Thursday, December 3, 2009

US Oil Demand Is Falling

In the Grand Game, which I define as meeting the world's energy requirements, oil plays a key role. Oil is not the only source of energy, of course, as natural gas, coal, nuclear power, and renewables of various kinds also play a part. Oil consumption, as measured by the amount of gross inputs into refineries, peaked in the U.S. in summer 2005 at just over 16 million barrels per day. Since then, gross inputs into refineries has steadily declined, to approximately 15 million barrels per day, for a reduction of approximately 6 percent over 4 years. Imported finished petroleum products such as gasoline also peaked around 2006 at approximately 4 million barrels per day, and have fallen to approximately 2.5 million barrels per day recently. These results show that the U.S. oil demand is falling, this has continued for 4 years, and cannot be fully explained by the economic crisis and recession because those began just after Obama was elected President in late 2008. A possible explanation is the increased cost of gasoline and diesel fuel, causing motorists to slow down and thus save some fuel. Another possibility is the gradual impact of hybrid vehicles with their greater fuel economy, along with retirement of older vehicles with very poor fuel economy.

A very interesting article came to my attention, in which Deutsche Bank analysts are quoted as writing that U.S. energy intensity has been declining at an annual rate of 2 percent for several years, and this decline is expected to accelerate to 3 percent. Energy intensity, in this context, means oil consumed per unit of economic output. Energy intensity can be reduced by several means, such as replacing oil with another fuel e.g. natural gas in a flexible-fuel power plant or industrial furnace, converting transportation fleets to an alternate fuel such as natural gas, ethanol, or bio-diesel, mandating improved fuel efficiency for motor vehicles, reducing highway speed limits, and a few others.

In the early 1980's, the U.S. (and many other countries) embarked on a federally-mandated energy conservation program, because OPEC production cuts and misguided regulations caused an apparent shortage of oil worldwide. Hindsight proved that there was no shortage of oil or any other energy source, and in fact, more proven reserves of oil and natural gas exist today than then. The conservation program was quite effective, and reduced industrial energy consumption by approximately 30 percent.

The technologists, or geeks, are beginning to make an impact on the Grand Game. As just one example, GM's Chevrolet Volt car is now to be delivered by the hundreds in late 2010 for sale in California. The Volt is a plug-in hybrid, which under short commuting driving can use zero gasoline and run entirely off of electricity drawn from the grid. While the price tag for a Volt is expected to be rather high (some estimates are around $40,000), this price will likely decrease. Also, other manufacturers will likely beat that price and offer similar performance. The impact on the Grand Game will be huge.

As always, it will be quite interesting to watch OPEC's moves in the next few months. Maintaining their oil revenues is of paramount importance to them, so we may see increased oil flow and reduced oil prices as a move to check the popularity of plug-in hybrid cars. The higher cost for the plug-in hybrid cars only makes sense when gasoline prices are high. Otherwise, the consumer will buy a conventional car without the hybrid and plug-in machinery. However, the U.S. under Obama now has very ambitious fuel efficiency rules in place, such that the average city/highway miles per gallon for new cars sold in 2016 must be 35.5 miles per gallon. This target is a dramatic increase over current standards of approximately 25 miles per gallon. Either way, the U.S. demand for oil is likely to decrease for the next few years.

As I have already written, Peak Oil is a myth and will not occur, but peak demand has very likely already happened. In the U.S., peak demand has certainly already occurred.

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