank language about the goals of the position:

As the Resource Development Analyst, you’ll anticipate and resolve a broad range of stakeholder concerns and maximize resource development and provincial revenues from petroleum and natural gas, underground storage and geothermal resource tenures. … make recommendations which attempt to address stakeholder concerns and minimize impacts on provincial revenues.

Anyone reading this might get the impression that the role of the Ministry of Energy, Mines and Petroleum Resources is to maximise development and revenues.

What is its goal? I would have expected the job description to at least mention natural resources, the environment, the public interest and the interests of future generations; and not to imply that land planning boils down to “us” the government and “them” the stakeholders. That assumes that all interests other than the private development interests are adequately represented by the stakeholders and that government can take sides with development and try to maximize revenue.

Oil at the “Break Point”

I just read the report about the current oil crisis that Daniel Yergin gave to US Congress in June. It summarises all the issues very well, and I think it’s a much more informed and less-biased analysis than many I have seen. He says the current high prices are caused by a confluence of factors including “traditional fundamentals” such as supply problems, and “new fundamentals” such as increased investment costs due to shortages of skilled labour and materials, slowing down supply expansion.

He then gives his views on the issue that everyone seems to be talking about – the role of financial markets or “speculators”. I don’t think he agrees with the view that speculators are to blame for distorting the market but he does talk about a “shortage mentality” that is probably responsible for driving up oil prices higher than they need to be. Here’s an excerpt.

the general expectation of very tight supplies is based upon the assumption that the global market cannot generate the responses that are warranted—in terms of demand and efficiency; in terms of new supplies and timely investment; and in terms of renewables, new technologies, and alternatives. Delays and postponements are read as predictions of shortages. Meanwhile, developments of great importance—such as the very large discoveries in offshore Brazil—get relatively little attention. Downward shifts in future demand from what would have been anticipated two years ago are discounted.

This sounds more plausible to me than all that talk about speculators deliberately manipulating the market for personal gains, or indulging in irresponsible gambling. It’s more of a herd-mentality argument where market information and expectations are self re-enforcing and begin to ignore contrary evidence. Demand in the US is dropping fast and OPEC and non-OPEC supply is slowly coming online now. What happens if prices do drop sharply? Will the speculators be left with worthless futures contracts that they can’t sell?

The recent decline in US petroleum consumption

The graph below shows US petroleum consumption since 1995. Demand peaked in March 2007 and the decline since then is quite obvious – it is now back down to 2004 levels. Remember how everyone used to say demand is inelastic? It will be interesting to see how long the decline continues. Will it cause a drop in prices or will rest-of-world demand keep the price up, or will supply increases come online in time to prevent further decline?

Related news articles:

• Driving Less, Americans Finally React to Sting of Gas Prices, a Study Says, NY Times, June 19, 2008.
• Prices Curtail U.S. Gasoline Use, Wall Street Journal, June 20, 2008.
• Gas demand may have topped off, Bloomberg, June 19, 2008.
• With gas prices soaring, Americans driving less, Associated Press, June 19, 2008.
• Gas May Finally Cost Too Much, BusinessWeek, April 23, 2008.
• Short-Term Energy Outlook, US Energy Information Administration.