I’ve been digging for a while in the EIA’s data for oil to understand the market dynamics. After a while, I concluded that the greatest and most important unknown for me was the price elasticity of demand in developing vs developed countries.
As the price of oil has increased by 50% in the past six months, demand in developing countries has fallen by 300,000 barrels per day. Forecasts for oil consumption have also fallen, according to the IEA. However, the demand in developing countries continues to grow and is forecasted to continue growing yet.
The strongest explanation may lie in the consideration that some petroleum consumption is a want instead of a need. Those in developed countries are much more likely to use an incremental gallon of petroleum to visit their family or go on vacation. It may very well be that the demand in oil is falling during those times, as shown on Memorial Day weekend, when demand fell 19% year over year.
China on Safari
As an aside, let’s look at China for a few sentences. China continues to increase its imports of oil and coal to fuel its economy. One particularly interesting development is the strong relations they’re developing with African nations, particularly Nigeria and Sudan (the latter which has caused significant human rights headaches preceding the Olympics). With significant direct foreign investment in these nations and diplomacy, China is amassing the resources it needs for the growth of the next 100 years. Additionally, China are hedging their bets against shortage during the Olympics which might precipitate a mild drop in demand in the fall.
Long Term Patterns
In any case, the US demand for oil has been leveling off for the past few years which is a wonderful thing since we import nearly 2/3 of our oil. Our refining capacity has also stayed constant. And as we adopt the religion of environmentalism, or that of refusing to pay European prices for gasoline, we’re investing significantly in more fuel efficient means of transport and energy production, which in my opinion will ensure that our demand for oil will continue to fall.