Low oil prices might be decreasing demand for oil

As you probably know, the price of oil has been cratering over the past six months, dropping from over $100 per barrel, to just over $60 today.

And the Iranians are warning that it may drop as low as $40.

One of the counterintuitive things I’ve been noticing about all of this is that the stock market is unsure how “good” a thing this really is. Another surprise: Cheap oil may be decreasing, rather than increasing, the demand for oil.

Oil drilling

Oil via Shutterstock

On the face of it, you’d think low oil prices would go hand in hand with economic prosperity. And in fact, when oil prices go down a lot of industries (other than the oil industry) benefits. The airlines, for example, are doing quite well as a result. (I’m sure any day now their cute little “baggage fees,” read: taxes, will be lowered.) And really any product that needs to be transported to the market will benefit from lower fuel prices.

As for why the markets are reacting poorly to dropping prices – the market plunged (well, kinda plunged) yesterday by 1.6% (the S&P500), it’s biggest drop in 2 months, because (they say) of oil. From what I’ve read, some of the concern is deflation. And not just deflation caused by lower oil prices, but deflation caused by lower business investment in oil and energy-related industries (alternatives too many suffer, as higher oil prices make it more worthwhile to invest in non-oil alternatives).

Another surprise, for me at least, was that lower oil prices aren’t necessarily leading to higher demand for oil. Demand is actually still down. Part of the reason is fuel economy in cars has grown 28% since 2007. Another: young people are moving into cities, and aren’t getting cars.

A final reason demand might be dropping, or might eventually drop, as a result of lower oil prices: consumers will use the money they’re saving to buy more fuel-efficient cars:

Funny, that oil isn't lowering my demand.

Funny, it doesn’t feel like oil is lowering my demand.

And then there’s this twist in the energy independence story — lower crude prices could paradoxically weaken demand. The argument goes like this: Declining oil will give consumers more disposable income that they can use to purchase more efficient vehicles, energy economist Philip Verleger said Dec. 8 by phone from Carbondale, Colorado. Likewise, airlines will reinvest profits made possible by cheaper fuel into new planes with more economic engines, he said.

“Consumers are doing their best to get themselves out of buying petroleum products,” Verleger said. “The fall in oil prices is going to accelerate the fuel’s own demise.”

I fear that last reason is giving consumers too much credit. But we’ll see.


Follow me on Twitter: @aravosis | @americablog | @americabloggay | Facebook | Instagram | Google+ | LinkedIn. John Aravosis is the Executive Editor of AMERICAblog, which he founded in 2004. He has a joint law degree (JD) and masters in Foreign Service from Georgetown; and has worked in the US Senate, World Bank, Children's Defense Fund, the United Nations Development Programme, and as a stringer for the Economist. He is a frequent TV pundit, having appeared on the O'Reilly Factor, Hardball, World News Tonight, Nightline, AM Joy & Reliable Sources, among others. John lives in Washington, DC. .

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