The Demand Response

An article on the relationship between oil prices and oil demand in today's Wall Street Journal reveals that data to be released shortly by the International Energy Agency will show a slight decline in oil consumption among the OECD countries during 2007. The article also quotes Department of Energy figures showing that US consumption for last year was up slightly, by 0.2%. Compared to our average annual increase from 2000-2006 of 0.8%, this appears to reflect some response to higher oil prices, though as the article notes, it is disappointingly small, compared to the dramatic reduction in demand experienced in the late 1970s and early 1980s. But while data at this extremely high level of aggregation are relevant to global oil supply and demand, and thus oil prices, they mask some very interesting details, including the impact of our increasing use of ethanol.

The article doesn't provide any information on gasoline demand, and the online database of the Energy Information Agency of the Department of Energy still only reflects actual supply and demand through October 2007. When I combine the EIA's monthly data for gasoline supplied with their weekly estimates for November and December, gasoline consumption for the year seems to have increased by about 0.5%. That shouldn't be too surprising, because despite the big run-up at the end of last year, average retail gasoline prices for 2007 were only about 20 cents per gallon higher than in 2006. It's worth noting, however, that 2007's retail gasoline prices were a full dollar per gallon higher than the average for 2003-2004, when many of the new models being launched at the current Detroit Auto Show were planned.

But how do these figures look if we adjust for the contribution of ethanol? As of October, ethanol use in 2007 was on a pace to reach 6.8 billion gallons for the year, compared with 5.4 billion gallons in 2006. If we back the difference out of the approximately 143 billion gallons of motor gasoline supplied in the US last year, then on a comparable basis our consumption of petroleum-based gasoline actually shrank by about 0.5%. Making the same adjustment to the aggregate crude oil and petroleum product demand figure cited by the Journal suggests that total oil demand in the US might have actually declined by 0.2% last year. That's consistent with the proportionally larger apparent drop in US imports of crude oil and petroleum products.

I want to be careful about drawing sweeping conclusions from the hodgepodge of actual and estimated data I have relied on above. However, a couple of things seem reasonably clear. Although fuel prices in the US are high enough to cause consumers serious pain, they aren't yet high enough to stimulate dramatic changes in consumption patterns, even if they seem to be driving consumers in the direction of choosing more efficient new cars. US motor fuel demand is still increasing, but apparently at a rate slower than the growth of the population. At the same time, for all its shortcomings, our only consistent alternative fuel strategy for the last two decades--corn ethanol--is finally growing fast enough to affect the country's overall oil supply and demand balance. These two observations offer a ray of hope that the combination of higher biofuels production and fuel economy mandated by the recent Energy Bill will be able to reverse--however gradually--the steady increase in US oil imports that we have experienced since the late 1980s.