WSJ
OCTOBER 17, 2008 Drop in Oil Demand to Continue
Lure of Falling Prices is Outweighed by Broader Economic TroublesBy NEIL KING JR.Article
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For all the talk of the Great Depression, this year for the oil industry suddenly looks a lot like 1979, when high oil prices and then a sharp recession sent world-wide crude demand plummeting.
AFP/ImageforumBut this time there's a big difference. During the last oil shock, prices stayed high for several years. This time, the worsening U.S. economy continues to gnaw into demand for everything from gasoline to asphalt even as fuel prices plunge.
The dramatic drop in U.S. oil demand -- down more than 6% in July over a year ago -- is yet another symptom of the depth of the economic malaise now sweeping across the industrialized world. And as U.S. unemployment rises and retail sales and manufacturing orders slump, the world's largest consumer of oil looks set to use even less of it next year.
Increasing gloom over the world economy has helped shove down oil prices at a dizzying rate. U.S. benchmark crude on Thursday fell to less than half its all-time high, set just three months ago, of $147 a barrel. At noon Thursday, oil had fallen 6.06% to $70.02 on the New York Mercantile Exchange, down $4.52.
In response, the big producers within the Organization of Petroleum Exporting Countries agreed to meet next week in Vienna to weigh a production cut in a bid to firm up prices. The cartel, supplier of more than a third of the world's oil, had planned to hold an emergency session in mid-November, but the plunge in prices has spread alarm among countries such as Nigeria and Venezuela that have grown heavily dependent on rising crude revenue.
Events over the last months have stunned oil analysts almost as much as bankers and stockbrokers. For the first time since the last U.S. recession in 1992, world oil demand this year could end up essentially flat despite robust growth in Asia and the Middle East, a development few predicted even six months ago.
AFP/ImageforumMost private forecasters went into the year predicting world oil demand would jump by around 1.3 million barrels a day in 2008. As prices soared in the spring, Goldman Sachs went so far as to predict that robust demand and crimped supply could send prices spiraling to as high as $200 a barrel by next year.
But events in the U.S. changed all that. The U.S. in July consumed 19.4 million barrels of oil a day, a drop of 1.3 million barrels over last year. Many analysts predict the U.S. may shave off another half-million barrels a day next year, which would put U.S. consumption about where it was a decade ago. The world this year is consuming around 86.3 million barrels a day, up only 200,000 barrels a day over last year.
Falling oil prices offer a rare flash of good news for the U.S. economy. Most analysts were predicting just weeks ago that oil would average around $105 a barrel next year. If the price instead stabilizes at around $80 a barrel, as many now expect, "that will amount to a $275 billion stimulus package to the U.S. economy," says Lawrence Goldstein, an analyst with the Energy Policy Research Foundation.
Yet for now, all signs suggest that the troubled economy will continue to dwarf the fall in pump prices as airlines, trucking companies and commuters continue to cut back. "What is happening now is that the economic slowdown is trumping the downturn in prices," says Tancred Lidderdale, a petroleum supply expert at the U.S. Energy Information Administration.
U.S. commuters and companies began sharply paring fuel purchases earlier this year as pump prices soared to over $4.10 a gallon nationwide by July. The cuts were most dramatic in California, where diesel sales fell 9% in the second quarter over the year before. California gasoline sales in June were off 7.5% from the same month last year.
"Numbers like that are close to being a collapse in demand," says Aaron Brady, an analyst for Cambridge Energy Research Associates.
But even with gasoline prices now heading back toward $3 a gallon in most states, analysts expect demand to keep falling. MasterCard said Thursday that by its estimates, gasoline sales for the week of Oct. 10 dropped 9.4% over the same week last year.
The reasons for the continued plunge are simple. About 35% of all miles driven in the U.S. are work-related, so the higher the unemployment, the less the driving. September saw the biggest job losses in five years, and the jobless rate, now at 6.1%, is all but certain to rise.
There are also clear signs of a serious retraction in the U.S. manufacturing sector, which will in turn put a squeeze on fuel use. Toyota, which produces many of the world's most fuel-efficient cars, cut its global production in August by 17%, as exports of all Japanese cars to the U.S. fell by 30%.
Cuts in U.S. government spending have also sent asphalt use sharply downward as cities and states delay road projects. Jet fuel demand is also falling.
The big question now is to what extent oil-demand growth in China and the Middle East can continue to outpace the slump in the industrialized world. Most analysts still say oil demand will rise next year, by as much as 500,000 barrels a day. OPEC agrees, and looks likely to trim at least 1 million barrels a day from its production going into 2009 to avoid oversupply.
The credit crunch and gyrating oil prices have sent a chill through many segments of the oil industry. Delayed or shelved exploration projects from offshore West Africa to the Canadian oil sands could lead to a supply crimp if and when demand comes roaring back. |
