It's always a pleasure to chat with the FT's Ed Crooks, who authored the linked article. He's incredibly knowledgeable about the oil business, and it's possible to debate detail with him, and frankly, to discuss the limits of approach and knowledge. Here's the article, a much better version of which is, of course, available at the FT.
Ed Crooks and Gregory Meyer in New York
“People have smiles on their faces when they’re filling up their tanks,” says Mike Thornburgh, of the US fuel and convenience store chain QuikTrip. “They’re coming in happy.”
The 55 per cent plunge in benchmark West Texas Intermediate crude since last June has been accompanied by a 42 per cent drop in average US retail petrol prices, lifting both the spirits and the real incomes of American consumers. Regular petrol prices averaged about $2.14 a gallon on Monday, and are below $1.80 in some states.
The response to those lower prices, however, could end up wiping the smiles off drivers’ faces.
The crude price has slumped because of soaring production from US shale oilfields and sluggish growth in global demand.
In discussions of how and when the global oil market will come back into balance, there is generally more attention paid to supply than to demand. Analysts examine how long US oil production can continue to rise as drilling declines, and wonder whether Saudi Arabia will have a change of heart and agree to cut its output.
A jump in US fuel consumption over the past few weeks has raised the question of whether the demand response to lower prices could be just
Mr Thornburgh says QuikTrip has definitely seen an impact. Some of the money people are saving is being spent on drinks and snacks and other items, and some is going in increased purchases of petrol. Some customers are trying to play the market, buying the smallest amount of fuel they need in the expectation that prices will be lower the next time they buy.
Steven Kopits of Princeton Energy Advisors, who thinks there could be a strong pick-up in global oil demand this year, says such a reaction was only to be expected. He believes other forecasters, including the International Energy Agency, the think-tank backed by rich countries’ governments, have underestimated the scale of the possible demand response.
“There’s a general agreement out there that oil is in the bargain basement, priced to move,” he says. “But the presumption has been that although it’s super-cheap, no one’s going to take it.”
The IEA forecast in December that world oil demand this year would on average be 900,000 barrels per day higher than in 2014, at 93.3m b/d. Of that increase, it predicted just 100,000 b/d would come from the OECD countries in the Americas: the US, Canada, Mexico and Chile.
Because the US uses more than twice as much oil as those other three countries put together, its demand response is the one to watch.
Weekly consumption data from the government’s Energy Information Administration show that over the four weeks to January 9, implied US petrol consumption rose 7.1 per cent from the equivalent period a year before — the fastest rate of increase since 2004.
The EIA has been reluctant to draw strong conclusions, forecasting a modest 60,000 b/d increase in US petrol demand in 2015 due to lower fuel prices, but said this would reverse in 2016 as petrol prices recover towards $3 a gallon.
Howard Gruenspecht, the EIA’s deputy administrator, says: “I don’t think people go out and say ‘Let’s take the long way to work today because gasoline prices are so cheap’.”
Tom Kloza of the Oil Price Information Service, which surveys 5,000 service stations around the US, disputes the EIA weekly data. In the four weeks to January 3, average sales volumes at the OPIS-surveyed stations were actually down almost 1 per cent from a year before. “You do not get the same picture of gasoline demand being brisk at the pump,” Mr Kloza says. “There’s no sea change where everybody is driving again.”
EIA officials also caution against reading too much into their own weekly consumption data, in part because of variability due to the weather. Last year’s brutally low temperatures kept many drivers indoors.
“There can be significant revisions when the monthly data comes in,” says Tancred Lidderdale, an EIA economist.
Even so, analysts at Goldman Sachs wrote in a note published on Sunday, before the latest weekly data, that a demand response to lower prices was “already visible” in the US.
There is also supportive evidence in a monthly set of data known as prime supplier sales volumes. For gasoline, these volumes rose on an annual basis in September and October, after months of stagnation.
The fact that US oil consumption slumped in the recession of 2007-09 and has never regained the level it reached in 2005 has encouraged talk about “peak demand”: the idea that structural changes in the economy, including changes in demographics, lifestyles and fuel efficiency standards will permanently hold down demand for oil. However, the uptick in US fuel demand has raised the possibility that what looked like structural factors may in part have been just cyclical effects of a strong oil price and a weak economy.
Michael Sivak, director of the Transportation Research Institute at the University of Michigan, wrote in a recent paper that the number of miles driven in the US per unit of gross domestic product — a measure for what he calls “motorisation” — peaked in 1977, and has been in more or less steady decline since the early 1990s.