Rising U.S. oil demand in 2015 - and beyond

Jun 21, 2015 12:00 AM

The constant writing on the oil market today largely focuses on mounting global supply. That’s perfectly understandable: shale oil productivity has increased 50% over the past five years, U.S. crude output is up 90% since 2008, and OPEC infighting on how to deal with the U.S. shale oil revolution is interesting discussion to say the least. But, oil demand is now becoming more of a focus, as rising global use remains a steady drumbeat.

For the U.S., the largest oil consumer in the world at nearly double 2nd place China, demand for the week of June 12 hit 20 million b/d, an 8% increase year-over-year. Overall, U.S. oil demand has seesawed between 18.5 and 20.5 million b/d for years. Yet, there are now signs that our demand is beginning to rise again, after the worst economic times since the 1930s.

A 2014 Financial Times headline surprised many Americans: US oil demand growth outstrips China in 2013. For 2015, falling crude and product prices and rising incomes are driving higher U.S. oil demand. Through the first five months of this year, the price of crude (West Texas Intermediate) averaged $52 per barrel, compared to $100 over the same time in 2014. Real GDP per capita incomes increased 2% in 2014.

We’re 24 weeks into 2015, and we’ve averaged 19.51 million b/d of oil consumption. By comparison, in the first 24 weeks of 2014, we averaged 18.69 million b/d, versus 18.45 million b/d in 2013. U.S. oil demand is staying higher for longer. For the first 24 weeks of the last three years, we’ve seen just 6 weeks below 19 million b/d in 2015, compared to 19 weeks for 2014 and 22 weeks in 2013. Year-over-year, U.S. oil use in 2015 is up 820,000 b/d, with gasoline accounting for 34% of the increase, diesel fuel 19%, and jet fuel 13%. Falling pump prices have encouraged more driving. In fact, gasoline demand for the week of May 22 was the 2nd highest level ever, 9.73 million b/d (the third week of August 2007 demand hit 9.76 million b/d). Cheaper gasoline is expected to save Americans $750 this year. Road travel was up 4% in March year-over-year, with the busy Summer season coming into full swing.

The EIA’s weekly Petroleum Report reported for the week ending June 12 that’ve we had 7 consecutive storage withdrawals, compared to 16 consecutive injections prior to that and 1 withdrawal to start the year.

U.S. Oil Demand is Rebounding

Screen Shot 2015-06-21 at 7.34.14 PM

Source: EIA

With 255 million registered passenger vehicles, perhaps the best way we can tell that economic growth and oil demand are rebounding is car sales. Personal mobility…was, is, and will remain an American hallmark. Every month since March 2014, seasonally adjusted annual rate of U.S. car sales have been above 16.3 million, 99% of them running on oil. Regardless of what laws are being imposed (as reality sets in, I’m convinced that many laws now being passed will need to be drastically altered or even repealed, see here and here) non-oil sources are limited physically, so they will remain much more supplemental than alternative. Oil Price June 17 headlined: “Has U.S. Ethanol Production Topped Out?.” Annual cellulosic ethanol production, promoted as the savior by those obsessed with ending oil’s reign, must increase 762-fold (yes, you read that correctly) by 2022 to meet its 16 billion gallon EPA mandate.

U.S. Car Sales Are Rebounding

Screen Shot 2015-06-19 at 11.05.23 AMSources: Y-Charts; JTC


Looking forward, both the EIA and the IEA project that U.S. oil demand will stay “buoyantly very high” (my words), between 19 and 20 million b/d. New Corporate Average Fuel Economy (CAFE) standards will increase fuel economy to the equivalent of 54.5 mpg for cars by Model Year 2025, and the Obama administration says that’ll reduce oil consumption “by more than 2 million barrels a day by 2025.”

In 2017, the standard for cars will head toward 55.8 mpg in 2025, double 27.5 mpg in 2010. Truck efficiency will also double to 39.8 mpg. But, those projecting peak U.S. oil demand advocate a clearly unproven proposition. As we grow, there’ll surely be great opportunities to consume more oil, our primary source of energy. After all, by 2030 alone, the U.S. will add 45 million people and $8.7 trillion in real GDP.

Just one obvious reason to stay bullish on gasoline demand is that we will sell some 300 million new cars over the next 20 years. And very importantly, I’ve already documented the numerous problems with CAFE: higher fuel economy standards are hardly “free lunches” (a must read here). As for the new efficiency regulations for trucks, the 1,300 page proposal (no wonder DC has 14 times more lawyers per capita than 2nd place New York!) should have us all concerned. By the Obama administration’s own estimate, the rules will add an average of just under $12,000 to the cost of a new truck, another law based on untested technologies. Increasing transportation costs might be the worst thing we can do (see here). Once again, the health benefits of lower costs and more Americans having more money going conveniently ignored.

Ultimately though, I still argue that the key for analyzing U.S. oil demand for today and in the future is looking at what happened in the years prior to The Great Recession compared to the years after it. It’s more money that drives more energy demand and the economic problems that rippled across our economy just 6 or 7 years ago linger longer than most people realize. Oil demand graph after oil demand graph after oil demand graph, it’s obvious to see that are consumption patterns have still not normalized. Before the Recession, the U.S. was averaging 172,000 b/d in yearly incremental oil demand growth. Since then, new demand has fallen into the negatives as economic growth has been significantly slower, augmented by rising prices (until recently). For example, from 2000-2007, the U.S. real GDP increased $335 billion a year, but from 2007-2014, it increased just $173 billion a year, with negative growth in both 2008 and 2009. Even though the U.S. unemployment rate is now 5.4%, compared to 9.1% in June 2011, a record 93 million working age Americans are still not in the labor force, a massive, dislocated block that’ll surely add to our oil demand as the economy improves.

The final takeaway? Re-stated again, since oil has nowhere near a significant substitute (the biggest reality the anti-oil crowd refuses to realize), and thus high U.S. oil demand is sure to stay under any energy policy scenario, we better support our oil companies, or else we’re sure to be supporting OPEC.

What if There Was Never a Great Recession? U.S. Oil Demand Would be Nearly 3 million b/d Higher

Screen Shot 2015-06-19 at 1.34.27 PM

Sources: EIA; JTC

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