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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  • Archie Stay

    With most of the economies of the developed western world based around the price of oil the key question being raised is “what will happen when it runs out?”. However there is already a change starting, the main sticking point is: will the corporations resist or embrace the change away from oil? Although still more reserves of oil are being found and it is unlikely to run out any time soon, there is still the inescapable fact that it will one day run out and for the industries, that far off day is a lot closer and more threatening than for the rest of society. So id the corporations embrace the shift away from oil before it is too late (before the oil runs out or the planet melts, whichever is sooner) then, it could be hard initially but they would remain in control of the shift and would have a degree of influence over how the change pans out. If they decide to oppose the change then, on that fateful day when it all runs out, there will be a mad rush to re-build the economy and base it on some other, dependable commodity. So the question remains, and it will effect everyone more than consumers getting themselves out of their commitment to petrol as it could trigger a wider social shift, so if the industries decide to make the gradual transition to other sources of fuel and materials for manufacture it would affect them for the worse in the sort term but it would reduce the damage then it finally does run out. The question is: will the corporations be prepared to sacrifice short term profit for long term stability?

  • quax

    Based on what I’ve seen in the Canadian press below $60 will do it.

  • judybrowni

    Ronald Reagan famously ripped the solar panels off the roof of the White/ House and proceeded to gut/block any and all environmental progress for 8 years — and then Bush I continued that trajectory — plus gave us our first oil war!

  • Mike F

    Solar water heating has a much shorter ROI, about 5-7 years, depending on costs, whereas solar PV is roughly 15-20. Of course, in some states with generous credits, etc., that ROI can be halved. If you can finance the water heater first (I’ve seen estimates from 3KUSD to 7KUSD), I would do that. Having said that, my wife and I would love to have both on our nice flat-roofed 1912 house. I have to say, though, that my numbers on solar PV may be somewhat out-of-date, as panel costs have plummeted over the last five years. I congratulate you in advance on your new PV installation.

    Regardless of costs, however, the fact is that I’ve been seeing more and more solar PV installations popping up on roofs all over the City, at least a dozen or more. Most of which seem to be well over 10kW in size. (Matter of fact, I now recall that the building that my wife’s employer, a theater arts org, is located in has a new array on the roof, courtesy of the landlord; a pretty large one, too, judging by the twin 4′ x 14″ inverters; further thought leads me to realize that the IBEW Local 1 hall down the street has some on the roof, as does the IBEW-contractor training center next door, in addition to the Chevy Volt and its attendant charging station). Then of course there’s the new IKEA going in, which will have its own sizable array on the roof, which will likely be the largest array locally. (Not an IKEA acolyte, just reportin’ them facts).

    I can’t help but think, however, what this country and planet would be like if all of this started 40 years ago, in the aftermath of the OPEC embargo. The profit motive will be the ruination of this planet and the millions of species it supports.

  • Audra

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  • judybrowni

    However, sales of SUVs have soared, while sedans are tanking and the Prius sales have dipped 12 percent.

    But SUV sales reflect that SUVs have gotten greener:

    “It really has to do with the fact that fuel economy has become more comparable,” said Alec Gutierrez, an analyst with Kelly Blue Book.

    Gutierrez noted that the Mazda CX-5 SUV gets around 35 mpg, while the Mazda 3 sedan gets 40 mpg — a far cry from just a few years ago, when the difference in fuel efficiency between an SUV and a sedan was likely closer to 10 miles per gallon.

    Plus, Gutierrez notes, the difference in cost is just not that great either. The CX-5 starts at $21,545; the 3 at $16,945.”

    http://fortune.com/2014/12/10/why-are-suvs-so-popular-it-has-nothing-to-do-with-gas-prices/

    Electrics and hypbrids also suffer from sticker shock, but even Fortune believes that the Prius can come back with a redesign and updates.

  • Look at the history of all the countries in that region. In almost every case the borders were drawn by the British to reward local royalty they thought were friendly to them, often with no regard to ethnic and religious tensions in the area. (see Iraq specifically) The middle east and Africa are still suffering from the repercussions of colonialism and its aftermath.

  • FLL

    I’ll agree that Britain and the U.S. are at least partially to blame for religious fundamentalism even in the case of Iran, whose mullahs are anti-Western. The repressive dictatorship of the Shah created the fundamentalist religious reaction that we see in Iran today. I believe that if the U.S. had not instigated the coup in the early 1950s that placed the Shah in power, much of the political steam that religious fundamentalism has in Iran would not be present today.

  • And pretty much the entire middle east. Read up on the history of “countries” like Iraq. It’s disgraceful and it was a recipe for disaster from the very beginning. It’s mostly the fault of the British, especially at the outset (meaning the splitting up of the region as the British pulled out around WW1), although the US (in particular the CIA) has fingerprints all over so much of what has gone wrong over there in the last 60 years.

  • FLL

    Yes, the American and British governments are guilty of making a huge mistake in the 20th century by actively supporting the House of Saud in Saudi Arabia. They unleashed a Frankenstein.

  • FLL

    Several of the commenters here have already noted the reasons for declining oil prices, including some fairly overt attempts by OPEC (led by the Saudis, as always)…

    I read your comment that I quoted above, and I meant my comment as an extension of your own comment, not a disagreement with your comment or an accusation. My hypothetical example about Saudi Arabia being the only country that (insanely) doesn’t let women drive was to offer yet one more reason why people are not wild about Saudi-led OPEC manipulation of prices. I’m sorry if my comment was ambiguous. I agree that clarity in writing is always important.

  • Whatever gave you the idea I have ANYTHING other than disdain for the Kingdom of Saud and absolutely EVERYTHING they stand for?

    Seriously, what’s next, accusing me of loving Uncle Bandar?

    The only thing I remarked on is it does look like OPEC (led by Saudi Arabia) is trying to kill off oil and tar sludge fracking — because it’s in THEIR economic interest to do so. Is what they’re doing in the best interest of the human race and the Earth’s biosphere? Fuck no. The Titanic is sinking and these assholes have decided it’s time to have a firehose fight.

  • Agree 100% of iran in particular. The young people there (the vast majority of the population btw) are surprisingly pro-western and eager to end the sanctions on their country because they make jobs hard to get. Change will eventually come to the more modernized parts of that region once these horrible governments (some of which we or the British put in power anyway) are removed and they have actual democracies.

  • FLL

    I don’t think the disgust many Americans have at being Saudi Arabia’s crack whore isn’t going to be diminished by a temporary drop in price of our country’s drug of choice.

    I’m guilty of typing too fast myself and winding up with unintended double negatives (the ones that I’ve underlined above). Correct me if I misunderstand you, but I think you’re saying that Americans will continue to be disgusted about being Saudi Arabia’s crack whore in spite of the temporary drop in price. If I’ve got that right, then I agree completely. 1000 “likes.” I absolutely agree that a temporary manipulation in price by the Saudis is hardly a cure. The latest sleight of hand by the Saudis (and the Iranian mullahs) pushes oil prices down for the moment, but when it suits them, the Saudi royals and the Iranian mullahs will jack the price right back up again. You are right on target to say that renewables and clean energy are the only real cure, both politically and environmentally.

    Your phrase “Saudi Arabia’s crack whore” is brilliant. Yes, we have been Saudi Arabia’s crack whore for quite some time, and the vast majority of Americans view that fact with disgust, as you point out. Can you blame them? Both the Saudi and Iranian regimes behead gay men—and even high school boys—for same-sex relations, when it suits their hypocritical whims, of course. The Saudis won’t even let women drive. And finally, the indoctrination of hate in the Saudi public school system certainly bore fruit. All but one of the hijackers in the World Trade Center attack were Saudis—simply the maraschino cherry on the cake.

    I’ve taught ESL to Saudi college students here in South Florida, and I can easily see that the Saudi population, especially young people, are itching for change. I’m sure the same is true in Iran. The sooner they overthrow their corrupt theocracies, the better, both for them and for the world. But until that time comes, Americans are loathe to continue being Saudi Arabia’s crack whore, as they should be.

  • That’s occurred to me. One thing I do know is we (my wife and I) aren’t fooled. We’ve been talking about installing a full-on solar-electric system here as soon as we can get the financing together. Hopefully this coming year.

  • 2karmanot

    Same here. I’ve been driving old Betsy ( a 1995 Cadi Fleetwood—-people think I’m a Republican until I talk post Marxist economics) for many years. But I barely survive on a subsistence Social Security regime, so that when every 6 weeks I fill the old Betsy it costs roughly $50.00 for half a tank, here in California, which I reckon is about 16 cans of cat food, but what the hey. I drive maybe 8 miles a week to the nearest town for doctor’s visits and Safeway. But, hallelujah! Now that $50.00 fills up the entire tank—-first time in years. Yep. I sure loves me some post Marxist capitalism!.

  • For the taxi fleets and CTA, it’s purely bottom line: using hybrid vehicles cuts fuel costs immensely.

    As for the bike lanes and rental stations: the city’s been embarked on a city-wide “beautification” program for a number of years now, which has included a lot of environmental benefits, in addition to relieving traffic congestion and pollution — the city’s established several new wildlife refuges in the parks that include restoration of native species, and has planted over half a million trees in the last fifteen years or so. There are planters along major streets that are maintained regularly, with changing seasonal plantings, and in the larger streets and boulevards that have central islands, plantings now include trees, shrubs and perennial flowers, which not only look nice but reduce noise and pollution. Chicago really is “The City in a Garden.” Encouraging cycling is only part of it.

  • This has been going on for decades. Every now and again the price will suddenly drop and usually the national conversation about alternative energy goes away. Are we finally on to their game? I hope so. It should have happened 20-30 years ago!

  • I don’t think the disgust many Americans have at being Saudi Arabia’s crack whore isn’t going to be diminished by a temporary drop in price of our country’s drug of choice. We need to be energy independent and renewables and clean energy are the best way to accomplish that.

  • I don’t drive anywhere that I don’t have to. I’m as cash-strapped as most Americans. The lower prices are a big help to my budget but I need those savings to pay for things I need. I’m certainly not going to go out driving around town aimlessly because gas is cheaper and I suspect that it’s rare that anyone would think that way.

  • Denver Catboy

    That’s actually addressed in the article you replied to. It may. Or people may remember how expensive it was to buy gas when it was expensive, and so they opt for more fuel efficient cars, using the money they save from cheaper gas.

    Also, see other comments on this article about how vehicle fleets are being retrofitted with fuel efficient automobiles, and how cars in general are more fuel efficient today.

  • The_Fixer

    I’ve been away from Chicago for quite a while (I grew up there), it’s interesting to hear that there’s been so many positive steps being taken there. I’d venture that high fuel and energy prices wee the driver of that.

    I heartily recommend biking. Far less punishment on the joints than running, it’s healthy and fun. At least it is during decent weather. My bike has a full suspension and is quite comfortable – no bone-jarring jolts from even the smallest expansion joints in the pavement. Not only that, you get to see a lot more than if you’re cruising along in a car.

  • S1AMER

    Demand will go up as people start buying gas-guzzling cars again.

  • Just a couple of notes on the decreased demand: In Chicago, I’ve noticed that most of the taxi fleets have converted to hybrids, cutting their gas use in half; and the CTA has been converting to hybrid technology in buses. And I see a lot more hybrid cars on the streets, to counterbalance the living rooms on wheels so favored by the 1% wannabes. And a lot more people are riding bikes.

    And a footnote: a couple blocks down the street there’s a new fire station, complete with solar panels on the roof.

  • Mark_in_MN

    I wonder how much speculators effect oil demand, not just oil price. Could lower prices, and especially thoughts that it will still lower, lead to lower attractiveness for speculators which in turn means less oil being purchased by them and stored for future re-sale?

  • BillFromDover

    Oink, said the first little tetrahedral?

  • BillFromDover

    Low oil prices might be decreasing demand for oil…

    One can actually still hope?

  • FLL

    Over the next several years, the manipulation of oil prices by the Saudi ruling elite may make it less profitable for smaller American and Canadian oil ventures to produce oil. In terms of the environment, that is not necessarily a bad thing. However, As Becca and others note below, both solar energy and improvements in energy efficiency are proceeding rapidly. Very soon, that will diminish the economic and political clout of the Saudi government. I can’t bring myself to cry about that. Admirers of fundamentalist religion might object, but the sooner that the bag of snakes which constitutes the extended Saudi royal family are no longer major players, the better.

    OK, maybe I’m being unfair and U.S. society is “just as bad” as the Saudi regime. Becca, you’re reasonable and well spoken, and you’ve traveled at least as far as India. So Becca, please fly to Riyadh, Saudi Arabia, then drive to the Ministry of Petroleum Resources and offer some of your thoughts on sustainable energy for the planet. Oops. I forgot, Becca, that the Saudi government won’t give you a driver’s license. Let me rephrase that. First, Becca, convince the the Saudis to give you a driver’s license, and then drive to the Ministry of Petroleum Resources in Riyadh and offer some of your thoughts on sustainable energy for the planet.

    “You’re never fully dressed without a smile.”

  • Several of the commenters here have already noted the reasons for declining oil prices, including some fairly overt attempts by OPEC (led by the Saudis, as always) to keep other countries from pursuing things like fracking and the Keystone XL sludge pipeline. By lowering their price, in one fell swoop, the OPEC nations have made large portions of proposed oil-drilling projects no longer profitable.

    Then there’s things like the replacement of heating oil with much cheaper fracked natural gas. Increased vehicle fuel efficiency. The rapid advancement of alternative energy sources, including solar.

    But most of my vote goes toward market manipulation and economic forces, including mushy worldwide economies and the growing chasm of income inequality. Even though gasoline prices are down now, average wages and income for the bottom 80% of the population (esp. in the U.S.) have been stagnant or declining ever since the technology dot-com bust. (Actually, the stagnation and decline set in during the Reagan years, but this so-called economic recovery has been the first where nearly ALL of the recovery has gone to the 1%’ers and almost NONE to the rest of us.)

  • The_Fixer

    Yup. Every time the price of gasoline drops, sales of SUVs and pickup trucks climb again.

    The part about people using the money saved to buy newer, more fuel-efficient cars is wishful thinking, I fear.

  • Indigo

    I see Hummers back on the road again.

  • Don Chandler

    The VIX or S&P Volatility Index is way up in 5 days time. The falling rouble has an effect on a lot of emerging markets and neighbors of Russia. That in turn puts strain on G10 investments.

    interesting article here on the last russian default in 1998:

    http://www.dailyfx.com/forex/fundamental/article/special_report/2014/12/10/forex-russian-default-risk-grows-as-markets-complacent.html

    Why does Russia need Ukraine? Probably so that Russian’s can see a nation doing worse than itself and feel good. Why does Ukraine want to escape Russian domination? Probably because it’s neighbor, Poland, is doing so much better after leaving the Old Soviet sphere of influence or or system of corruption.

  • nicho

    There are two things at work. First is a slacking off of the economies in China and Japan, causing a weaker demand. The second is an effort by the US and the Saudis to keep the price down as an economic warfare tactic against Syria and Russia.

  • BlueIdaho

    A headline in my local paper today was “Lower oil prices may lead to lower airfares next year”. Yeah, right when pigs fly. The airlines are just as greedy as the rest of corporate America.

  • The primary reason for oil prices dropping is that OPEC has decided to stop artificially inflating the price. At least temporarily. They’re scared that natural gas production and shale oil production are making them less relevant. But it’s really all politics, and has little to do with market forces. Saudi Arabia wants to make North American production not profitable enough to maintain. When a bunch of the smaller American oil producers go out of business, allowing OPEC-controlled companies to buy up their operations for pennies on the dollar, the price will start to go back up again.

  • emjayay

    I’m wondering how low prices have to go to make Canada oil sands production non-competitive.

  • Indigo

    Deflation? Or a return to sensible pricing? Or actually a crypto-admission that we’re mired in a Real For Sure Depression?

  • 2karmanot

    Not to mention the rise in Turkish oil wrestling!

  • pricknick

    Not to worry all you oil suckers. The demand for gas guzzling SUVs is rebounding.

  • Jim Olson

    Lower fuel prices, lower demand, less pollution, and the end of an oil-based economy? Sign me up!

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