Has OECD oil consumption peaked?

The above diagram shows that the pattern of growth in oil consumption has varied greatly for different groupings of countries. Oil consumption in China and India has continued to grow, whether or not oil prices rose greatly. Oil consumption also continued to grow in the "Others" category, which includes many of the oil producing nations. Oil consumption in the Former Soviet Union also followed a pattern somewhat independent of world oil prices. It was only the OECD whose consumption changed significantly as world oil prices changed.

Based on this comparison, it seems to me that OECD consumption is far more affected by oil price changes than the consumption of other countries. Based on data shown in this post, it seems to me that OECD economies can only absorb a price increase of US$10 per barrel in a year, without experiencing slowdowns in their economies and a reduction in oil consumption. Non-OECD economies (including BRIC countries) are more resilient, and are more likely to continue to show growing consumption.

Below the fold, I examine similarities and differences in oil consumption patterns of OECD and Non-OECD countries and offer my view as to what the future may hold.

Recessions tend to follow increases in oil prices-for example price spikes lead to recessions in 1973/1974, 1979/1980, and 1990/1991, as indicated on this graph by Jeff Rubin when he was Chief Economist at CIBC World Markets. Even if this economic downturn is somewhat different from previous ones, it seems like strong growth in oil prices in 2008 is instrumental in slowing down OECD economies. In the early 1980s, some substitution took place, mainly replacing oil consumption with nuclear and natural gas consumption. This time there is no meaningful scalable substitute for oil, putting the OECD countries in a much worse position than they were when oil prices spiked earlier.

It looks increasingly like the OECD economies are falling victim to what I have started to refer to as the “Oil Price Trap”. The oil price (at today’s US$50/Bbl) is presently too high to add valuable pulling strength to slow down the economic downturn and bring the OECD economies back into growth. At the same time, the present oil price is too low to stimulate sufficient investment in future capacity growth to bring about much needed renewed economic growth.

Figure 01 The above figure illustrates the world supplies of all liquid energy split on classes for the period January 2001 to December 2008 as reported by EIA in their International Petroleum Monthly’s (IPM) plotted against the right hand axis. NOTE: Axis not zero scaled. The diagram also shows the movement (yellow circles connected with black line) of the average monthly oil price (Europe Brent Spot FOB) plotted against the left hand axis.

The global oil supply (all liquids) has for all practical purposes been on a plateau during the last four years. It took almost a quadrupling of the price to increase total oil supply by approximately 1 Mb/d.

Figure 02 The above figure illustrates OECD countries total petroleum consumption for the period June 1987 through November 2008 as reported by EIA plotted against the left hand axis. NOTE: Axis not zero scaled. A 12 Month Moving Average (12 MMA) is added (yellow line) to smoothen seasonal swings in consumption. The diagram also shows (thick red line) the average monthly oil price (Europe Brent Spot FOB) plotted against the right hand axis.

The diagram illustrates that as oil prices moved above US$60/Bbl, it affected growth in consumption. The diagram also illustrates that as oil prices continued to rise above US$75/Bbl, consumption started to decline. This decline accelerated with growing prices and the emerging economic slow down in 2007/2008. When oil prices remained at US$30/Bbl or below, oil consumption continued to grow at a stable rate. For OECD, historical data suggests that growth in oil consumption could be maintained while oil prices increased by about US$10/Bbl per year, and the economies continued to grow.

It is also worth noting that the growth in OECD consumption ended early in 2006. This is before Nouriel Roubini stood before an audience of economists at the International Monetary Fund and announced that a crisis was brewing, and before the acronyms CDS, CDO, SIV, Alt-A etc. became mainstream. Between early 2006 and November 2008, OECD oil consumption declined by 2,5 Mb/d or approximately 5 %, and the decline continues.

The diagram also illustrates that at higher prices, oil becomes increasingly unaffordable for OECD customers. Because of this, price rationing sets in as prices breach a certain level.

Oil prices are presently around US$50/Bbl while the OECD economies are projected (on average) to contract 5 % in 2009. If economies are contracting, this suggests that these economies now have a weakened ability to support higher oil/energy prices.

Inasmuch as the OECD economies consist of several regions with differences in taxation of petroleum products, one might expect that a higher taxation level on petroleum products would introduce some moderation in the decline of petroleum consumption when crude oil prices grow.

Figure 03 The above figure illustrates OECD Europe total petroleum consumption for the period June 1987 through November 2008 as reported by EIA plotted against the left hand axis. NOTE: Axis not zero scaled. A 12 Month Moving Average (12 MMA) is added (black line) to smoothen seasonal swings in consumption. The diagram also shows the movements (thick red line) of the average monthly oil price (Europe Brent Spot FOB) plotted against the right hand axis.

The data suggests that for OECD Europe, which has higher petroleum taxes than the US, consumption grew until oil prices reached US$60/Bbl and decline in consumption set in during winter 2007 as oil prices continued even higher.


Figure 04 The above figure illustrates the exchange rate between US Dollars and EUROs since 1999.

For the period shown, there is little indication that swings in the exchange rate have played a significant role in OECD Europe’s oil consumption. Variations in the exchange rate seem only to introduce ripples on the surface.

Figure 05 The above figure illustrates US total petroleum consumption for the period January 2000 through March 2009 as reported by EIA plotted against the left hand axis. NOTE: Axis not zero scaled. A 52 Weekly Moving Average (52 WMA) is added (red line) to smoothen seasonal swings in consumption. The diagram also shows (thick black line) the average weighted crude oil price plotted against the right hand axis.

The diagram shows a similar pattern as for all OECD and OECD Europe. US total petroleum consumption reached a high (or peaked) about the same in time as housing prices peaked as illustrated here. The continued decline in consumption after the crude oil price collapse seems to be mainly driven by growing unemployment and the recession.

Figure 06 The above figure illustrates US gasoline consumption for the period January 2000 through March 2009 as reported by EIA plotted against the left hand axis. NOTE: Axis not zero scaled. A 52 Weekly Moving Average (52 WMA) is added (dark red line) to smooth seasonal swings in consumption. The diagram also shows the movements (thick black line) of the average gasoline price plotted against the right hand axis.

The diagram illustrates that gasoline consumption reached a high in the second half of 2007. (This also happened for diesel, while kerosene reached a high earlier.) An average gasoline price of US$2,60/gallon slowed consumption, and as the price moved higher the decline in consumption accelerated. This again illustrates that there is a threshold above which gasoline becomes unaffordable for some people, and these people start to make adjustments. The diagram also illustrates that as prices retreated to around US$2,00/gallon, the decline in consumption came to a halt.

Figure 07 The above figure illustrates oil consumption for OECD (blue), China and India (yellow), Former Soviet Union (FSU) (brown) and the others (grey) for the years 1965 through 2007 plotted towards the right hand axis. The oil price in 2007 dollars is plotted as black dots connected by a yellow line towards the left hand axis.

The figure above shows that the 1973/1974 oil price shock resulted in a relatively small reduction in OECD oil consumption and a recession.

The 1979/1980 oil price shock with the doubling of the oil price led to a longer recession, but also a deeper decline in OECD’s oil consumption. At this time, alternate fuels, including natural gas and nuclear were brought on line, reducing OECD's need for oil, particularly for electrical consumption.

As oil prices again started their growth in 2004 it started to affect OECD oil consumption and the diagram illustrates that OECD consumption started to decline while prices continued to grow.

Based on Figure 07, oil consumption for China and India was little affected by the oil price shock of 1979/1980. The recent (starting 2004) run up in crude oil prices seems to have had only a small impact on the growth in oil consumption of these countries.

FSU seems also to have been little affected by the run up in oil prices. The exception here is the dissolution of the Soviet Union, which resulted in a major decline in consumption.

The "Others" category includes all the OPEC countries, plus some other countries that have historically had low oil use. This group seems to have had a continuous growth in oil consumption independent of price fluctuations in all the years reflected in the above diagram.

Why is it the OECD economies seems to have a weaker resilience towards big increases in oil (or energy) prices than other countries?

Figure 08 The above figure illustrates oil consumption for OECD split between OECD members production (blue) and net imports (red) for the years 1965 through 2007 plotted towards the left hand axis. The oil price in 2007 dollars is plotted as yellow dots connected by a green line towards the right hand axis.

The figure illustrates that by the 1973/1974 oil price shock, OECD oil production was in a temporary decline. By the 1979/1980 oil price shock, OECD oil production had begun to grow because of additional production from fields in Alaska, Mexico and the North Sea. The availability of more oil within OECD may have contributed to the oil price decline (collapse), and cut the need for imports, thus helping the OECD economies. As oil prices remained in the US$30/Bbl (2007) range, OECD imports started to grow. The recent run up in oil prices that started in 2004 coincided with a sharp decline in OECD production and a corresponding need to increase imports.

This closer look on OECD oil production, which now is in terminal decline, and OECD net oil imports suggests this is not solely about the oil price. The effects seem to be compounded by the volume of OECD net oil imports.

Figure 01 above shows that total world oil supplies grew a little in 2008 and in figure 02 that OECD consumption had (as of November 2008) declined by around 2,5 Mb/d since the average oil price reached around US$60/Bbl.

The data thus suggests that some countries were able to afford the recent higher oil prices better than OECD. This seems to run contrary to expectation, since the OECD countries represent the richest countries in the world. That oil consumption grows in some of the oil exporting countries is no surprise, but it does not explain all the growth.

Figure 09 The above figure illustrates OECD total oil stock changes from January 2000 through November 2008. NOTE: y-axis not zero scaled

The figure illustrates that there has been a stock build within OECD through 2008. In other words, this shows that total OECD supplies have been higher than total OECD consumption.

Using data for 2007 as a base line, it should now be possible to identify changes in oil consumption (or supplies) for Non OECD countries through 2008.

Figure 10 The above figure illustrates Non OECD changes in oil consumption/supplies through 2008

Despite the high oil prices through 2008, Non OECD countries continued to increase their consumption/supplies as they have done as OECD consumption started to decline in 2005.

Could this suggest that an economic decoupling between OECD and Non OECD countries is now gaining strength?

It is currently estimated that OPEC has shut in a capacity of 3 - 4Mb/d. For the next 3 - 4 years many estimates show that new capacity brought on line will at most offset the decline from producing fields. If an economic decoupling now is gaining strength, could it be that the Non OECD countries will eat into most or all the existing spare capacities in the next few years?

Figure 11 The above figure shows the growth in the Chinese oil consumption together with the annual changes. Based on what was portrayed in figure 10 there is reason to expect that China's oil consumption through 2008 will grow are a rate similar to its growth in recent past years. China’s growth is likely to continue in 2009, though at a slower pace than earlier projections called for.

In 2007, each person in the US used 11,5 times as much oil as the average Chinese. GDP for each person in the US at PPP (Purchasing Power Parity) was in 2007, 8,7 times higher than for the average Chinese.
As of 2007 the average Indian had a purchasing power only half of the Chinese, but as this article on the Tata’s Nano and ”India Defies Slump, Powered by Growth in Poor Rural States (From Wall Street Journal) suggests the global bidding war for oil is about to see a growing number of bidders.

One way to look at the data above is that if 9 Chinese (or 18 Indians) pooled together to bid on oil against one person from the US (or a person from any G-7 countries), the 9 Chinese would combined have more purchasing power. The outcome from a bidding war is that one wins, while the other ends up empty handed. This comparison illustrates the challenges which now face the OECD countries and increasingly may face in the future. Because of the challenges in winning this bidding war, OECD consumption looks likely to have peaked, whether or not world production has peaked.

These charts are great! I like your plotting price change with other variables like consumption and supply, then suggesting possible reasons for correlations.

I have one comment about the recent run up in oil prices and the economic downturn. Since the US and most OECD countries have been importing larger amounts of oil and other energy liquids, the run up in prices caused a large transfer of wealth from the oil consumers to the producers. This capital flow is largely one way as the US and many other OECD countries have large trade deficits. So as more capital flowed out (more for the US than others since its dollar declined) the economic growth was slowed and only remained flat from 2005 onward because of the increased debt by individuals, businesses, and governments.

As the oil price grew to unsustainable levels, consumers and companies saw there available cash diminished and debt access cut off. this was partly due to the financial crisus and partly due to the increased expense of energy. Note that many utilities in the US had raised electric rates at two or three times the rate of inflation starting in 2006, further sapping the consumer and business sectors. Food, which is largely dependent on energy for the high rate of production, likewise increased in price far beyond the core inflation rate. All these combined with the financial meltdown and decreased housing values to kill the economy. This is why the downturn will be much worse than in 1981-82 and in 1974-75.

Thank you!

I think your point about wealth transferral has a high relevance. For the US it looks like when the total annual crude oil bill (volume X price) approaches 3,5 – 4,0 % of GDP (Gross Domestic Product) oil increasingly becomes unaffordable for many, who then starts to adjust the way they use oil.

For Germany (which has a higher petroleum tax than the US) it seems like this threshold is at 2,2 – 2,4 % of GDP.

During the first oil price shocks (1973/1974) and (1979/1980) the relative and total debt load for many consumer nations was lower while at the same time the savings rate was higher. This I would presume was an additional built in resilience within the big oil importing and consuming nations.

The higher relative and absolute debt level among consumers and big importing and consuming countries will, I believe, restrict future oil price growth and this time I would expect economies heavily dependent on oil imports to be more vulnerable for price increases.

Oil price growth needs GDP growth alternatively that a higher portion of GDP is allocated to paying for the oil imports and thus other energy consumption as prices for other energy seems to correlate with the oil prices. .

I hadn't really stopped to think about the higher debt level being important. Clearly, a person's (or business's or government's) total spending must cover a number of different things:

-Debt repayment and interest;
-Fuel needs
-Food or raw materials
-Everything else

Clearly, "everything else" gets squeezed by rising fuel prices. It also gets squeezed by debt repayment and interest. If the economy isn't growing, or is actually shrinking, there is a further squeeze, as less and less is available for everything else.

In most developing countries, consuming what little of oil is a matter of life and death -- most of that fuel usage is going into the bare necessity of life. A fisherman neesd gas to run his little boat -- even though he feels a pain, he can recover the cost from his costumers. So what little they get from the oil; it goes around -- it costs the country a bit more to import oil but they'll gain it back when they export commodities & raw materials. I think as long as they run a trade surplus; they'll be fine. There will some exporters hurting bad right now b/c they can't export -- but if 90% of country is still in agriculture mode, it doesn't matter that much. Iran still needs rice, Saudi still needs wheat -- you can always swap for oil.

In the US, however, we have a lot of waste. Our trade deficit is so large b/c we are using more things than we produced. So when the oil price got too high, we have to cut it down and down. When you've been living on debt for a long time, you will have to stop spending if the other guy doesn't give you anymore money. That is what happened. So now instead of China and Middle East giving Americans and US corporations this "spending" money; the US government is doing this job. It's funny but the Ponzi scheme continues -- spread the debt around.

In the US, however, we have a lot of waste. Our trade deficit is so large b/c we are using more things than we produced. So when the oil price got too high, we have to cut it down and down.

This was my thought looking at the above. Of course a price spike hurts us more: because we use more oil.

Fortunately we waste it on really stupid things. Like SUVs. I wonder what the effects of peak oil in the US would be if we banned commuter automobiles and required everyone to use 150/200 mpg electric or motor assisted bicycles at speeds of 10-15 mph... and only freight could use big rigs could use the interstate until more rail came online. The effects would be HUGE. First, the car companies would fail, and we'd go into Depression. Then we would all rearrange cities. Then things would get better. Likely this will happen anyway, just slowly and painfully if the markets have to do it.

So yeah, we waste A LOT by being inefficient... not on a thermodynamics level, but on a stupidly designed society that thinks to transport a single person to work, it must be done with 2 tons of dead weight across a 40 mile commute at insane and deadly speeds.

It is often said on TOD that oil consumption has followed economic growth prefectly. But correlation does not equal causation, and yesterday is no proof of what tomorrow will bring. I think that negawatts are underestimated. I would guess that we spend at least 90% (based on commuter waste and oversuse of A/Cs, etc) of our available BTUs on things that don't increase GDP efficiently.

This has only been possible b/c of cheap oil. When it is gone we will have to adjust our use of it, so we will. And then we will escape the "oil price trap"... which is not a real limit on EROEI of extraction, but a limit based on (I think) negative EROEI when you consider the inefficient end use.


I really like the idea of showing oil income/expendetures as a function of GDP for each nation. That plot might have serious explanatory power.

And thanks in general for all of your charting work. I love seeing the new ideas you present in plots. It's inspiring for my own efforts.

-- Jon


Thanks for your comments. It is much appreciated.

I planned this post as a series where at the end I would show how much the total oil bill (as a percentage of GDP) was for some countries for the years 1980 - 2007.

If you then add in the costs from use of other energy sources, costs of food, looks on interest on debts and debtpayments etc. it hopefully could help further explain why there will be limits to how much oil prices can go up and down.

It doesn't become "unaffordable". It becomes "less attractive". As in "I'd like to go to the grocery store, but that can wait until I go to the hardware store too" or "I'll pick up a whole week's worth of groceries, so I don't have to make two trips this week." Or more pointedly - "I can afford this $20,000 sports car, but I can also afford this $35,000 hybrid which gets better gas mileage. With the price of gas, I guess I'll go with the hybrid".

They _can_ buy more oil, but they _choose_ not to. It is always about tradeoffs. The fact that we choose not to pay more is a sign of strength, not a sign of weakness.

This is interesting.

Would you care to elaborate a little more about this?

The theory appears to be that people in the OECD burn a lot more oil for luxury and discretionary uses (large cars, pleasure trips, long commutes, convenient vs. efficient shopping trips, etc.) than do people in developing countries, and that luxury/discretionary spending is more sensitive to price than business/necessity-related spending. Based on that, we should not be surprised to see higher price elasticity in the OECD than in developing countries.

Essentially, "rich vs. poor" is being outweighed by "luxury vs. necessity". It's apparently been more worth paying a higher oil price for a Chinese factory to move its products to market than for a Jersey soccer mom to leave the engine running for AC while she waits for her kids.

"They _can_ buy more oil, but they _choose_ not to. It is always about tradeoffs. The fact that we choose not to pay more is a sign of strength, not a sign of weakness."

I don't know about that. I think the graph of debt levels of the whole US says that we really don't have that flexibility.
You have two guys : one makes $100K with $300K debt, the other guy makes $5K but he has $10K in cash. Now, who has more flexibility when the amount of jobs (which relates to energy) goes down -- who will in the end has more flexibility. Hard to say, but if both guys lose their jobs tomorrow; that guy with $100K job will be begging the guy with $5K job for food.

Until there is some sort of job security (which translates to economic growth which goes against population and energy) and that debt level is paid off -- that guy with $300K debt really doesn't have that much flexibility he thinks. Sure, he can charge $5K on his credit card to go to Florida or not but that doesn't really mean he's in control of his finance.

Yeah, and if the 5K guy loses his job, he will be in more trouble. the 100K probably has assests he can sell/keep if he files bankrupt, will probably get a severance pay equal to much more than the 5Ker's annueal income, and as we have seen, often that 300K debt might never get repayed.

This comparison seems pointless.

I think it would be more accurate to say that spending on fuel as a percentage of disposable/discretionary income is a better way of understanding the issue than as a percentage of GDP, at least for gasoline. Thus, even in 2007, conservation was still being practiced, despite continued GDP growth.

There's also definitely a psychological level to gasoline consumption. You see big falloffs in demand when gas prices reach a benchmark, say $4. You also saw massive falloffs in sales of large vehicles in the US just as the price of a fillup reached $100. The psychological impact of a $100 fillup completely outweighed the "macho" feeling of owning a tank-like vehicle.

By coincidence I just posted this in yesterday's drumbeat. Feel free to knock it down :-)

Here's OECD imports (IEA OMR Table 8).

And this time just total shown to get a better scale.

Note that total imports to OECD countries peaked in 2005. However imports from all regions (other than core OPEC) known to be increasing production over the period actually increased through 2007 only levelling off in 2008. Russia/Former Soviet Union OECD import data in particular seems to be a good calibration source as their production data seems to be far more reliable than OPEC. Even though core OPEC claimed some production increases absolutely none of that showed up recently in OECD members countries. Increased FSU, African and Iraqi production did show up.

I suspect the blue bars might be reasonably proportional to true world C+C production and match up with Simmons's "shady" data (showing 2008 production down about 2mb/day on 2005). If this is true then it follows that recent consumption in particular in non-OECD countries has been overestimated in IEA/EIA data to balance the inflated production figures.

Another curiosity.

Here's imports from Saudi tracked in OECD countries by grade plus totals over the last decade (from IEA OMR Table 6)

Light exports to OECD peaked in 2002 at 2.84 mb/d
Total exports to OECD peaked in 2003 at 4.65 mb/d

Isn't Saudi Arabia exporting oil to China? It seems like some country must be doing so, and a country relatively in Middle East seems much more likely than one from, say, the Americas. This, and exports to some other countries like India and developing nations, could explain a fair amount.

Clearly producers export to non-OECD nations - it's just that recently we have to assume all of their supposed extra production and more is going to non-OECD countries despite all Bush/Cheney's visits. And Kuwait is even worse - they must absolutely hate the west. Our "pals" in the middle east obviously don't like us very much if "official" production figures are correct. Iran on the other hand seems to like the west as they export pretty much the same proportion of production to Europe as they did a decade ago according to the IEA. Been disagreeing a bit with memmel on this but I think Iranian production figures might be some of the most accurate in the middle-east. Not sure how much that says though :-)

I really do think that the overall picture makes more sense if we really peaked for good in 2005, started to fall significantly in 2007 thus igniting the price of crude then the financial system crashed spectacularly also crashing rapidly real demand.

I also realise that this scenario would suggest real OPEC spare capacity after cuts right now is a lot closer to 1mb/day than the 4.5 (or is it up to 5.5 now?) that is currently claimed. In this case decline will outpace demand again and prices will shoot back up again near the end of this year/early next - unless major additional demand destruction happens first.

The IEA forecasts that Q4 world consumption will be slightly lower than Q3 world consumption this year which would not normally be the case unless there's a huge price jump or a further massive economic shock to come in Q4. Wonder which one they expect? They may give some explanation for this in the full latest OMR but only the highlights are available to non subscribers for another week or so - not the full report.

Clearly producers export to non-OECD nations - it's just that recently we have to assume all of their supposed extra production and more is going to non-OECD countries despite all Bush/Cheney's visits.

I think that is what I showed in figure 07, 08 and 10 in my post.

If prices again shoot up (i.e. increases by more than 50 % above today’s levels) I would expect a new round of demand destruction/adjustments as historical data suggests that most economies cannot sustain such a price shock.
Prices may temporarily spike even higher, but there is little that supports that most economies can absorb dramatic price changes as of now.

I agree that the official figures show that's where it all went. But taking the lead from Simmons I just don't believe them. I hope I'm wrong in thinking that the numbers just "feel" more right and it's much easier to match IEA import data with production if you knock just a few key producers down a bit in line with Matt's odd data - because if he's right then we are in much worse shape than even most TOD readers realise. I get the sinking feeling that his numbers may be from an internal IEA database, after all he has claimed repeatedly that the IEA has two sets of numbers - one set for public distribution and another set in private; but if we're lucky he's just gone mad and made them up :)

In keyposts I realise that TOD staff in general have to work with the official data or it would be a complete mess and your post is greatly appreciated - don't take my mutterings as a criticism in any way shape or form. Just a "what-if"?

Hi Undertow I think the key to Iran is net exports. Iran like Mexico reimports a significant amount of finished product since it does not have enough internal refining capacity. Next they have substantial internal demand. Thus the issue becomes how good are the finished product import numbers and how are they balanced against exports. Also for Iran in general Iranian crude is of low quality one big reason they choose not to refine it themselves since optimized refining requires complex refineries. Thus the real situation in Iran is made complex by differences in the rate and amount of gasoline imported vs oil exported. These have no intrinsic reason to balance.


DUBAI, March 30 (Reuters) - Iran's April gasoline imports will rise 9 percent versus March, countering market expectations that the Islamic Republic would buy less after filling storage tanks in recent months, industry sources said on Sunday.

Tehran will import around 128,000 barrels per day (bpd), up from around 118,000 bpd in March.

The rise in imports has come as a surprise to traders who were expecting Iran to cut back following heavy buying between December through February, when Iran took advantage of relatively cheap international prices to stock up, traders said.

Traders were unsure why Iran was buying more, but one said the country would want to avoid any shortages in the run up to presidential elections in June.

"They have been building inventories for a few months now, and there was some expectation that they would cut back from April," a trader said. "They are probably making absolutely sure that they are well stocked in the period leading up to the elections."

I'd suggest that the "evidence" if you will points to falling production and higher imports of gasoline to offset the difference. How much is growth in internal demand and how much is a true overall decline is probably almost impossible to determine. I pointed this out to WT long ago when he introduced the export land model that many producers may use the export land concept to mask overall declines in production until the numbers become untenable.

This graph of US per capita auto mileage together with gasoline prices, from this Brookings Institution report reminded me of your graphs. Because US population is growing, the downturn occurred earlier on a per capita basis than when viewing actual amounts, and the extent is more severe.

Per capita mileage clearly peaked in 2006, about the time prices started rising above $2.50 a gallon. Housing values started going down as well.

A study by Moody's Economy showed that price drops were greatest in the most distant suburbs.

Thanks Gail!

Using specific data often clarifies trends.

VMT I assume is estimated based upon supplies/sales of gasoline/diesel products.

Those graphs again illustrates that at a certain point gasoline/diesel (or crude oil) becomes increasingly unaffordable for households with stretched economies.

The report is based on US Federal Highway Statistics Data. It sounds like the report uses a variety of data sources, but ultimately the amounts are collected by different states. According to that website:

The Highway Statistics Series consists of annual reports containing analyzed statistical data on motor fuel; motor vehicles; driver licensing; highway-user taxation; State and local government highway finance; highway mileage, and Federal aid for highways. This data is presented in tabular format as well as selected charts and has been published each year since 1945.

Every ten years since 1945, a Summary of Highway Statistics has been published. These publications include a general summary of information on highways, their use, and financing. Much of the same data as shown in the annual series are provided in yearly trend format to the current year.

How Statistics are Compiled

All highway data are submitted by the States. Each State is analyzed for consistency against its own past years of data and also against other State and Federal data. The finished product is as close as possible to the original submission with only minor adjustments. Major issues are resolved with the help of the data provider.

The cooperation of Federal, State, and local agencies in providing the basic data from which these statistical series are derived is acknowledged and greatly appreciated.

One important point about this graph and also the declining import graphs for OECD is that the biggest price increases have happened despite falling consumption.

It took and economic collapse over a period of six month, a hurricane significantly impacting the US imports and finally a small surge from KSA to cause prices to drop.

They are already back on a rising trend. Next of course at some point demand in the US will start hitting structural limits and the overall population is still expanding. Our economy is slowly starting to bottom out in its decline and even with it still in decline oil prices are increasing.

Another collapse of the same magnitude as the bubble blow off which is now occuring will have structural impacts. Basically we simply will find it ever harder to shrink demand as the economy becomes more focused on needs not wants.

on the flip side for big ticket items such as houses the bottom is less than zero homes can and do become a liability that no one wants. All thats required is and excess in supply and they generally last a long time. We have plenty of room to reduce our expenditures on housing to offset rising oil prices long before we face another structural collapse.

Next housing construction i.e new homes are the real economic driver and new home construction has already reached the point that further declines will have little additional economic impact. Certainly we are still feeling the results of a collapse of new home construction and will for some time but the worst pain from the collapse of this industry is behind us.

Net of course is commercial real estate and the auto industry but we can and will absorb the loss. Neither of these two areas are as widespread as single family home construction and for a host of reasons the smaller number of commercial projects tend to decline slowly. Generally for commercial real estate is either stopped early or finished. Its more a case of no new projects coming on line as current ones are halted or finished. Now the biggest impact on the CRE side is rents and loan defaults but this tends to be concentrated in the wealthy classes and banks. Its a rich mans depression in CRE. Of course it spreads out into general construction but in absolute terms most of the money is lost in the upper class.


So more pain is on its way but overall we have passed through the worst that can be offered by a normal recession. Falling rents both for residential and also just as important for commercial space will actually act to soften the blow of CRE collapse to the rest of the economy. As CRE loses its actually a positive to the rest of the economy with only normal CRE construction workers really taking a hit.

I'd argue that lost wages from the construction workers is more than balanced by lower overall commercial rents.

As far as the wealthy class and banks losing money well tough the biggest impact of this is probably in the luxury housing market since regional banks and CRE drive a lot of the demand for high end luxury homes. Again BFD.

I continue to predict that this Credit/Housing bubble induced deep recession early stage recession will morph soon into a full blown depression driven by rising oil prices as further economic decline cannot keep pace with falling oil production.

The key driver is of course the large amount of equity still locked away in housing and commercial real estate. This equity can be eroded via falling home values falling CRE values and falling rents to offset the effects of rising oil prices for several years. Once construction stops further direct economic impact of falling equity in real estate is minimal and in general instead bolsters the basic day to day economy as money is diverted from rent and mortgage payments and into paying for consumable items and other necessities.

So the economy overall can in a sense flatline with the bulk of future pain located in falling equity values until we no longer get a real gain from lower real estate costs. In general however I see this close to zero or when equity costs become equal to other expenses in magnitude. This is a really low number like 75-90% less then the current value assigned our excess of buildings.

Only at this point will continued increases in oil prices finally result in structural dislocations in the economy as we really can't afford to pay more for oil.

Assuming the trend in rising oil prices sets in by the end of the year my best guess it it will take 3-4 more years of ever falling building equity before we really hit the wall. Certainly living will get ever more painful over this period the Baby boomers close to retirement that held on to real estate to long waiting for a rebound will be especially hard hit as they see their retirement investments evaporate not to mention other losses such as in the stock market. And of course pension funds of all sorts will be bankrupt and probably not fully bailed out along with a slew of local and state governments.

But regardless the final big one only hits once we have devalued our real estate holding to zero at that point we simply have nothing left to give up in exchange for oil. We will then and only them be working for survival.

Nice job Rune. You have replaced Stuart at theoildrums chart guru...

I think OECD consumption has peaked, because credit has peaked. Quant easing will continue but will not re-open the spigot to as wide as it was with derivatives, CDOs, easy and plentiful debt, etc. We'll see.

Thanks Nate!

I never intended to replace Stuart....................

Often I find that it is easier to communicate a message with diagrams/pictures (it takes a little time though), challenge is to find a format that most people easily can relate to.

I also have hard to believe that OECD petroleum consumption in the near future again will reach and surpass the levels, which recently was experienced.
I also think that availability to credit also will make it harder to develop new spigots to fuel future growth. It seems like growth in oil prices is justified when the economies grow. As economies contracts their abilities to pay for higher priced oil will have been weakened.

Excellent graphs.

While there are I'm sure other reasons, to me there are two main reasons why consumption drops in the OECD countries in relation to rising prices, and not other countries:

1: Consumers in most OECD countries are exposed, directly or indirectly, to the oil price. Many oil exporting countries set their own local prices that are separate from the world price. Therefore their consumers do not see any change in price at the pump, whatever the world price is, so there is no driver to lower consumption.

2: Relative poverty and level of oil consumption: in most non-OECD countries a far smaller percentage of the population has any significant exposure to oil or oil derived products. For example car ownership levels per capita are far lower, and is therefore concentrated in the wealthy classes, to whome any increase in price is just an inconvinience. Compare this with the OECD countries, where there is car ownership in most/all income bands, and in these lower income bands the change in price at the gas station pump has a significant impact on disposalbe income.

Thank you!

For some oil producing and exporting countries I think you are right that petroleum products are heavily subsidized by the governments (actually by the oil importing and consuming countries).
This is probably a factor we will have to live with also for the future....... either we like it or not :-(

Agree on your point 2. It looks like the middle classes of these (Non OECD) countries continue to grow and these will increasingly participate in the bidding war for oil.
I also think it is relevant to look on total and relative debt levels for many of these countries.

Less debt generally seems to increase resilience towards higher oil prices.

I agree with your final assessment that OECD consumption has likely peaked and that any bidding war between OECD countries and developing nations will likely hurt OECD the most.

However, I have a few areas of concern/clarification that I'll illustrate with charts from the Energy Export Databrowser:

1) Although OECD is a convenient grouping it should really be broken into four distinct areas with different oil consumption and production patterns, differently managed economies and different tax structures: Western Europe, North America, Japan/South Korea and Australia/New Zealand.

Looking at charts for different sources of energy in these four regions shows significant differences in how they responded to the 1973 and 1980 oil price shocks and which other fuels they switched to if any.

2) Although Europe was definitely hammered by the oil price shocks of 1973 and 1980, some significant portion of the reduced consumption of heating oil during that period was replaced by increased consumption of (largely indigenous) natural gas.

3) An important thing to remember about China is that it was still exporting oil during the 70's and 80's.

I think it is still way to early to say exactly how each of the four OECD regions will react to the most recent price shock but those that have access to coal and natural gas will undoutedly go in that direction.

The bigger wildcard in my mind is how profound this recession/Depression will be and what affect that will have on consumption at both the industrial and consumer level.

-- Jon


I have presented the two largest regions of OECD oil consumers, USA and OECD Europe above. It seems like the trends in their oil (petroleum) consumption moves in tandem.

Looking at Japan (OECD’s second largest oil consumer) data shows that oil consumption has been on a downward trend since the second half of the 1990’s. Japans economy also seems more tied to economic developments in Southeast Asia.
Since the recent run up in oil prices (starting in 2004) Japan has shown the same trend in their oil consumption as USA and OECD Europe and Japan’s consumption had as of November 2008 declined with close to 10 % relative to consumption mid 2004.
The other thing with Japan is that the country is relatively more dependent on oil in their energy mixture which makes them more vulnerable to dramatic price increases on crude oil.

I am in the process of drafting a post that will look more into the historical developments of countries.

Generally and as of now it seems like oil prices has been too low for most OECD countries since the oil price collapse back in 1985/1986 as this ended the change of the energy mixture of these countries.
Looking at BRIC countries (Brazil, Russia, India and China) these countries have through the recent years lowered their relative dependence on oil. BRIC was as of 2007 still a net exporter of oil.

Generally, for the OECD countries data from BP Statistical Review suggests that consumption form other energy sources than oil has moved in parallel with oil since 1985/1986.

BRIC was as of 2007 still a net exporter of oil.

True, but of course you have three net oil importers and one net oil exporter, Russia. The EIA puts net oil exports from the group for 2008 at 670,000 bpd.

Could BRIC expand or develop more intimate relations with other emerging economies like in the Middle East?
If the BRIC economies continue to grow this could suggest an economic decoupling where the fastest growing economies further expands their cooperation with other oil/energy exporting nations and thus continue to grow their oil consumption.

More on BRIC

Its easy for BRIC to expand: they just need to add Kazakhstan, and become "BRICK." That should increase their net exports.
Of course, if they added Libya, Ecuador, Guinea and Oman, they could then become a "LEGO BRICK."
But maybe you meant expanding production within the existing four countries?

Your play with acronyms is funny.
Could G7 be hitting a future BRICK wall? ;-)

I was more thinking of other emerging economies like Saudi Arabia, Iraq etc. getting closer ties with BRIC. There has been some mentioning of Iran getting closer involved with BRIC.

As of now, a big consumer like China is locking in future net oil (and natural gas) exports by offering financial help in developing fields/infrastructure.

Other regional initiatives worth following are SCO, Shanghai Cooperation Organization.
The Shanghai Cooperation Organization is an international institution comprised by Russia, China, Kazakhstan, Uzbekistan, Tajikistan, and Kyrgyzstan. The SCO countries cooperate in the spheres of security, economy, and culture.

It looks to me like Japan's decline in oil consumption mostly represents a switch toward the use of more natural gas and coal.

Australia's oil use is headed upward. One thing that impresses me is the size of Australia's coal exports. They are huge.

While comparing countries is certainly useful, probably a more accurate assessment would be on the basis of income. I've described it this way. Let's take all consumers in all oil importing countries and put them in five groups of equal size, broken down by income, from lowest to highest. At the bottom of the lowest quintile, we have a poor Third World consumer. At the top of the top quintile, we have Bill Gates. What oil price would force our Third World consumer to conserve, and what oil price would force Bill Gates to conserve? Or turn it around, who would be better able to bid for declining oil exports, a wealthy millionaire in Africa or a person on welfare in the US?

As forced energy conservation moves up the food chain, the higher income groups will be better able to shift spending from discretionary items to non-discretionary food & energy expenditures. Of course, this accelerates the destructive cycle that we are seeing on the non-discretionary side of the economy, which has negative impacts on a lot of people's incomes, which is why I have for quite some time advised people to "Cut thy spending and get thee to the non-discretionary side of the economy."

BTW, I think that the rate of change in consumption in oil exporting countries is the $64 Trillion question, and Mexico is an ongoing case history.

Their consumption as a percentage of production in 2004 was 52%. Their four year production decline rate has been -4.7%/year. Their four year rate of increase in consumption was +1.4%/year. This is all quite close to what I stipulated for the Export Land Model (ELM), and we have so far seen the accelerating net export decline rate that the ELM predicts, with net oil exports from Mexico declining at -7.6%/year in 2005 and at -25%/year in 2008, with an overall four year net export decline rate of -13.5%/year (all data from EIA). Volumetrically, their net exports went from 1.85 mbpd in 2004 to 1.08 mbpd in 2008.

At Mexico's current production decline rate, about -10%/year, their production would be down to 1.93 mbpd in 2013, versus 2008 consumption of 2.11 mbpd. If they wanted to maintain net oil exports of about one mbpd, they would have to cut their consumption to 0.93 mbpd in five years, a consumption decline rate of about -16%/year. The EIA does show a slight decline in 2008 consumption, at -0.5%/year.

To paraphrase George Orwell, IMO some consumers are more equal than others. Because of subsidies and because of a desire to take care of the home team, I expect to see consumers in exporting countries getting a better deal than consumers in importing countries (and preferential access to petroleum), but it will be interesting to see how it all plays out. All of this is further complicated by the price of oil versus the volume of net oil exports and thus the cash flow from oil exports. It is interesting however, the Indonesia, a founding member of OPEC, went to net oil importer status at oil prices below $40.

Hello westexas,

And I was hoping you would come up with a comment about the weather;-).

What you describe about Mexico and their relative strong dependence on oil within their energy mixture is interesting. This could suggest that Mexico will have a long struggle to adjust their energy mixture to become less dependent on oil.

As of 2007, 57 % of Mexican primary energy consumption was from oil, versus 60 % in 2003. This suggests some relative growth in consumption from other energy sources. It seems like a higher oil price encourages the increase of use of other energy sources (which should not be a surprise).

Looking at data from Brazil a similar trend is identified. Brazil has a relatively high dependency of oil in their energy mixture and increased oil prices seem to encourage the use of alternative energy sources. That Brazil has a relatively high dependence on oil could also suggest that it will still take a while before they become net exporters of oil.

As of 2007 Brazil still (net) imported around 15 % of its oil consumption.

I posted a note over on the Drumbeat thread regarding my vote for nonsensical headline of the week--about Brazil, et al taking market share away from OPEC. A minor problem: How does a net oil importer take market share away from OPEC?

If we extrapolate recent trends for Brazil, in 10 years they would be a small net oil exporter, about 280,000 bpd.

Extrapolating recent trends from Venezuela, Mexico and Canada would put their net oil exports collectively down by about 2.3 mbpd over the next 10 years (and all three showed net export declines in 2008, EIA).

Just my 2¢ worth from the NOEOCD Group (Net Oil Export Obsessive Compulsive Disorder).

See my really long post below :)

Seriously these various changes in trade have a lot more to do with the rise of a triangle trade with oil speculators willing to shoulder the expense of storing oil in expectation of profiting of contango.

These examples of cargo from Brazil and Russia showing up in the US in my opinion highlights how much oil is actually flowing first into speculators then out to end users creating very interesting changes in sources of imports.

The real game afoot right now can be seen in this quote.

OPEC spot fixtures increased in January over the previous month, while sailings from OPEC and arrivals in the US saw declines. Except for the VLCC sector which had vessels tied up as storage to take advantage of the deep contango structure in the forward market, spot freight rates for crude oil tankers declined in January impacted by the lower activity and reduced OPEC output. Product freight rates were also lower with East of Suez routes showing the largest drop.

And here

The real game afoot is to force the collapse of the triangle trade and flush out the contango oil speculators.

I also really suspect that OPEC also thinks that a lot of the OECD storage is paper barrels if they force the market into backwardation and the speculators are forced to cover via the spot market oil prices could take off with a bang.

Whats interesting is I think that earlier this year the speculators where close to getting caught out with no physical oil to back their paper barrels and I really think the Saudi's helped them out eventually to their detriment if so then we can expect the Saudi's to know the real situation.

In any case I'll watch with extreme interest how prices move if the contango breaks down and speculators are forced to deliver things may get hot fast.

Interesting analysis, it will take me a long time to work through.

It suggests to me that oil has a greater value to society, in the margin, for non-OECD countries than OECD. Thus even as prices rocket, its still worth the money and can be afforded.

I'd caution on some bits of the analysis. Don't forget there is a time constant in society reacting to higher prices which means what you see as a $10pa rise might actually be a smaller number from a time delayed series.

It certainly suggests that when the bidding war really comes, its the less well off OECD countries that will suffer preferentially. It would be interesting to see that set broken down.

I wrote;

For OECD, historical data suggests that growth in oil consumption could be maintained while oil prices increased by about US$10/Bbl per year, and the economies continued to grow.

If we looked at a larger time span say from 1986 – 2007 it looks like OECD economies could absorb an annual price increase of around $5/bbl (but admittedly this would take a more rigid and comprehensive analysis to identify a more accurate number).

Hopefully I will come back with more later, but as of now it looks like oil prices has been too low during the last 20 (or so years) and this has not encouraged enough introduction of more and other energy sources into the energy mixture.

Yes, I think what you suggest is right that the actual price increase that OECD economies can absorb when growing is lower ($$/bbl). This may also help explain why the projections on oil price increases from organizations like EIA and IEA has reflected low growth in their scenarios. They are probably aware of that to high price increases hurts economic growth.

It certainly suggests that when the bidding war really comes, its the less well off OECD countries that will suffer preferentially. It would be interesting to see that set broken down.

How do we define less well off?

Are these countries with high debt to GDP ratio? Or countries where households debts are high relative to income? High specific GDP ($$$$/capita)?

Economies that produces few $$$/bbl (high energy intensity)?
What I have learned is that the relations between economies and energy often are complex.
Countries which energy mixture that now is dominant by oil, high energy intensity (and being highly dependent on oil /energy imports) high level of national debt/GDP ratio and high households debts to income could be some of the indicators to watch out for.

OECD economies can only absorb a price increase of US$10 per barrel in a year [...] Non-OECD economies (including BRIC countries) are more resilient, and are more likely to continue to show growing consumption.

Bit of a quibble, but I wouldn't necessarily view inelastic demand for oil as a sign of economic resilience. I'd say that an economy that responds to increased prices by immediately reducing consumption is the adaptable and resilient one.
That said, the continuing increase from China and India (versus the decline in the OECD) likely just reflects the fact that these economies are at an earlier (faster) phase of growth. If you look at the rate at which their oil consumption was growing just before the price spike, it certainly looks like there's been a large reduction from what their consumption *would have been*, absent the higher prices.

I'm with bbartloq - I think Rune is inferring way too much about the economic choices of the OECD vs the non-OECD.

Here's an example. Let's say you have two men. One (Albert) makes $50,000/year, the other (Bob) $25,000/year. Both smoke. The price of cigarettes double. Albert cuts back on his cigarette consumption, but Bob does not. Would you then infer that Albert can't afford cigarettes as much as Bob does? Would you start to worry about Albert's fiscal solvency?

Or could it be that Albert is simply less addicted to cigarettes, and is reducing his consumption because the pleasure of smoking is not worth the additional cost. In that situation, you might actually feel sorry for Bob, who is forced to pay more for something that isn't particularly good for him in the long term.

And I think this follows to oil production. The OECD countries *choose* to consume less oil. We can afford it, but we have so many alternatives that we do not need to pay more. Our businesses may still need to consume oil at the same rates, but our citizens can substitute away via carpooling, work from home, commuting and combining trips. Thus, reductions.

Whereas, in BRIC, the primary consumers are businesses, which are more-or-less cost insensitive.

Very well said!


Watch out for the tomatoes!!!

I don’t look upon your comment as a quibble.

I would expect that given a more rigorous and comprehensive analysis (which would be more time consuming considering the data and numbers involved needing crunching) could show that the annual average oil price increase the OECD economies could absorb and still growing at an annual rate of 2 - 3 % could be in the range of US$ 5 - 10/Bbl.

My point here was not to exactly identify what annual growth in oil prices the OECD economies could absorb, but more to raise attention to the fact that there is a limit to what annual oil price growth the OECD economies (and most certainly other economies) are ready to absorb.
(This could of course change if the economies were willing to use a larger portion of GDP to pay for their oil consumption, but that would have an effect on others sectors of the economy which might be a matter of both political and economical nature. And of course vice versa).

Let us here and now just assume that this limit is in the US$ 5 - 10/Bbl range.

This would have a lot of consequences (just naming a few below and hopefully more to come).

1) How should analysts then justify higher annual price increases (except from the occasional spike in prices which could come from hurricanes, geopolitical events, speculators etc.)?
The annual oil price increases (or price changes) needs to be such that the economies can sustain them.

2) If there is an effective “roof” (and/or “floor”) on annual oil price movements that the consumers (meaning importing and consuming nations) can sustain this will have implications for the incentives to explore for and develop new capacities.

It is from observations like the one listed above I increasingly refer to today’s price as “The Oil Price Trap”.

Prices on oil have stayed too low for too long (oil was in other words too cheap for too long) to encourage deployment of incentives for conserving energy and deploying alternatives where these are economical feasible.

If some of the Western economies are faced with an econommic contraction (long term) this suggests that their abilities to pay for higher priced oil declines. This could be obtained by using less and higher priced oil in the future.

How do we get economies (GDP) to grow (in real terms) with less and more expensive oil?

Many readers of the Oildrum have probably heard of the savings glut talked about from time to time. I read about it then go and try to find hard information on the savings glut only to find that the supposed glut is in countries with very poor reporting and banking systems such as south east asia and even Africa.

However some fairly trivial digging quickly brings into question the entire concept of a savings glut.


In general the savings glut seems to be more a result of countries sterializing the inflow of printed dollars by buying treasuries in order to keep their currencies devalued no real money is changing hands instead whats happening is exporters to the US are being paid with increasingly worthless dollars.

No one wants the party to end so these dollars are sent back to the US and into the Western fractional reserve banking system creating more debt to buy more goods.
Rinse and repeat.

The general rule of thumb is that if your argument is based on data from Asia especially central and southwest Asia then be very very careful about your conclusions. If someone makes claims about Africa then you can pretty much dismiss their arguments. No one really knows what happens in Africa on a region by region basis much less compiled as a comfortable statistic for comparison with western countries.

Given these caveats lets look at the underlying assumptions of this article.

Starting with the FSU there has been tremendous political change in the region most of it now in the past in general the economies of the region have rebounded from the collapse of the Soviet Union many now highly profitable from their share of the oil and gas trade or other resources. So right off the bat the claim that FSU oil consumption never rebounded from the collapse of the Soviet Union is suspect. Russian oil usage rebounded thus realistically one would expect some rebound in other FSU countries.

So the independence of FSU countries on world oil prices esp since many are exporters while other export economies increased internal usage is highly suspect.
The numbers are probably junk and you probably should use the best numbers you have for some of the FSU countries to estimate oil usage. A reasonable guess is to assume that they increases at say 2-3% a year at least. As with Africa who really knows what FSU demand was is or is going to be ? How are the numbers collected I suspect if you dig you will find that FSU numbers are a WAG generated by some peon in a government agency somewhere.

Moving out to the rest of the world and in particular China and India what we had until recently was repeated reports of shortages of finished products developing. A shortage is a great way to reduce demand a good bit of the current excess storage in the world can be derived from the Hurricane induced shortages in America. In general when you take the route of subsidized prices with growing demand and limited capitol you get unmet demand and shortages. Overall a good bit of the average demand growth outside the OECD was met simply by not supplying the oil and inducing shortages. This is not to say that demand did not grow on average but supply probably simply was not available to meet the average demand. Spot shortages are powerful tools for balancing supply and demand forcing extreme conservation to happen over a short period of time.

Next obviously your report recognizes the contradiction developing OECD inventories supposedly rose while demand declined and the rest of the world which was supposedly increasing in demand and also theoretically capable of outbidding the OECD for oil had repeated reports of shortages.

And the price continued to rise.

At this point one begins to even wonder about OECD reporting forget the rest of the world. One wonders how reliable even these figures are. I've begun to seriously question OECD inventory numbers and what I find is that when the price of oil is volatile the oil trade in general moves from a direct trade i.e a oil refinery buying oil from a OPEC country on contract to a three way trade. Speculator buying and storing oil and then later selling it to a refinery.
More cargoes tend to be sold on the spot market and as often as not these end up in the hands of speculators reselling the cargo.

Whats important is this changes the accounting since oil production and consumption becomes disjoint and in general these speculators store oil closer to or in the final market countries. In the case of the direct trade storage would tend to be in the producing country with the refiner only requesting more oil as needed and maintaining a reasonable cushion. Thus the two way trade is a JIT model with storage local to the producer and the three way trade moves storage towards the consumer.

Thus overall these supposed storage builds in the OECD are probably simply and artifact of the changes in trade relationships with strongly rising oil prices.
Producers find that they have no shortage of buyers in the form of speculators and thus they store little oil the speculators and real consumers then use arbitrate the final price.

In general you have no real build in overall storage whats happening is instead of oil producers storing the oil and eating the costs and not reporting their storage levels you simply have oil moving into storage that is reported. Given that the oil is speculative and may change nominal ownership several times one has to wonder how well the actual amount physical amount of real oil vs the number of paper trades is resolved. You get situations similar to the gold markets where the relationship between the amount of physical gold and paper trade in gold becomes a bit murky. Is it a barrel full of gold coins or one of lead with some coins on top ?

Historically when physical commodities such as oil and gold are used to leverage market trades you generally get and inflation in the amount of physical commodity reported. Eventually if more and more trades are settled with actual physical delivery you tend to finally resolve the imbalance. However as long as a brisk paper trade is backed with real physical oil for speculative purposes you have ample opportunity for murky accounting and generally it will inflate the amount of physical oil actually available. The difference is of course settled with certain trades becoming and exchange of money instead of a physical trade. Not a problem for the market perse but certainly something that makes it difficult to asses the real amount of physical oil available. The physical speculators are of course playing the contango game so steep contango with supposedly high inventories are a pretty much a sure bet that the real physical storage levels are probably distorted. Of course the traders at Goldman Sachs could of course be angels when they trade oil despite signs of significant market manipulation in other areas.

Given that inflated inventory numbers favor people in the physical contango trade I'm sorry but I just don't believe inventory numbers until I see a market with backwardation or minimal contango for several months.

So in closing here is what I think we really know about the oil market over the last several years. Outside the OECD increases in demand where met as often as not with shortages so demand did not equal supply.

Inside the OECD speculative purchases by the true highest bidders not China not India and not OECD consumers but Banks resulted in inflated inventory numbers sold for profit in a contango market.

For producers every barrel they produced always had a buyer and storage was kept at a minimal level vs previous decades it was produced and loaded as soon as possible and if needed sold on the spot market. Probably a significant number of contracted barrels where not even delivered instead one can suspect that the oil was diverted to the higher priced spot market and thus to speculators driving the market contango even higher as real consumers found that they did not recieve contracted barrels forcing them to third party purchases of physical oil.

Recently the economy has crashed lessing the pressure on the global oil supply and of course causing a crash in prices thats at least temporary.

However despite the absolute change in oil price we have no indication that the overall oil market has changed one bit. Outright shortages in non-OECD countries have lessoned and this has cut the immense pressure on oil prices from the poorer countries but the market dynamics have not changed one bit.

If anything the increase in storage levels to historic highs and steep market contango indicates that even more of the worlds oil supply is being diverted onto the spot market and thus into speculative contango selling. Regardless of the true absolute level of oil storage in OECD the direction is probably reasonably correct most of the time i.e if a steady increase is being reported then your probably getting a real increase the level and amount of increase may be distorted say the absolute level is half whats reported and the increase may be smaller but in general relative changes are reasonably believable at least until your top out.

And now we finally can get to production. Given all the above it becomes increasingly clear that production numbers from most producers have consisted of a large surplus of paper barrels. Often the same paper barrels owned buy various physical speculators. Mexico for example has sold a lot of paper barrels. Other countries such as Saudi Arabia claim they don't engage in speculation sure...

With the recent drop in oil prices producers don't need to sell as many speculative barrels in fact they are now at least in a position to report true production levels at some point even under report. However since I believe the production numbers where already heavily distorted they would need to realistically back down from false claims and at some point will probably report the real production numbers at least for a time.

I think we have hit that point on the producer side. On the speculator side you have the problem to keep the contango going even as producers report lower and lower production numbers you have to report ever increasing paper barrels.
At some point of course this simply does not work the paper speculative barrels disappear storage falls and prices increase and the speculators have to sell all of their physical barrels as the market enters backwardation. If production does not meet demand then you have a price war again.

At the end of the day all that seems to have happened is that the financially induced fall in prices seems to have given speculators a chance to control even more real physical oil bought up as the rapid crash of the economy resulted in a temporary supply glut. Given that they paid little for these barrels they can keep the triad trade going for a while as they offer lower prices than most producers are willing to offer. The beauty is a producer is now forced to put a cargo on the spot market and sometimes sell at a discount as the front month is highly volatile so the traders are still able to pick up the odd distressed spot sale from time to time given a volatile market.

If you noticed in this long tirade at no point in time was the amount of physical oil increasing in fact for all this to work you must have a steady persistent and probably steep decline in physical production. Speculators are putting up billions of dollars and paying millions for storage and I don't think Goldman and friends will do this unless its a pretty sure bet. Maybe they eventually get burned but given the above I doubt it.

Comparing patterns of vehicle ownership in: 1. the US, 2. Europe and 3. the developing world.

1. The US has a high rate of vehicle ownership at 2.28 vehicles per household according to a recent survey. From the same survey, “'The most common pairing of vehicles in American households with two to four cars is a full-sized pickup truck and a standard, mid-range vehicle.” The average efficiency of the US vehicle fleet is in the low 20 mpg range.

2. Europe has similar levels of vehicle ownership per household as the US. However, average European fuel efficiency is much higher. Public mass transit is more readily available than in the US.

3. In the developing world there is usually less than one vehicle per household and these vehicles are very efficient (such as a motorcycle/tiny car). Public mass transit is less available than in Europe.

When oil prices rally, households in the US have capacity for immediate efficiency gains as they can drive the more efficient of their two vehicles more and if they buy a new vehicle they can buy a much more efficient vehicle.

In Europe, people are already driving relatively efficient vehicles and so they have less capacity for oil consumption efficiency apart from using public transportation more heavily, which is much more widely available as an alternative in Europe than the US.

In the developing world, there is less public transportation available and vehicle owners are already driving one very efficient vehicle. Developing country oil consumers, therefore, have the least ability to cut back on consumption when oil prices rise.

In summary, when oil prices rise, households in the US can quickly decide to buy less oil, followed closely by Europe – but for slightly different reasons. In the developing world, households cannot as easily avoid buying oil even when prices rally.

I tend to agree with your division on car ownership as you defined it and responses to higher oil prices.

What I found interesting was that oil consumption declined about the same relative amount in the US and OECD Europe during the recent run up in oil prices. The impact from higher taxation on petroleum products in Europe did not seem to lead to a less relative decline.

Europe also suffered its own housing bubble and general credit bubble.

Although I think that Europe uses less oil to build a house than the US I could be wrong it might be close to the same. I really don't know much about demographic changes in Europe vs the US. I noticed in England at least that the housing bubble there seemed to include a lot of suburban sprawl similar to the US. While in Spain it was Condos but also generally on the edge of town. So its hard to say.

Also I don't know how building materials are moved in Europe vs the US. I'd guess Lumbar could well be shipped similar distances same with concrete for that matter.

The more I think about it the more its likely that oil usage in construction is actually quite similar in Europe the US and even in the third world. If so then the popping housing bubble could readily explain declining oil usage in both Europe and the US. While the third world economies declines have just really started so they are just now pulling back from construction.

However I do know that in the third world housing tends to be high rises of some sort or at least multistory buildings and they are built all over town mostly on the outskirts but not as rigid as the EU or US. This is a commercial construction usage pattern different than the US or EU so they might use less oil on a per sqft or sq meter basis. But it could well all average out and the general oil usage amount tends toward a constant per ton of material used.

If this conjecture is correct for the world and I believe most of the construction declines are in the past and most parts of the world now have reached a very low level of construction activity then we will see oil usage flatten.

I think right now only Australia is still having a bit of a housing boom and thinks that they are different from the rest of the world and won't suffer the same fate everyone else has.

I'm waiting patiently to dis base a few of our Aussie posters of their belief that they are different and won't suffer a housing crash.

In fact right now Australia serves is a nice test of my theory. So far at least their housing market has not crashed and overall oil usage has not changed.

Looking here


From this data you see flattening unrelated to oil prices and in my opinion highly correlated with a housing industry that stalled and will go into decline any day now.

I agree with your observations. Also of course in developing countries you tend to have directly subsidized fuel so the price impact is both delayed and moderated except as I noted in my long post you tend to get persistent shortages.

The shortages tend to force conservation. In general I suspect that the demand declines in the US and Europe basically at least balanced out any increases in developing countries. Its not clear to me that we had any net increase in supply and therefore any net increase in demand.

Next as far as US households using less oil probably the biggest change to date was a halt in suburban expansion leading to the average vmt traveled to at least stagnate for US households. Some conservation as you mention is probably at play. The biggest is of course discretionary summer demand.

The rest and in fact the bulk of VMT decline in the US so far is in my opinion related not to individual households actually decreasing VMT on a personal consumption level but from collapse of the private and commercial construction industries. Remember that VMT is a total for both commercial and private road traffic its not just private cars. And of course general decline of OT trucking from a variety of different industries. We ship a lot more by truck in the US.
Construction material, workers etc are a big source of traffic. And of course all the varied stuff people buy when they buy a new home from the SUV to refrigerator.

All of this business activity decline with falling construction and used home sales my opinion is this was the major driver of overall VMT decline while individual VMT decline was concentrated in pulling back on non-essential trips.

So far at least if we start tracking in mid 2008 when the steepest declined occurred and housing really tanked we are running down about 3% I suspect this summer this difference will approach zero as by the second half of the summer most of the declines where in. Basically VMT will flatten out fairly quickly this year if I'm correct and the decline itself was from collapsing housing.
Look at the 2001 recession fast drop then flat VMT. Housing did not fall as much during that recession so the 1980's is a better mini example.

If I'm right of course if VMT stops people will claim its because of low prices spurring demand but so we will just have to wait until we get high prices and VMT stubbornly refuses to decline much from its current levels.

Once people reduce personal oil consumption to only whats needed to work further reduction becomes difficult to implement regardless of the price of oil and rising gasoline costs coupled with a credit crunch make buying big ticket items like more fuel efficient cars difficult. Falling home values prevent people from easily moving closer in as the far out suburbs devalue faster than the closer in regions.

Next of course employment is far more disperse in the US with many jobs located in fringe regions unlike the 1908's where most employers where still centrally located in downtown areas or industrial parks. So carpooling will be much less effective then it was in the 1970's and 1980's. People are simply traveling in to many different directions. In fact out migration from the inner suburbs to jobs lying further out is quite common. I lived in Chicago for a while and that city had dense traffic in practically every direction you traveled with congestion in all directions.

And last but not least having mentioned congestion :)

Congestion plays a huge role in overall fuel efficiency most of the US's roads have traffic levels well beyond design leading to highly inefficient congested traffic patterns. The nominal MPG of various auto's is probably completely negated by the horrible inefficiency of stop and go driving. I'd suggest that one additional part of the large difference in fuel usage between the US and Europe is a simple result of congestion. Also note this generally applies to third world countries to which tend to have poor heavily congested road networks.
The only solution is either a major expansion of the road networks or for some people to simply stop driving. Given the current roadways in the US and congestion levels I suspect the overall fuel usage will remain quite high.

Now congestion is of course a problem in Europe don't get me wrong but I suspect even though I don't have the numbers that Americans travel significantly more congested miles vs Europeans. We both generally have longer commutes and also spend a large part of the commute in heavily congested traffic. And last but not least the lighter more fuel efficient cars used in Europe win big in congested environments as your accelerating far less mass with a more efficient engine.
Stop and go or congestion efficiency of smaller cars at low speeds is significantly better than in the US with large fuel inefficient cars.

So in my opinion the much higher US fuel usage per capita in the US is significantly impacted by two additional variables seldom mentioned our sprawling housing construction industry which is in my opinion a big part of our fuel usage. And congestion. The suburban expansion is over but congestion is going to be much harder to deal with.

But all we can do is wait in see if indeed it turns out like I suspect and VMT changes begin to level off and remain quite flat despite increasing fuel prices then I nailed it. If this is right then we see if I score a double and see relentless declines in the value of homes and rent as oil prices increase with VMT still remaining stubbornly close to flat.


Those are good points.

I think, too, that a reduction in vacation miles traveled has been a factor. This may affect Europe as well as the US.


Thanks for the hard work - I did like your post.

Two clarifications:
1.) You say there is no meaningful substitution for oil. I think what you may miss is that we cycled our power plants off oil in the early 80s - the opportunity this recession is to cycle off transportation through the use of the grid.
2.) China & India have not reduced their oil demand before b/c there is a oil subsidy which obscures the price signal when oil spikes - this is also changing.


1: You are right that OECD countries substituted much of their oil use with mainly natural gas and nuclear following the oil price shock of 1973/1974, which gradually was brought on stream as the oil price shock of 1979/1980 hit home. In addition, gains were obtained from improving fuel efficiencies.
As of late 60’s and early 70’s more than 50 % of OECD primary energy consumption was from oil that mainly substituted for coal.

Something interesting seems to happen with the oil prices collapse back in 1985/1986, the drive to substitute for oil stopped. This means that the ratio of energy used from other sources to oil remained (for all practical purposes) constant until the most recent price spike.
Now I am afraid that the present oil price is too low to encourage more use of the grid for transportation. This could of course change with governmental involvement or regulations.
(With the above I am running ahead of future posts.)

The diagram above shows development of primary energy consumption by energy source for China for the years 1965 - 2007.

One thought I made from observing the above diagram is; “Could it be that China presently is trading their growing coal consumption with oil?” China recently started to import some of it coal for consumption.
Coal is mainly used for electricity which runs the Chinese factories producing consumer goods that until recently contributed to a high Chinese trade surplus. This trade surplus may again be used to purchase oil for Chinese consumption. Subsidized or not the trade surplus gives some financial strength to both bid for oil and allow for growth in consumption.

Just my 2 SDR’s.

Thanks Rune. That was well thought out. I would split hairs a bit that the current energy price is too low to use grid transportation. The grid will be used for more transport b/c of last summer's spike to $147 and its semi-permanent ramifications.

Supply as you know moves much slower than demand and whether we go to 31mpg in the US or 35 or higher has nothing to do with today's prices but what is being done to prevent the next spike.

Said more simply, there is a lag btw price spikes and demand destruction. I think grid enhanced transportation will continue to permeate during this lag period.

I think James Turk has raised a very important point:
Oil really has not increased in price in 50 years. Rather, the dollar has declined. Even the big run up that WT amd Simmons always point to - 15X in the past 10 years - is really just "inflation" - or rather the decline in purchasing power of the dollar. This emphasizes how fiat currency misallocations distort our understanding of what is happening.


TURK: We can see from this chart that the price of crude oil in terms of gold is basically unchanged over this 59-year period. In other words, a gram or ounce of gold today buys essentially the same amount of crude oil it did in January 1950. Clearly, that result would make gold to be a lousy investment. There has been no appreciation from owning gold. You can only buy the same amount of crude oil with gold that you could in 1950, not more.

Forget gold buy oil with copper :)

Hmm why was the dollar devalued in the first place vs a lot of commodities and metals of use to a technical society ?

Until recently it was massively devalued vs housing if you want to look at it that way.

This tells you nothing about why the value of something in dollars is changing.

In the case of houses its obvious via massive extension of credit restricted to buying houses you had and artificial scarcity created with to many dollars that where only investable in houses. A bank would readily loan me half a million dollars no questions asked for a house but not one dime for a good small business plan.

Whats up with oil ?

Well there is no artificial source of money tied to oil no loans only for oil. So its not a artificial supply and demand problem hmm must be when all the money from other parts of our economy needs to be spend on oil the supply of oil vs money is short. I.e we have more money that needs to be converted into oil for other endevours than oil. The supply of dollars in and of itself is not and issue.

Plenty of commodities spent years with minimal price changes despite the rapid decline of dollars vs oil. Wheat/Sugar/Corn Soybean and even for most of the time NG never reached the same dollar vs commodity situation as oil until the very recent past. And given the amount of oil used to raise crops one wonders which came first oil price increases then general commodity price increases with the rising cost of oil inputs.

Let say hypothetically we suddenly decide to really convert our society to a renewable one then over time the number of dollars chasing oil will decline in relation to the oil supply and eventually oil would drop to both some low value and low total volume.

Similar to as refrigerators replaced iceboxes the value of iceboxes dropped to zero as their became no need to convert dollars into iceboxes.

Only four basic things have had their prices inflated via specialized lending that favors the product. Houses/Buildings, Cars, Student Loans, and Medical Insurance in the US.

All other goods and services for the most part make use of general credit worthiness or cash for transaction with no artificial support. And for the ones with specialized pricing support the government is heavily involved or in the case of medicine involved in a weird way.

These government sponsored special debt sources causes the prices of these goods to be artificially inflated forcing general inflation. And at least until the last 10 years some wage inflation. Eventually some of these dollars are of course used to buy stuff thats not artificially priced and in general you have and excess of dollars vs the good in question. Then depending on the supply of dollar demand for the good and supply of the good the price will change.

A lot of goods that where relatively easy to produce or via globalization could be cheaply manufactured actually declined in value. Many to the point that they where no longer worth manufacturing in lands that had to have high wages to buy the artificially priced goods primarily housing. This forced even more debt to be used to cover the loss of real purchasing power even as the price of goods declined.

For oil at least until it become in short supply vs dollars you pretty much had the generic bleed over price inflation causing slow price increases.

But overall given the way our economy works extreme price beyond general inflation and outside of the artificially inflated area only occur when their are supply problems.

Overall as long as credit did not get to extended you eventually had short recessions blowing off speculative excess and resetting prices a bit but as long as the system could grow it went right back to growing with everyone generally happy. Only when it reached failure and credit expansion resulted in no real growth but just a spiral of speculation in the artificial markets did the system collapse.

And its not just housing that became increasingly a target of speculation but student loans and medical care and even car loans became ever more speculative.
To some extent generic credit like credit cards also over extended.

The artificial inflation sources became the only viable investments and once that happened everything blew up. Underlying this shortages of raw materials esp oil caused other sectors of the economy to steadily decline as they faced ever rising input costs. Housing being the largest of the bubbles popped first but all the bubble venues are going down with it student loans, credit cards, medical etc.
A lot of it in the form of credit default but this still leaves us with to many dollars and not enough oil no matter how great the credit deflation is. Credit could go to zero and we still simply don't have enough oil for all the dollars we want to spend on it.

Certainly right now credit deflation and even real monetary deflation is effecting the price of oil to some extent like every other good and service. But if we are right about peak oil then it will naturally inflate because of supply and demand issues and with it oil dependent produces and services will have no choice but to increase prices even as we experience overall monetary and credit deflation.

A extremely vicious and probably deadly variant of stagflation where basic commodities become ever more expensive and the need and desire for credit for luxury items or those with artificial price supports decline.

Regardless of this and no matter what monetary games are played you still have the problem of more money than oil.

Gold and oil ?

Well gold tends to be somewhat special in that it has little intrinsic value but is excepted as a sort or form of money. In a lot of ways its anti-fiat if the purchasing power of fiat is declining then the price of gold in the fiat increases. If the risk of debt default is increasing then again the demand for gold as a form of safe haven increases. This tends to offset changes in the purchasing power of gold vs commodities. Most importantly gold is trivial to hoard and thus if the consensus is that the demand for gold is to low i.e its price does not reflect its use as a store of value gold is simply withdrawn from the market and not offered for sale until the supply and demand reaches what the market thinks is the "value" of gold in the fiat currency.

The key is no one is forced to sell gold in their possession at the current market value for gold. For something like gold thats trivial to hoard you can readily see how it tends to act as a store of value vs fiat currencies which are generally inflated. Or during times of trouble when losses through deflation esp debt deflation happen.

However since gold has little intrinsic use one big reason it made a good form of money in the past all of its value is purely sentimental. Its really just a nice form of fiat where the "Central Bank" is the willingness of gold owners to sell either directly for goods if its excepted as money or indirectly via a exchange to a fiat currency. If supply is really short mining can expand the gold supply only slowly so generally its managed to not get devalued.

Actually all metals that can be readily stored tend to have behaviors quite similar to gold and better their demand is also tied closely with the real economy not just simple sentiment this makes their value vary with the economy but so would gold if it was in wider circulation. Since its primarily hoarded its value as a store of wealth during deflation is dubious at some point gold hoarders will be forced to sell then down goes the price of gold just like any other real mens metal.

Thus my suggestion that copper is probably a much better metal to use if your discussing store of value. Nickel is another good one.

My favorite is actually platinum its got the best traits of all the metals.

Sorry there is no real magic in the metals least of all gold. If any metal possesses magical properties its platinum did I mention its my favorite :)

But I'm a chemist and most people don't know this but we tend to worship platinum figurines in private :)

We know the god metal when we see it :)