Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
4 Insurance Policies You Should Consider Buying - 6th May 21
Fed Taper Smoke and Mirrors - 5th May 21
Global Economic Recovery 2021 and the Dark Legacies of Smoot-Hawley - 5th May 21
Utility Stocks Continue To Rally – Sending A Warning Signal Yet? - 5th May 21
ROIMAX Trading Platform Review - 5th May 21
Gas and Electricity Price Trends so far in 2021 for the United Kingdom - 5th May 21
Crypto Bubble Mania Free Money GPU Mining With NiceHash Continues... - 4th May 21
Stock Market SPX Short-term Correction - 4th May 21
Gold & Silver Wait Their Turn to Ride the Inflationary Wave - 4th May 21
Gold Can’t Wait to Fall – Even Without USDX’s Help - 4th May 21
Stock Market Investor Psychology: Here are 2 Rare Traits Now on Display - 4th May 21
Sheffield Peoples Referendum May 6th Local Elections 2021 - Vote for Committee Decision's or Dictatorship - 4th May 21
AlphaLive Brings Out Latest Trading App for Android - 4th May 21
India Covid-19 Apocalypse Heralds Catastrophe for Pakistan & Bangladesh, Covid in Italy August 2019! - 3rd May 21
Why Ryzen PBO Overclock is Better than ALL Core Under Volting - 5950x, 5900x, 5800x, 5600x Despite Benchmarks - 3rd May 21
MMT: Medieval Monetary Theory - 3rd May 21
Magical Flowering Budgies Bird of Paradise Indoor Grape Vine Flying Fun in VR 3D 180 UK - 3rd May 21
Last Chance to GET FREE Money Crypto Mining with Your Desktop PC - 2nd May 21
Will Powell Lull Gold Bulls to Sweet Sleep? - 2nd May 21
Stock Market Enough Consolidation Already! - 2nd May 21
Inflation or Deflation? (Not a silly question…) - 2nd May 21
What Are The Requirements For Applying For A Payday Loan Online? - 2nd May 21
How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part1 - 1st May 21
INDIA COVID APOCALYPSE - 1st May 21
Are Technicals Pointing to New Gold Price Rally? - 1st May 21
US Dollar Index: Subtle Changes, Remarkable Outcomes - 1st May 21
Stock Market Correction Time Window - 30th Apr 21
Stock Market "Fastest Jump Since 2007": How Leveraged Investors are Courting "Doom" - 30th Apr 21
Three Reasons Why Waiting for "Cheaper Silver" Doesn't Make Cents - 30th Apr 21
Want To Invest In US Real Estate Market But Don’t Have The Down Payment? - 30th Apr 21
King Zuckerberg Tech Companies to Set up their own Governments! - 29th Apr 21
Silver Price Enters Acceleration Phase - 29th Apr 21
Financial Stocks Sector Appears Ready To Run Higher - 29th Apr 21
Stock Market Leverage Reaches New All-Time Highs As The Excess Phase Rally Continues - 29th Apr 21
Get Ready for the Fourth U.S. Central Bank - 29th Apr 21
Gold Mining Stock: Were Upswings Just an Exhausting Sprint? - 29th Apr 21
AI Tech Stocks Lead the Bull Market Charge - 28th Apr 21
AMD Ryzen Overclocking Guide - 5900x, 5950x, 5600x PPT, TDC, EDC, How to Best Settings Beyond PBO - 28th Apr 21
Stocks Bear Market / Crash Indicator - 28th Apr 21
No Upsetting the Apple Cart in Stocks or Gold - 28th Apr 21
Is The Covaids Insanity Actually Getting Worse? - 28th Apr 21
Dogecoin to the Moon! The Signs are Everywhere, but few will Heed them - 28th Apr 21
SPX Indicators Flashing Stock Market Caution - 28th Apr 21
Gold Prices – Don’t Get Too Excited - 28th Apr 21
6 Challenges Contract Managers Face When Handling Contractual Agreements - 28th Apr 21
Corsair H150i Pro iCUE Firmware Update Says Bye Bye - H100i, H115i, Bricked Jet Engine Fans Fix - 27th Apr 21
Bude Cliff Walk and Secluded Pebble Beach Tour in VR 360 - Cornwall UK Holidays 2021 - 27th Apr 21
The Top 3 CBD Oils with Anti-Inflammatory Properties for Stopping Pain - 27th Apr 21 -
Biden’s Green New Deal - 27th Apr 21
Gold Stocks Upleg Accelerates - 27th Apr 21
The Tax Plan to Slay the Stocks Bull Market? - 26th Apr 21
See What’s Next for European Markets - 26th Apr 21
Gold's Perfect Storm - 26th Apr 21
Biden’s ‘Green Reset’ Could Be Great for Silver - 26th Apr 21
SPX Stock Market Short Squeeze – Here Or Not? - 25th Apr 21
Fiscal Guilt: What a Shift in Monetary Policy Portends for Investors - 25th Apr 21
Gold Price Reversal? Have No Fear! - 24th Apr 21
No Fear Of Inflation; Threat Of Deflation - 24th Apr 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

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