Yesterday, we noted the Beginning of Demand Destruction? Today, Oil has reversed, and that thesis may be getting questioned.
For more on demand destruction, see today’s WSJ:
"During the energy crunch of the late 1970s and early 1980s — the last time gas prices were close to current levels in inflation-adjusted terms — consumers sharply cut back their gas consumption. When prices dropped, demand rose again, but at a slower pace because of the embrace of more-fuel-efficient foreign cars.
This time around, the breadth of change in consumption patterns is even more dramatic, and, if oil prices stay near current levels, the decline in demand could be more sustained.
The slower economy means pinched consumers, as well as truck drivers delivering goods, are driving less. DOE economists estimate that a 1% decline in personal income results in a 0.5% drop in gasoline demand."
As the saying goes, your mileage may vary . . .
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Source:
Prices Curtail U.S. Gasoline Use
Report Says 2007 Was Likely the Peak; An Enduring Shift
ANA CAMPOY
WSJ, June 20, 2008; Page A4
http://online.wsj.com/article/SB121392646391690835.html
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Due to suburbanization and sprawl, the amount of miles Americans drive to work and do errands etc. is much higher today than in the 1970s. This makes it harder to reduce miles driven. Also, there are many more two and three worker households than in the 1970s, meaning lots more vehicle miles for work commuting today than in the 1970s.
“The slower economy means pinched consumers, as well as truck drivers delivering goods, are driving less.”
Yup. Fast Money’s “Pops & Drops” segment yesterday said Nevada brothel business is down 40%. The reason? Less truck drivers because of high diesel prices.
Truck drivers use diesel fuel, not finished motor gasoline. Glad to see WSJ is as ignorant as CNN on this fact. The latter often cites this when “Truck Drivers Cross Border for Cheaper Gas”, etc.
Winnebago is in the crapper, I assume along with the entire RV industry. To someone who has gotten stuck behind those damn things many times on mountain roads in Colorado and desert roads in Utah, this is one bright shiny silver lining in the dark clouds.
Oil is rising today because of Israel’s sabre rattling towards Iran. So it doesn’t have anything to do with “destruction demand”.
In comparing the current price of gasoline to the 1970’s is important to remember that in addition to the pump price of gas, there was also a time and convenience cost (from physical shortages, lineups, etc.).
This time around, this shortage cost has likely affected Chinese consumption to some degree. If the recent increase in retail price diminishes the shortage related costs, the overall cost may not change as much as it seems, and it may be premature to expect the retail price change to destroy demand to the degree you’d otherwise expect.
In the US, no such physical shortage costs have arisen (yet), so demand destruction is happening as expected.
Most Americans simply lack the financial wherewithall to compete in the global marketplace for scarce energy resources.
Major price differentials are beginning to open up in less fungible forms of energy, like natural gas.
LNG (liquefied natural gas) sells in the global market for about $16 per MMBTU. But in the local market natural gas fetches only $13 per MMBTU.
Companies who built plants in the U.S. to receive and gassify LNG shipments are now on the verge of bankruptcy.
When these plants were on the drawing board, I’m sure they never imagined the day when the United states would get priced out of the world energy market.
But as we all know, because George Bush told us so, the problem is due to not enough refineries, even though the oil companies say we don’t need more refineries, which we don’t have because evil Democrats won’t let us build them.
1) Auto sales down to 15-year lows in June
Ostensibly the folks who were lucky enough to get a $300 tax rebate from Uncle
Sam aren’t using the windfall to buy a new vehicle — according to sources on
Bloomberg, it looks like June was a total bust — between 12.5 million and 13
million cars/trucks (SAAR), which would be a 10% hit month-over-month and a
near-20% slide on a year-over-year basis. This would mark the lowest print in 16
years.
2) Big cutback in driving
Americans reportedly drove 30 billion fewer miles from November to April
compared to year-earlier levels (down 1% but usually this metric is UP 2%-to-3%
per year) — the sharpest decline since 1979-80. According to the ATA, the
declines are accelerating — the April miles-driven figure was down 1.8% year-on-
year and negative now for SIX consecutive months.
It’s diesel that’s driving the price of oil. Gasoline doesn’t matter right now.
Personally, I think the top is in for crude. We are going into a recession after all. And I still feel that the year over year increases in commodities will start to decline over the next couple months.
With all respect to you BR, I still believe inflation is a lagging indicator…
Barry, how long does demand destruction take ? If someone owns an SUV, the only thing they can do in the short term is to reduce their driving – it probably takes time for them to switch to a more fuel efficient car ? How long is the lag between rise in price and fall in demand ?
Regards
The Market appears to be breaking through some technical support levels, while oil remains strong.
I’m surprised the 12k barrier has been punctured so decisively; I’d concluded it was not going to happen. I wonder if this will be like an ice dam breaking, with all hell breaking loose once the opening is fully breached.
It’s all fun and games until the good folks at NASCAR get impacted:
http://sports.yahoo.com/nascar/news;_ylt=AtsDFmsmjgLRLmJvXegVeFc5nYcB?slug=jb-economy061908&prov=yhoo&type=lgns
People will drive less miles to work if they don’t have a job.
thanks to our “friends” in israel,oil is up $3. they dont give a damn about america
Jake, why shouldn’t Israel be concerned about Israel? If they plan to hit the Iranis, who have threatened to wipe out Israel, why is that a bad thing? Why does it follow they don’t care about us?
No logic, just the usual anti-Israel screed. Stupid.
Why don’t our Senators and Reps go for drilling more, and why is domestic production down over the many years? Is that because those nefarious Israelis are trying to raise oil prices? WHO THE HELL DOES THAT BENEFIT?
They are pumping $10/gallon over there, so why the HECK do you think they want to drive up oil, of which they have almost none themselves?
Idiot
Yep, couldn’t take it anymore, parked the SUV and bought a scooter. It takes $6 to fill up, 100mpg and I get a good feeling driving by the gas station over and over. With monthly payment, insurance and fuel it’s still $40 less than I used to pay just for gas. I’ll never go back to a big vehicle that doesn’t get at least 30 or 40mpg. They’ve cured me of a low mile vehicle.
I started riding my bike during a short period without a car. The forced exercise was so nice I never went back to a car. The high fuel prices are yet another reason to stay with the bicycle as my primary transportation.
But wait. So if higher prices mean “demand destruction” causing prices to go down then don’t prices going down result in “demand creation” which should then cause prices to go up. But then would that also not then result in further “demand destruction” causing prices to go down again. But wait…
I guess the point is that simply pointing out how a market works does not really provide any insight. There are really good questions out there about whether there really is “peak oil” and thus a leveling off of supply increases. Whether Asian demand will continue to increase. Whether “speculation” has really caused the run up ( a bit of a misnomer as that really just means that people are betting that the other factors are going to affect supply and demand.
According to the CFTC data, rampant speculators are not evident in crude on the NYMEX (doesn’t include ICE) as net spec longs fell by 50% to the lowest level since Feb ’07. Gold net longs were little changed at the lowest since Sept ’07. Net shorts in the S&P 500 fell a touch from its highest level since Sept and emini S&P 500 net shorts fell to the lowest since mid Feb. NDX net shorts fell slightly and net shorts in the Russell 2000 fell to the lowest since May ’07. Net longs in the Yen fell to the lowest since early Jan while net shorts in the Euro were up slightly.