What Does the American Consumer Say About the Fall in Oil Prices? You’re Welcome!

PRICE OF OILby Andy Stevenson

WASHINGTON,DC (RUSHPRNEWS) AUGUST 29,2008–Oil prices hit an all-time high of $147/barrel in July. Up until this time, global oil supply had failed to keep up with rising global demand, allowing speculators to push oil prices higher and higher without penalty. That was their thinking anyway, before the American consumer spoiled the party. Now oil is at $113/barrel and the markets are still wondering what happened.

Since we are by far the largest buyer of oil in the global marketplace, it shouldn’t have come as a complete surprise to energy traders that a change in our behavior could have a meaningful impact on oil prices. Yet the fact that the US had reduced oil consumption by 860,000 barrels a day during the first half of this year did not seem to get much attention from the markets. It didn’t actually matter much as global demand, lead by China, continued to grow at a pace of 1.2mln barrels a day, leaving oil production in deficit.

This all changed in July of course when new Saudi Arabian crude came on line and the US’s hard won reduction in demand finally tipped the scale in favor of supply. In fact, as can be seen in the table below, without the US consumers’ efforts to reduce oil consumption, the world would still be a supply/demand imbalance. An imbalance that would have allowed speculators to continue to push oil prices higher and higher.


Moreover, as vehicle sales data continues to point out, a structural change in the US vehicle fleet is taking place that should provide additional demand side reductions coming out of the US over the next several years. While it might seem strange that the US has been the main driver of reduced oil demand over the past few months, it should be noted that the US consumer is far more exposed to higher gas prices than consumers in other countries. As can be seen in the graph below, lower fuel taxes and a weakening dollar have made higher oil prices far more painful at the pump for Americans than Europeans over the past several years.


Indeed as Americans, it should be rewarding to know that we as consumers can actually influence global oil prices directly by changing our behavior. This demand-side response is far superior, for example, to the potential supply side impacts of drilling, which would have no impact on prices for the next decade and then only offer marginal relief thereafter. This ability of the US to influence oil prices from the demand side, even with China showing little sign of slowing their demand for oil, must be remembered by those scrambling to develop an effective policy response.

Half-measures to tackle this problem from the supply side are really looking at this problem from the wrong end of the stick. The desire to open up unavailable OCS for drilling is a case in point on how limited our supply side options actually are in practice. OCS drilling is being touted as a meaningful step to increase our national security and reduce American’s pain at the pump.

This rhetoric is in direct contrast to EIA’s analysis of the impacts of opening up OCS to more drilling. In this analysis the EIA concluded that even at peak production, the additional 200,000 barrels of oil produced by additional OCS drilling would have an “insignificant” impact on wellhead prices. This is a far cry from the claims of the “Drill here! Drill now! Pay less!”crowd. The only one getting paid in their scenario is Exxon and the other large oil companies.

In sum, with less than 2% of global supply we simply do not have the energy resources needed to combat this problem effectively. What is needed is to continue pressing for additional demand side responses such as more aggressive government fuel-economy standards for cars, higher mileage standards for heavy duty trucks and more government investment for public transportation.

In addition to this, efforts should be made to acknowledge that the most effective way to develop both demand and supply side responses is by establishing a cap and trade policy that would put a price on carbon emissions. Not only would such a program accelerate investment in new technologies that would reduce our dependence on oil, it would help transform our economy into an exporter of energy technology that would create jobs and reduce harmful greenhouse gas emissions. Let’s not settle for meaningless supply side gestures. We have just proven demand side responses work, now its time to up the ante.