|
The Direction of
Oil – Watch the Demand not the Supply
Imagine a world that is awash in oil. Imagine oil
tankers filled to the brim with no takers. It has happened before.
Can it happen again?
Oil has come to be considered a precious resource in short supply.
It seems there are stories daily in the press about localized
events in oil producing countries that are interrupting the supply
of crude. Is this an unusual occurrence? The press coverage would
indicate that perhaps it is. Actually, there have always been
those supply disruption events, but now their perceived magnitude
is being multiplied by speculators who are driving up the price of
oil. Supply, supply, supply…that is all we hear about, because
that is what the speculators know will further drive up the price.
Anecdotal stories indicate a shortage of tankers for transporting
oil because tankers are now being used simply to store oil,
presumably by speculators who feel that the increase in daily
price justifies the storage fees. Oil tankers are becoming hot
items because of their use as a storage mechanism rather than a
transporter.
There is a concept in economics called price elasticity. It
basically says that as the price of a resource rises the demand
will go down and vice versa. It has been presumed thus far that
oil is not subject to the rule of elasticity; that we will
continue to consume the same amounts of oil regardless of price.
That is not the case. The rule of elasticity will prevail but it
will take a long time for consumers to adjust their patterns to
the new $4 per gallon of gasoline. But they will adjust. There
will be fewer trips, more carpooling, more use of mass
transportation and more fuel efficiency. SUVs, trucks, and RVs
will be driven fewer miles and more fuel efficient cars and
hybrids will be developed and purchased. As the demand goes down
dramatically we will indeed be awash in oil and it will seem to
have come from nowhere.
Let’s take an example of a family and how their use of gasoline
might be decreased in light of $4 gas. Assumptions: a two car
family, an SUV that gets 13 mpg, a Sports Car that gets 22 mpg,
Miles driven prior to $4 gas: SUV 1000(77 Gals) miles per month,
Sports car 600(27 Gals) miles per month. Assume that by shifting
driving patterns and eliminating needless trips we decrease
mileage to 1400 miles per month and that a new mileage allocation
is: SUV 400 miles per month,(31 Gals), sports car 1000 miles(45
Gals). Total gas consumed goes from 99 Gallons to 76 Gals for a
savings of 23 Gallons or a 23% reduction in the use of gas.
What kind of an impact would a 23% decrease in consumer demand for
gasoline have on the price of crude oil? Since the US consumes 25%
of crude oil worldwide, a 23% decrease in crude oil usage by the
US would result in a 5.7% decrease in the demand for crude oil
worldwide. Currently oil demand is greater that oil supply, which
is driving the speculative oil bubble. However, the demand versus
supply is less than 1%. If oil supply were to exceed oil demand by
even 2% it could drive the price of a barrel of oil from $135 per
barrel to $60 per barrel or much lower. Imagine the possibilities.
June 16, 2008
Copyright© 2008 – Bruce Miller - All Rights
Reserved
 |
|
CLICK HERE to download the above article in Adobe
Acrobat PDF format. If your web browser is not
already equipped with the Adobe Acrobat reader,
Click
here to download
this free software. |
|
