Oil prices have been coming down significantly this week. Is that good economic news?
Minerals Management Service reports that 78% of Gulf of Mexico oil production remains shut in as a result of Hurricanes Katrina and Rita, and hurricane season is not yet over. Even so, the graph at the right (data source: EIA) reveals that oil prices have fallen almost 10% since Rita hit land. What gives?
A big part of the answer appears to be continuing indications that global energy demand is softening. Thirsty China showed only a 2.5% increase in petroleum consumption in the second quarter of 2005 compared with the second quarter of 2004 (more on China here). And new data confirm that the drop in U.S. gasoline consumption we saw in the first two weeks of September is for real (see the graph below from Calculated Risk).
There are also structural indications that even bigger drops in demand lie ahead. As the table below reveals, sales of the big gas-consuming vehicles in the U.S. plummeted in September.
Elimination of airline routes will also reduce fuel consumption. Both of these may also mean layoffs and a slowing economy. That of course would be yet another reason to expect further declines in energy demand. But that concern could also explain why the S&P500 stock price index fell along with oil prices this week.
|Sales of Full-Size SUVs, Sep 04 vs. Sep 05|
|Company||Model||Sep 04||Sep 05||Change||% Change|
|Land Rover Range Rover||1,010||985||-25||-2.5%|
|Toyota Land Cruiser||614||296||-318||-51.8%|