When Will We See Demand Destruction for Oil?

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When Will We See Demand Destruction for Oil?

Posted by Jeff Rubin on April 20th, 2011 under SmallerWorldTags: destruction, International Energy Agency, oil • 26 Comments

How high must oil prices go before they start killing the very demand that feeds them?

Everybody from the International Monetary Fund to the International Energy Agency (IEA) are warning of dire economic consequences if today’s triple digit oil prices persist.

Curiously though, the IEA, which is warning of a potential global recession due to today’s oil prices, is also predicting an almost a one and a half million barrel/day increase in world demand this year. And judging by their recent track record, this forecast, like the one it made early last year for 2010, will once again be on the light side.

Somber warnings from leading world institutions aside, there is no evidence yet of demand destruction in the places that have been pushing world consumption for over the better part of the past decade. Preliminary data on apparent fuel consumption show Chinese oil demand, already closing in on ten million barrels a day, continued to grow at a double digit rate in March for the sixth consecutive month. That doesn’t sound like demand destruction to me.

Of course, that is not to say there won’t be demand destruction in the future as oil prices continue to rise. All past oil shocks have resulted in recessions and falling crude prices, and there is no reason to expect the coming one will be any different.

Given how high oil prices will likely rise ($200/barrel?) and the likely lack of fiscal counter measures from deficit ridden governments when the economy does finally kell over, there is potentially even more room for demand destruction than during the last recession. Keep in mind, the last recession was severe enough to register the first annual drop in world oil consumption since 1983.

But what is still lacking for demand destruction to happen is the huge round of monetary tightening that always attenuates oil shocks. It’s no doubt coming. Just look how interest rates are already chasing runaway energy and food inflation in the world economy’s new growth areas, China and India.

Facing 5.5% inflation, the People’s Bank of China has already increased interest rates four times over the past six months, and inflation will soon force other central banks around the world to follow their lead. Just as they did last time, those rate hikes, along with the burden of skyrocketing fuel bills, will eventually knock the economy back into recession.

But until then, it is a little too early to focus on demand destruction. In the meantime, a fuel-hungry world economy will push oil prices to new record highs.

oilwatcher

I am “confused” Mr. Rubin. The Libyian situation has taken 1.3 MMB a day of supply out of the World. Yes, prices are up, but there does not appear to be a shortage..in fact, crude inventories are still building. Speculators will cause demand destruction for sure but that is the only cause of high prices at this time
Montrealstewart

i am amused by all the talk of “speculators”. it sounds like some kind of hatfield-mccoy mind set. evrybody is all in favour of free markets and capitalism, until reality bites back, and supply becomes a problem. perhaps inventories are building in anticipation of further increases, caused by more consumers chasing flat production? could it be?
The Next Big Short

Why is Saudia Arabia saying there is no shortage? Abundant suppply. Will cut production?????
How about Gulf CEO seeing drop at his gasoline pumps?
What game is this?
The game of QE!
Caveat emptor when it ends.
Morg

Today’s EIA Petroleum Inventories: Crude -2.32M barrels, vs. consensus of +0.8M. Gasoline -1.58M barrels vs. consensus of -0.7M. This would be falling supply, not building.

Blaming higher prices on speculators is the government’s version of a boogie man story and the way they cast suspicion away from themselves. If you want to know the cause look no further than Fed monetary policy and government obstruction to domestic oil exploration.

Here is the link to the EIA website if you want to check it out yourself. http://www.eia.doe.gov/oil_gas/petroleum/data_publications/weekly_petroleum_status_report/wpsr.html
Rojelio

That doesn’t make any sense. What’s your point?
Rojelio

Isn’t there an overwhelming consensus in the peak oil community that there are real shortages of cheap oil? Otherwise why put all that effort into expensive deep ocean drilling and developing the tar sands? And these underlying shortages are most certainly amplified by endless rounds of quantitative easing and speculation.

So when the next recession hits (did this one ever end?), it’s hard to imagine that people all over the world won’t be more resistant to more rounds of bailouts.
KingPonzi

And blaming it on the Fed and the government is “austrian economics” tiresome mantra.
Steve Manders

Demand destruction is occuring. World oil production grew 2 % from 2005 to 2010, world population grew 7 % (500 million people) Therefore, the average person is using 5 % less oil than 5 years ago. The U.S.A is using 8 % less fuel than 5 years ago, with 5 % more people, for a 13 % reduction per capita. Is that not demand destruction?

This 500 million people is equal to the entire population of North America, Mexico, USA and Canada, but no new continents have appeared in the middle of our oceans in the last 5 years to house them.

Saudi Arabia just lowered oil output in March by 800,000 barrels per day, (10%), the Gulf of Mexico in the USA is down to 400,000 barrels a day from 1.2 million a day 5 years ago,(67%) Libya is down 1.7 mbpd (temporarily) . We probably reached peak oil last year. In 5 more years, there will be another half billion people sharing this reduced output. Even with constant output, there will be a 7 % demand destruction just due to population growth. I have reason to beleive from the Peak Oil curve that world oil output will be down 5 million barrels a day in 5 years for a total demand destruction of an additonal 14 % on top of the current, now proven 5 %. The demand destruction is a double exponential curve of growing population, and an accelerating decline in oil supply.

Peak oil is about record high rates of oil production that proceeds the inevitable decline. It gives a warm cosy feeling of all being well. Enjoy gas while it is still cheap.
Steve Manders

Demand destruction is occuring. World oil production grew 2 % from 2005 to 2010, world population grew 7 % (500 million people) Therefore, the average person is using 5 % less oil than 5 years ago. The U.S.A is using 8 % less fuel than 5 years ago, with 5 % more people, for a 13 % reduction per capita. Is that not demand destruction?

This 500 million people is equal to the entire population of North America, Mexico, USA and Canada, but no new continents have appeared in the middle of our oceans in the last 5 years to house them.

Saudi Arabia just lowered oil output in March by 800,000 barrels per day, (10%), the Gulf of Mexico in the USA is down to 400,000 barrels a day from 1.2 million a day 5 years ago,(67%) Libya is down 1.7 mbpd (temporarily) . We probably reached peak oil last year. In 5 more years, there will be another half billion people sharing this reduced output. Even with constant output, there will be a 7 % demand destruction just due to population growth. I have reason to beleive from the Peak Oil curve that world oil output will be down 5 million barrels a day in 5 years for a total demand destruction of an additonal 14 % on top of the current, now proven 5 %. The demand destruction is a double exponential curve of growing population, and an accelerating decline in oil supply.

Peak oil is about record high rates of oil production that proceeds the inevitable decline. It gives a warm cosy feeling of all being well. Enjoy gas while it is still cheap.
Steve Manders

Demand destruction is occuring. World oil production grew 2 % from 2005 to 2010, world population grew 7 % (500 million people) Therefore, the average person is using 5 % less oil than 5 years ago. The U.S.A is using 8 % less fuel than 5 years ago, with 5 % more people, for a 13 % reduction per capita. Is that not demand destruction?

This 500 million people is equal to the entire population of North America, Mexico, USA and Canada, but no new continents have appeared in the middle of our oceans in the last 5 years to house them.

Saudi Arabia just lowered oil output in March by 800,000 barrels per day, (10%), the Gulf of Mexico in the USA is down to 400,000 barrels a day from 1.2 million a day 5 years ago,(67%) Libya is down 1.7 mbpd (temporarily) . We probably reached peak oil last year. In 5 more years, there will be another half billion people sharing this reduced output. Even with constant output, there will be a 7 % demand destruction just due to population growth. I have reason to beleive from the Peak Oil curve that world oil output will be down 5 million barrels a day in 5 years for a total demand destruction of an additonal 14 % on top of the current, now proven 5 %. The demand destruction is a double exponential curve of growing population, and an accelerating decline in oil supply.

Peak oil is about record high rates of oil production that proceeds the inevitable decline. It gives a warm cosy feeling of all being well. Enjoy gas while it is still cheap.
Steve Manders

Demand destruction is occuring. World oil production grew 2 % from 2005 to 2010, world population grew 7 % (500 million people) Therefore, the average person is using 5 % less oil than 5 years ago. The U.S.A is using 8 % less fuel than 5 years ago, with 5 % more people, for a 13 % reduction per capita. Is that not demand destruction?

This 500 million people is equal to the entire population of North America, Mexico, USA and Canada, but no new continents have appeared in the middle of our oceans in the last 5 years to house them.

Saudi Arabia just lowered oil output in March by 800,000 barrels per day, (10%), the Gulf of Mexico in the USA is down to 400,000 barrels a day from 1.2 million a day 5 years ago,(67%) Libya is down 1.7 mbpd (temporarily) . We probably reached peak oil last year. In 5 more years, there will be another half billion people sharing this reduced output. Even with constant output, there will be a 7 % demand destruction just due to population growth. I have reason to beleive from the Peak Oil curve that world oil output will be down 5 million barrels a day in 5 years for a total demand destruction of an additonal 14 % on top of the current, now proven 5 %. The demand destruction is a double exponential curve of growing population, and an accelerating decline in oil supply.

Peak oil is about record high rates of oil production that proceeds the inevitable decline. It gives a warm cosy feeling of all being well. Enjoy gas while it is still cheap.
Steve Manders

Demand destruction is occuring. World oil production grew 2 % from 2005 to 2010, world population grew 7 % (500 million people) Therefore, the average person is using 5 % less oil than 5 years ago. The U.S.A is using 8 % less fuel than 5 years ago, with 5 % more people, for a 13 % reduction per capita. Is that not demand destruction?

This 500 million people is equal to the entire population of North America, Mexico, USA and Canada, but no new continents have appeared in the middle of our oceans in the last 5 years to house them.

Saudi Arabia just lowered oil output in March by 800,000 barrels per day, (10%), the Gulf of Mexico in the USA is down to 400,000 barrels a day from 1.2 million a day 5 years ago,(67%) Libya is down 1.7 mbpd (temporarily) . We probably reached peak oil last year. In 5 more years, there will be another half billion people sharing this reduced output. Even with constant output, there will be a 7 % demand destruction just due to population growth. I have reason to beleive from the Peak Oil curve that world oil output will be down 5 million barrels a day in 5 years for a total demand destruction of an additonal 14 % on top of the current, now proven 5 %. The demand destruction is a double exponential curve of growing population, and an accelerating decline in oil supply.

Peak oil is about record high rates of oil production that proceeds the inevitable decline. It gives a warm cosy feeling of all being well. Enjoy gas while it is still cheap.
Anonymous

I think the price ceiling will be bellow 150$ this time as the global economy is in a much more fragile state now than in 2008. We may even be seing the hike grinding to an halt at 125$ right now, floating around and waiting for that trigger-event of some new wave of major defaults.

With all these European and Asian strategies of toying with interest rates because of the commodity price-driven inflation this stagflationary stage we’re heading to will lead to some serious 70′s nostalgia.

No answers then, no answers now. There’s a new, history-changing, macroeconomics book out there, just waiting to be written.
Anonymous

I think the price ceiling will be bellow 150$ this time as the global economy is in a much more fragile state now than in 2008. We may even be seing the hike grinding to an halt at 125$ right now, floating around and waiting for that trigger-event of some new wave of major defaults.

With all these European and Asian strategies of toying with interest rates because of the commodity price-driven inflation this stagflationary stage we’re heading to will lead to some serious 70′s nostalgia.

No answers then, no answers now. There’s a new, history-changing, macroeconomics book out there, just waiting to be written.
Judge

then why do less than 5 percent of the traders take possession? I say make all futures traders take possession of their respective contracts and watch all commodities drop like a rock!
Unc

Jeff,bang on as the norm,but I beleive there is a tune up on the swing,In which is gonna involve the speculators,that are driving up the price of oil.over and obove true market value,it is one thing to make some coin,based on supp-ly and demand,it is another when it is simply pissing every one off ,every where in the world.The boys in the mercantile and elsewhere best back off,people are getting cranck-ey.If the boys want to carry on,they will be screwing the duck that has been laying the golden egg.Too hogi,it will barber chair on em.Unc.
David M

Jeff,
Do you have any thoughts on current efforts to build more ports and railroad infrastructure to export more coal from the U.S. to China? How quickly might these become stranded assets once globalization goes into reverse and our world starts getting a whole lot smaller?
http://www.cascadiaweekly.com/entertainment/coal_export_facility_presses_forward_against_concerns/
Unc

Monty, I am in to free market ,I am not into the bs of this so called free floating oil price set-up.It is F-In crap and you know it,you are fairley neat,for obvious reasons,you upper academia brokers in the markets are a F-in virus on the proper principles of 101 economics in the free world,you parisites are a hinderance on progression and inevitably you hogs will pay penanace,nobody and I mean nobody rides for free in this world.UNC.
Anonymous

I think I will answer this question with another question: Demand destruction where?

Since several countries out there subsidize their oil price and still have money in the bank (China, Thailand, etc.), they essentially, distribute the rising costs over their entire population while drawing down on their currency reserves. As noted, China has a long way to go before demand destruction caused by oil prices.

The US has almost no taxes on fuel (when compared to Europe). Therefore, they will probably see demand destruction later than many countries in Europe.

Poor countries will see demand destruction earliery because they have more people closer to the edge. Any oil price increase means a higher percentage of their tiny household budges will be spent on their fuel and food requirements.

Since we are already at Peak Oil and the end of cheap oil is now evident, the distribution of the remaining and depleting liquid fossil fuels will move towards countries that fully subsidize their fuel costs and have enough funds to do so.

China will keep getting more fuel, America will continue to get their slowly decreasing share as they rack up as much debt as the world allows and poor countries will quickly revert back to their previous pre-petroleum activities and adjust their populations accordingly (not by planning or choice).

This does not take into account the real possibility of resource wars where bankrupt countries with still powerful military forces find ways to attack countries with remaining fossil fuels. The reasons will be all over the map from political to religious (the Third Crusades anyone?).

Thus, using the predictable global crude production depletion curve (based on current levels of discovery and use) and examining the wealth and military power of the world’s nations, along with the religious and cultural issues of each, it may be possible to estimate where the remaining liquid fossil fuels will go and it what volumes.

If I were a developing nation with low cash reserves and a current high rate of oil imports, I would be very worried about right now. I would have to conclude that these oil imports will dry up completely in less than a few decades and that now is time to prepare for that inevitability.
Anonymous

It is called propaganda or sugar-coating.

I think we have all heard our share of that coming from recent dictators who passionately state their crazy ideas while reality slaps them hard in the face.

It is entertaining when watching from the outside. Not so funny that the US and Europe continue to try to keep the illusion of endless milk and honey alive.

Amazing what the general public will eat up. eh?
Anonymous

“in fact, crude inventories are still building”

Reference please.

Anyone who follows this industry knows full well that getting exact and accurate values in real-time is impossible. So, your “in fact” statement is incorrect.

While you see a calm duck floating on the surface, I see a distressed duck who’s feet are thrashing like crazy under the water.

You don’t go from $80 to $110 without SOME reduction in use by people. Think about it. It is obvious. Their gas and food costs go up as a direct result and their salaries do not.

One thing we do know is that Saudi Arabia is not covering the full loss of Libya, even when they said they would, or could. Now, there may be many reasons for that but for those of us that believe Saudi Arabia is lying about their reserve capacity, this screams volumes.

We will know in about six months a much better picture of what really is happening today. I am confident it will show that global crude production is still going down and that Saudi Arabia does not have the ability to export like they could before (They have not only peaked but their population is growing and using more, resulting in decreasing net exports).

Don’t people find it troubling that countries that currently export oil are, in general, experiencing rapid population and energy growth that result in less available for exports? Not at all disturbing?
Dhouston

Secretary of Energy Steven Chu as recently as last week said that we are currently awash in oil. Goldman Sacks recently said speculation in the oil market accounts for at a minimum 27 to 30 dollar in the per barrel oil price. (speculators using the recent libyan crisis as an excuse to push oil higher even though libyan supply is a minor amount on the world level). Yet there are some saying speculation has almost no effect on today’s price.
Dhouston

If you ask oil traders even they admit that the recent spikes in oil price are not caused by the supply side but by outright speculation. In the last decade or so and particular the last 5 years the number of traders in the oil market has skyrocketed. Almost none of those traders are interested in the actual physical oil or it’s delivery. And as in 2008, they say a financial crisis, not demand destruction will have to take place to cause them to exit the market and cause oil prices to fall.
Dkorith

Your statement America will continue to get their slowly decreasing share as they rack up as much debt as the world allows – the US debt is not related to energy, instead is related to cheaper labor. Japan debt to gdp is 200%, the US is about 100%, clearly we have a long ways to go. When the US reaches the limit of debt the world allows that means that countries that are soley depended on the US Economy for purchasing what they produce will face massive depression. The US economy is becomming service Related, means the US will be able to further withstand such a depression. In essence Free enterprise and capitalism will save the US. The only thing higher fuel cost will develop is alternatives, eventually a technology will come about that is cheaper then gasoline. The strenght of capitalism. Demand destruction is a point where energy cost produces cheaper alternatives.
Dkorith

You can make Diesel from CO2 and sun, why would I continue to pay hugh money for oil or even go to war for it. Invention is based on necessity. Supply and demand will create alternatives, don’t need high taxes.
Kat

To @3230c4ca7cf81c7cc7535adc50179a50:disqus You clearly have no idea what you are talking about. First, you can not make diesel fuel from CO2 and sun. Second, USA already went to war for oil many times in the past and as oil prices increase war over oil will be inevitable. Whether military or economic warfare is used, the fact that countries already are and will continue fighting over oil remains the same. Third, invention is based on investment in research and development. When the price of doing business increases due to rising oil, business are less inclined to invest in something that might or might not come to fruition. Lastly, where were these ‘alternatives’ you speak of the last time decreasing supply and increasing demand caused oil to reach $147/barrel in 2008? If I recall correctly, the only alternative they came up with was a recession. Great solution! (please note the sarcasm).

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