Oil: The Power Of Demand Destruction

Surprise, surprise. China reported that car sales had the worst start since 2005, writes Bloomberg (bloomberg). Wholesale deliveries of passenger automobiles, including multipurpose and sport-utility vehicles, declined 4.4 percent to 2.37 million units in January and February, the biggest drop since 2005. But this is not really a surprise, it`s just another response to the climbing price of gasoline. "Record fuel prices discouraged consumers in the world’s largest vehicle market", explained Bloomberg. The price of gasoline trailed the climbing global oil price: The average price of China`s February’s crude imports was $112.39 a barrel, up from $92.28 in the same month last year, wrote Bloomberg in another report (bloomberg).

But the Chinese aren´t the only consumers who are responding to the oil price rise. Even the energy-hungry Americans are cutting back: Total U.S. fuel demand fell an average 78,000 barrels a day to 18.2 million last week, an Energy Department report on March 7 showed (bloomberg). U.S. fuel consumption was down 7.6 percent from the same week a year earlier, reported Bloomberg. And Mastercard, who tracks gasoline purchases paid by credit card, reported that U.S. gasoline use was down 6.5 percent from a year earlier, the 26th consecutive week demand was lower than year-earlier levels (bloomberg).

The falling gasoline consumption has 2 explanations: People drive less and are using cars, which - on average -burn less gasoline. But not just cars are getting more and more energy efficient: Modern refrigerators, washing machines, air conditioners and many other household appliances use less electricity than older models. This is a clear response to the rising costs of energy and part of the technological progress. For centuries people respond to rising commodity costs and by finding cheaper alternatives.

Rising oil prices therefore cause a demand destruction. As a result oil is getting less important to our lives. Oil consumption was 4.8 percent of U.S. national income in 2010, compared with 9.7 percent in 1981, shows another Bloomberg report (bloomberg). These statistics are another proof for the long term trend of rising energy efficiency. The blog "Early Warning" reports that this trend accelerated recently (earlywarn.blogspot.com). Since 2010 the "amount of gross domestic product produced by the US economy per barrel of oil consumed" rose sharply "presumably under the influence of fairly high prices", writes the blog.

These statistics raise hope that the damage caused by rising oil prices will be less than in 2008 as an oil price hike to $147 sharpened the recession.