Tuesday, March 04, 2008

A Stall Point for Oil?

It's been a long time since the oil markets offered much good news, particularly on the supply side. Since the end of 2002, a litany of strikes, war, social unrest, sanctions, and other factors have contributed to oil's volatile climb from the mid-$20s to yesterday's settlement at $102.45 per barrel. Now we are treated to the possibility of armed conflict between three South American nations that between them account for about 5% of global oil production and exports. With demand in Asia compounding these pressures, it's ironic that the best news the market might get for a while should come in the form of consumption data for the world's largest oil importer, reflecting the price elasticity of demand and the impact of higher biofuels output.

The Energy Information Agency's figures for petroleum supply and demand in December 2007 are coming in, now, and the resulting annual totals represent milestones in several categories. Importantly, they show that as a result of the combination of higher oil and refined product prices and a slowing economy, and after factoring in the contribution of biofuels under the previous Renewable Fuel Standard, the growth of US oil consumption seems to have reached a stall point. And while in the past I might have been tempted to add, "for now," it isn't easy to envision the circumstances under which that growth would return to previous levels, even in a recovering economy.

With the addition of December's 9.25 million barrels per day (bpd) of finished gasoline supplied to the US market, our 2007 average consumption of 9.29 million bpd was only 0.4% higher than 2006. And when the larger quantity of ethanol blended into gasoline last year is factored in, the quantity of petroleum-based gasoline supplied actually declined by about 0.6%. In addition, total crude oil and petroleum product consumption in 2007 was essentially unchanged versus 2006, at 20.7 million bpd, before factoring in the 96,000 bpd year-on-year increase in ethanol use. Our net imports of crude oil and petroleum products were down, as well.

With our total oil demand essentially flat for four years, the US may have reached its petroleum high-water mark, from which consumption will gradually decline. Even if the benefit of more efficient vehicles is partially offset by a growing population and continued increases in annual miles driven, alternative fuels have finally reached a scale at which they are beginning to erode oil's market share in transportation, where it has been unchallenged for a century. Of course, halting US oil demand growth doesn't eliminate our 12 million bpd of net crude oil and refined product imports.

Skeptics would be right to remind us that we've been here before, and it didn't last. Between 1978 and 1983, total US oil consumption fell by almost 20%, before resuming its steady growth and breaking the old record in 1998. However, much has changed since then. Better technology and the urgency of addressing climate change have altered the energy landscape so much that it's even possible to extrapolate from static US oil demand to a future peak in global oil demand, a twist on the notion of Peak Oil that has nothing to do with the ongoing debate about how many barrels we can coax out of the earth. Reaching that point will require much hard work, including ensuring that when our economy recovers from its current woes, it is more energy efficient and makes better use of all the domestic energy sources at our disposal.

No comments: