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 |
| GM | Buick Rainier | 3,338 | 1,683 | -1,655 | -49.6% |
| Cadillac Escalade | 5,424 | 3,864 | -1,560 | -28.8% | |
| Cadillac SRX | 2,439 | 1,624 | -815 | -33.4% | |
| Chevy Suburban | 12,987 | 5,640 | -7,347 | -56.6% | |
| Chevy Avalanche | 8,147 | 4,131 | -4,016 | -49.3% | |
| Chevy Trailblazer | 28,175 | 21,412 | -6,763 | -24.0% | |
| Chevy Tahoe | 20,905 | 9,151 | -11,754 | -56.2% | |
| GMC Yukon | 16,848 | 11,027 | -5,821 | -34.6% | |
| GMC Envoy | 14,792 | 6,157 | -8,635 | -58.4% | |
| HUMMER H1 | 24 | 28 | +4 | +16.7% | |
| HUMMER H2 | 2,524 | 1,724 | -800 | -31.7% | |
| Ford | Ford Expedition | 15,003 | 5,906 | -9,097 | -60.6% |
| Ford Excursion | 1,498 | 1,740 | +242 | +16.7% | |
| Ford Explorer | 30,448 | 12,879 | -17,569 | -57.7% | |
| Lincoln Navigator | 3,514 | 1,559 | -1,955 | -55.6% | |
| Lincoln Aviator | 2,345 | 1,407 | -938 | -40.0% | |
| Land Rover Range Rover | 1,010 | 985 | -25 | -2.5% | |
| Chrysler | Dodge Durango | 10,828 | 9,656 | -1,172 | -10.8% |
| Toyota | Toyota Sequoia | 4,388 | 2,334 | -2,054 | -46.8% |
| Toyota Land Cruiser | 614 | 296 | -318 | -51.8% | |
| Lexus LX470 | 768 | 764 | -4 | -0.5% | |
| Nissan | Nissan Armada | 3,104 | 2,459 | -645 | -20.8% |
| Infiniti QX56 | 1,265 | 1,213 | -52 | -4.1% | |
| Isuzu | Ascender-7 | 753 | 449 | -304 | -40.4% |
Technorati Tags: oil prices, oil, petroleum demand
Dr. Hamilton:
The graph of consumption does illustrate that the normal Labor Day weekend bump was mostly eliminated this year. However, we still must recognize that the DOE’s definition of consumption is the shipments from refineries, and when we have the refineries shut in then by the DOE definition consumption declined. While the amount of retail and user inventory draw down is probably not responsible for all of this, it still seems wise to take the DOE information with a grain of salt.
Is it possible that the price of crude reflects that shut-in refineries don’t buy crude, and with some releases from the Strategic Petroleum Reserve there is been a basic change in demand – supply that is not really represenative of consumer behavior.
The change in the auto buying patterns is a rather dramatic. However, recognize that many purchasers defer major decisions in times of news stress, and while I am certain $3 gas is a factor, the comparison probably overstates the real impact.
12,000 miles a year – 15 miles per gallon – 800 gallons of gas – $1 per gallon – I doubt $800 changes the ability of a purchaser to buy an Escalade. Times of change always demonstrate irrational personal behavior.
Have a great week end!
Bill
If Bill is correct about the way the statistics are collected (and he usually is), then those tankers of gasoline from Europe would also not be counted.
And don’t forget – Hummer H1 sales INCREASED!
Survivialists?
Try survivalist. Look at the actual number
It could be a customer preferences trend break that shows in the decreasing SUV sales. This will affect also those buyers that can afford the gasoline in any case. The SUVs are “out”.
The coming down of the oil prices is a reminder that the oil demand can move down very quickly in the right circumstances. Physical things matter and people can adapt if it is necessary. Now we’ll see if this is a sign of a beginning recession.
Maybe decline in gasoline consumption, Is a result of a less confident consumer. Especially of those who realize they now have to heat their new Mcmansion, that they bought for at an inflated price, and hears a lot of talk about asset bubbles, so it’s less trips off to the mall to buy things they don’t need with money they don’t have, But this pattern will soon break as the average American consumer/shopaholic, will soon give up this temporary scrafice once the Christmas shopping season gets underway.And gasoline consumption will rise along with the need to heat these new “hummer” type houses…
Hey HW,
When I wrote “And don’t forget – Hummer H1 sales INCREASED!”
I was making a little joke about a big joke.
“Survivialists?””
But I was serious about the mispelling and about my question on the statistics.
Could someone explain how Free Trade Zones work–their advantages and their relationship to the country in which they are based?
This definition of free trade zones is about as good as any for use of the phrase to specify an area set aside within a country for the purpose of attracting businesses, primarily foreign, that will manufacture goods for export. It’s a government-subsidized trade tool that I believe the WTO is trying to stamp out as an unfair subsidy.
It has another meaning in the sense of customs union where participating countries harmonize tariffs — this was one of the original features of what’s now the European Union. This article provides some context.
Mike C,
Thanks. Your first definition was the one in which I have interest.
Found an interesting site all might find interesting:
THE WORLD ECONOMIC PROCESSING ZONES ASSOCIATION
http://www.wepza.org/
Read the article entitled Corporate Strategists Beware:
Despite their frequent denials these days, the world multilateral organizations (OECD, ILO, UN, EU, WORLD BANK, and WTO) are either attacking EPZs or ignoring EPZ success in poor country economic development. WTO at Doha proposed serious reduction Jan. 1, 2002 of rights of poor countries and their workers to offer tax and other incentives to export industry. Continuation of these attacks, if not opposed strongly now, will result in the disappearance of Free Trade Zones and Economic Processing Zones from the developing world where they are proven reliable expanders of Trade Capacity.
This site promotes the use of these zones.
These zones can be subsidies of the most vicious sort, exploitative and unfair. These zones are designed not only for offshoring manufacturing but also for a wide variety of other purposes: banking, tourismand yes, tax havens are among their purposes.
As for stamping them out, I wonder if all the free trade zones south of the Mexican border will be stamped out. I don’t think so.
Falling oil prices
Over the weekend it occurred to me that I haven’t written about oil prices for almost three months. I also realized why: this has been the summer of oil-market Chicken Littles, and with almost everyone convinced the sky is falling,…
I think the real reason that the car volume has dropped so precitpitously is not because of higher fuel costs, Its too soon to see a significant change in consumer purchase habits for autos. The employee pricing program at all the major car companies in the spring/summer cannibalized future sales. I suspect car sales will be low for the next several months.
Even if the sales of vehicles with high fuel consumption have dropped, these vehicles have not ceased to exist. They will still be sold, even if at a price which is below manufacturing cost. Indeed, given the structural rigidities afflicting the major US automakers, I wonder how much the continuing production of these vehicles would even be slowed down…..
Winter: a little warmer, drier than normal
I’m not so sure this is a whole lot more accurate than the Old Farmer’s Almanac, but Accuweather has posted its temperature and precipitation outlooks for the coming winter. For Texas, it looks like temperatures might be slightly warmer –…
Is this just an effect with near term stuff or is the overal curve shifting? If so, that would show changes and more indecisiveness in what long term outlook is. If not, it’s all time now related (Katrina and market reports).
I’ve managed to save up roughly $70860 in my bank account, but I’m not sure if I should buy a house or not. Do you think the market is stable or do you think that home prices will decrease by a lot?
Courtney, no one knows for sure, but there certainly is a risk of a decline in house prices. If the purchase and mortgage you’re looking at would only make financial sense for you on the assumption of further big gains in house prices, you might think twice about making a commitment.
One way to think about these decisions is to imagine you and your children and their children plan to live in the house forever and never sell it. If you did that, would the lifetime of payments (including property taxes, insurance, and maintenance) that you plan to make seem worth it in terms of the value of housing services you’d get out of it, compared to renting at whatever terms are available to you?