A Wall Street Journal editorial that appeared in the US edition last Saturday, and the Europe edition Tuesday (sorry, can't link to it because it's subscription only) raised a few observations about reduced gasoline consumption and what it means.
The column's focus was a call by US presidential candidate Barack Obama for tougher Corporate Average Fuel Economy (CAFÉ) standards. So most of the editorial is the usual debate over CAFÉ: efficiency vs. safety, the type of cars Americans want to buy, and so on. It was the last two paragraphs that caught our eye.
According to the editorial, passenger vehicles account for 40% of total US oil demand. That actually looks a little low: In February, according to the Energy Information Administration, finished motor gasoline supplied to the market was about 9.02 million b/d, and total product supplied was 21.27 million b/d, for about 42%. The editorial goes on to say that a 10% cut in emissions would therefore result in a 4% decline in US total oil consumption, which it says is “negligible” in relation to emissions.
That statement can be debated, but when that logic is applied to pricing, it falls apart. (Of course, the WSJ didn’t apply it to pricing, but The Barrel will). That's because any attempt to take apart pricing by looking at percentages -- as is often heard in political debates -- fails to note that pricing is set on the margin.
For example, in a slow real estate market, the vast majority of homeowners on January 1 are still in their homes on December 31, and they were neither sellers nor buyers in the just-completed calendar year. And in a hot real estate market? Well, it's basically the same thing. The difference between the two is that on the margin, the number of home sellers and home buyers has changed. The result can be a decline in prices that in terms of percentage reach double digits, but is far greater than the change in the number of buyers and sellers.
In the oil world, for an example of that, you don't have to look any further than the collapse of 1998, created primarily by the decline in Asian economies and an ill-timed boost in production by OPEC. For example, in February 1999, the International Energy Agency estimated that in the second quarter of 1998, when oil prices were starting to fall out of bed, supply exceeded demand by 3.5 million b/d, though admittedly that is in a quarter when supply traditionally exceeds demand. That was 4.8% of demand.
A year later, the difference between supply and demand was effectively zero, according to the IEA. Crude bottomed out during that spell in December 1998, but boosted by a shift of less than 5 percentage points in the world's supply/demand balance, it began an upward rise that took it over $20 in June 1999. Platts' low WTI midpoint assessment during that period was $10.69 on December 21, 1998. A year later to the day, it was $26.25, a gain of 144%. All on a shift in the supply/demand balance of just a few percentage points.
So while the WSJ may dismiss the air quality effect of a 4% cut in gasoline consumption, a drop that large would have a significant impact on price.
The final paragraph acknowledges the reality of the price mechanism, the only short-term tool available to policy-makers that would have a marked impact on consumption. “The quickest and most efficient way to deter gasoline consumption, if that is (Obama's) real objective, is not CAFÉ standards, but higher gasoline prices, i.e., through a carbon tax. Consumers cleary don’t want to pay more for gas, however, so Senator Obama wasn’t so bold or truth-telling as to suggest that.”
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