(John Kemp is a Reuters market analyst. The views expressed are
By John Kemp
LONDON, March 12 North America's shale fields
are the most visible symbol of the energy revolution, but they
tell less than half the story. An even bigger transformation is
taking place in the engines and fuel tanks of cars and trucks
across the United States.
High oil prices, recession and tougher fuel economy
standards have combined to cut 5.5 million barrels per day from
projected U.S. oil consumption in 2020, according to an analysis
of forecasts published in recent years by the U.S. Energy
Information Administration (EIA).
In the 2004 edition of its "Annual Energy Outlook" (AEO),
EIA projected liquid fuels consumption in the transport sector
would hit 37 quadrillion British thermal units (Btu) by 2020,
equivalent to about 19.7 million barrels of gasoline per day, up
from 27.3 quadrillion Btu in 2004.
But that prediction was made when oil prices were averaging
just $40 per barrel, before they doubled to an average of almost
$100 in 2008, and before the federal government enacted
aggressive petroleum reduction measures with the ethanol mandate
in 2005 and 2007, and stricter fuel economy standards for road
vehicles in 2011 and 2012.
In the 2013 AEO, EIA now projects liquid fuels consumption
in the transportation will be just 26.4 quadrillion Btu in 2020,
equivalent to 14 million barrels of gasoline per day, about 30
percent less than it was predicting in 2004.
The recession has played a big part in putting fuel
consumption onto a different long-term path, cutting perhaps 2
quadrillion Btu from the baseline, around 1 million barrels per
But aggressive conservation and substitution measures have
pushed consumption onto a new trajectory, and account for more
than four-fifths of the prospective reduction in demand by the
end of the decade.
Between 1950 and 2007, liquid fuels consumption increased at
a compound annual rate of about 2.6 percent. But between 2000
and 2020, EIA projects there will be zero growth (link.reuters.com/qaf66t).
EIA's forecasts include ethanol blended into the fuel
supply, so the reduction in demand for conventional liquid fuels
derived from oil is even greater than the raw energy consumption
Projected fuel savings are bigger than the liquids output of
any country, with the exception of Saudi Arabia, Russia, the
United States and China.
TEMPORARY AND PERMANENT
Previous price spikes (1973-4, 1979-81) and recessions
(1980-2, 1990-1) all reduced liquid fuels consumption, but none
on quite this scale.
Previous falls in consumption were also transitory. Demand
picked up once prices fell and the economy started growing
again. But EIA expects the current reductions to be permanent
because many of them are the result of changes enacted into law
and regulation, which will prove hard to undo even if oil prices
Reduced gasoline and diesel consumption in the U.S. fleet of
cars and light trucks is only the largest and most visible
aspect of a broader shift away from expensive products refined
from crude oil gradually gathering pace worldwide.
The United States has more scope to cut its consumption of
liquid transport fuels than most of the other advanced economies
because it made fewer efficiency gains following the previous
oil crises, and allowed them to reverse during the long period
of low prices in the 1990s and early 2000s.
But the EU and other developed countries plan to tighten
their fuel economy standards in the next decade, which will take
another small chunk of demand out of the market.
In China and other emerging economies, efficiency gains from
phasing out very old cars and trucks are likely to be more
offset by continued growth in underlying demand for
transportation services as output and incomes rise.
But even here, consumption of liquid transportation fuels is
likely to grow more slowly than before as the market mechanism
gradually forces more emphasis on conservation, and worries
about the competitive impact of energy-intensive growth begin to
Speaking at CERA Week in Houston this month, the head of
Saudi Aramco, Khalid al-Falih, confirmed world oil demand growth
has moderated because of environmental pressures and lifestyle
changes, as well as energy policies.
BEHAVIOURAL AND STRUCTURAL
"Demand destruction" is a broad term that embraces
everything from a short-term, temporary loss of oil consumption
as a result of cyclical factors, such as a recession;
behavioural changes, like buying a more fuel efficient car or
using public transport; to more long-lasting and irreversible
changes, such as replacing an oil-fired boiler with a gas or
Demand destruction takes places across a variety of
time-scales and the permanence of its impact is highly variable.
The simplest and fastest forms, such as taking fewer
journeys or using public transport, tend to be the easiest to
reverse once oil prices fall and the economy starts growing
again. By contrast, structural changes, requiring heavy
investment in expensive and long-lived equipment, like new
boilers and engines, or mandated by regulation, occur slowly,
but once costs are sunk are essentially irreversible.
The higher oil prices rise, and the longer they stay there,
the stronger the incentive to find ways of using oil more
efficiently or replacing it with cheaper alternatives. Recent
stories about companies experimenting with natural gas to power
railway locomotives and shipping suggest this sort of
long-lasting demand destruction is starting to take place.
Every year that oil prices remain high in real terms, and
threaten to rise further, the incentives to cut consumption
FAIR VERSUS REALISTIC OIL PRICES
Falling oil consumption, relative to trend, and rising
production, again relative to trend, pose growing challenges for
Founded in 1960, the organisation's founding statute commits
it to "ensuring the stabilisation of prices" (Article 2B) to
secure "a steady income to the producing countries" and "a fair
return on their capital to those investing in the petroleum
industry" (Article 2C).
In practice, "fair" prices and returns have often meant the
highest price member countries - especially Saudi Arabia -
think they can get away with economically and politically.
But it may be time for OPEC members to start thinking about
"realistic" prices instead. OPEC members still control the bulk
of low cost supplies and reserves. But the market is gradually
finding ways to work around their monopoly from both the supply
side (shale, deepwater and Arctic drilling) and the demand one
(substitution and conservation).
In the 1970s, and again in the 1980s, OPEC ministers set up
something called the Long-Term Price Policy Committee, which
attempted to peg the organisation's target oil price to the cost
of alternatives (at the time coal-to-liquids plants like the one
eventually built many years later in North Dakota).
The Committee failed. At the time the cost of alternatives
was far above the current market price of crude, but OPEC never
managed to push prices anywhere near the marginal cost of making
diesel and gasoline from coal. The full story is set out in
Morris Adelman's book "Genie out of the bottle" (1995).
Now oil prices are actually above the marginal costs of
alternative forms of supply, and OPEC risks losing market share
to other crude suppliers as well as alternative fuels.
If the Long-Term Price Policy Committee was recreated, it
would almost certainly fail again, not least because of
rivalries between Saudi Arabia and others in the organisation.
But OPEC and other oil producers, including the
international oil companies, need to start thinking hard about
what price is sustainable from both a supply and demand
perspective, because market forces are already starting to drive
substantial changes in both production and more importantly
consumption as the market seeks a new equilibrium.
Conservation and substitution look set to add more barrels
back into the market over the next decade than any single source
of new supplies.
Aramco, at least, appears to understand the dangers. Despite
forecasts of healthy demand growth at global, rather than U.S.,
level al-Falih warned his audience: "Although we are on the
right track, if our history teaches us anything, it is that such
rosy forecasts will not always materialise."
"Even if you are on the right track, you run the risk of
being run over if you just sit there."
(Editing by William Hardy)