• Since weak oil demand growth is a major ingredient in the current oil price crash, higher demand stimulated by low prices could be a moderating factor.
  • While US demand has risen since prices fell, there are several reasons why the global response may be slower to appear and less dramatic.

One of the main factors that will determine the depth and duration of the current slump in oil prices is the extent and timing of a resulting rebound in demand. It is likely to occur first in countries like the US, where fuel taxes are low and consumers see the results of lower oil prices at the gas pump relatively quickly–a $1.65 per gallon drop already, since June. However, other factors besides taxes could impede faster demand growth elsewhere.

From 2007 to 2009 the combination of high oil prices and a weak economy reduced US petroleum demand by almost 2 million barrels (bbl) per day, compared to its 2006 peak. The first volumes backed out of the market were imported refined products, which had grown rapidly from the mid-1990s until 2005. Low domestic demand and expanding US oil production then led US oil refiners to seek new markets, particularly in Latin America. US petroleum product exports have increased by around 1.7 million bbl/day since the recession began.

These refiners might reasonably expect their domestic and foreign markets to grow faster with oil prices dramatically lower. So far, it’s hard to see more than hints of this in the lagged data from the US government or API, which reported December gasoline demand at a 7-year high. It’s also hard to discern how much can be attributed to oil prices, rather than to US economic growth and a falling unemployment rate. The October update of vehicle miles traveled from the US Department of Transportation was still well below its 2008 peak but showed a modest upward trend, although that seems to have begun before oil prices fell.

Other indicators are also mixed. By the end of last year sales-weighted fuel economy of new vehicles sold in the US had declined by 0.7 miles per gallon from its August 2014 peak. That reflected US consumers buying larger vehicles, including more SUVs, fewer hybrids and only slightly more plug-in electric cars than in the prior year. Despite this retreat, full-year-average fuel economy tracked by the University of Michigan still showed a more than 5 mpg gain since 2007, equating to 20% better fuel efficiency. So the roughly 45 million cars and light trucks sold in the US in the last three years–nearly a fifth of today’s light-duty fleet–will use less gasoline than the ones they replaced, even in the most robust response to low gas prices imaginable.

Globally, growth prospects seem equally mixed. Since last July the International Energy Agency has reduced its forecast of 2015 petroleum demand growth by a cumulative 500,000 bbl/day, to +0.9 million bbl/day, as the global economy weakened.  These conditions could combine with currency-related effects to dampen, or at least delay, a potential surge in global oil demand due to low prices.

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Because oil is traded in US dollars, the dollar’s recent strength shrinks the oil savings experienced by other importing countries. While all of these countries are paying less for oil than they did last summer, exchange rates have eroded 10-30% of that benefit. The chart above displays this effect for the Euro and Japanese Yen. Closer to home, currencies like the Mexican and Colombian Pesos have depreciated by 12% and 29% since June, respectively.  That could prove significant, since Mexico’s refined product imports from the US averaged over 500,000 bbl/day in 2014 (through October), along with over a million bbl/day to the rest of Latin America.

Since petroleum products are sold in local currency, after tax at the pump, consumers in many countries have seen a smaller drop to which they might respond, compared to US consumers. The average German gasoline price has fallen by just 19% since June and the average UK price by 20%, compared to 42% in the US. Meanwhile state-controlled gasoline prices in Brazil and Mexico have  gone up. That’s unlikely to induce more driving.

So far the weekly figures  for US refinery throughput are up compared to last year, implying higher expected product sales. However, US inventories of gasoline and diesel fuel have also been growing for the last several months. If rising demand doesn’t erode inventory gains soon, refiners may need to reduce processing rates, and that would feed back to oil prices. The next few months of energy statistics should tell a very interesting story.

Energy Outlook