|High Prices Prod
To Curb Oil Use
Data Show First Drop
In Two Decades in West;
Crude Dips Below $50
By BHUSHAN BAHREE
Wall Street Journal
January 19, 2007
Mild winter weather has something to do with it. So does heavy selling by
financial funds. But a largely overlooked factor in the recent plunge in oil
prices may portend an end to the multiyear rise in crude: For the first time
in years, the developed world is burning less of it.
Fresh data from the International Energy Agency show oil consumption in the
30 member countries of the Organization for Economic Cooperation and
Development fell 0.6% in 2006. Though the decline appears small, it marks
the first annual drop in more than 20 years among the OECD countries, which
drain close to 60% of the 84.4 million barrels of oil used globally each
day. Industrialized nations' demand tiptoed into negative territory in 2002,
but the dip was so slight that it registered as flat.
Yesterday, U.S. benchmark oil for February delivery settled at $50.48 a
barrel, down $1.76, or 3.4%, on the New York Mercantile Exchange. Earlier in
the day, futures fell below $50 a barrel for the first time since May 2005,
hitting a fresh 20-month low after the Energy Department said U.S. crude-oil
stockpiles rose the most in more than four years. Oil has been sliding since
peaking above $77 in July. This year, prices have fallen 17%.
The tipping point where oil prices begin to erode demand was reached last
summer, several industry analysts said.
The fall in oil use by the industrialized world is a sign that the reactions
to higher oil prices by businesses and consumers from the U.S. to Germany to
Japan may be adding up to a cycle-turning downdraft in demand. The resulting
shift in global cash flows could mean a big boost for oil consumers'
economies at the expense of producers and exporters.
Other signals, both economic and psychological, have been popping up for
some time: Demand for gas-guzzling sport-utility vehicles has been falling,
while investment in and sales of alternative fuels such as ethanol are
booming. Even the Bush administration is vowing to reduce America's
dependence on crude.
Gasoline prices in the U.S. are also falling, both because of swelling
inventories and the slide in crude-oil prices, which can take four to eight
weeks to fully pass down to retail pumps.
To be sure, global oil demand grew 0.9% in 2006, owing to steady growth in
China and the Middle East. But that was down from growth of 3.9% in 2004 and
1.5% in 2005. And the price fluctuations highlight the role played by
expectations, rather than simple supply and demand, in determining the price
of oil on world markets.
Many analysts are just starting to review, and lower, their price forecasts
for this year, though a fair number still expect crude to rebound to $60 a
barrel or even higher. So do some investors who have placed big bets with
their own money, including Texas oilman T. Boone Pickens. For some, this
stems in part from a belief that $60 is the price the Organization of
Petroleum Exporting Countries aims to defend, though the cartel's de-facto
leader, Saudi Oil Minister Ali Naimi, seemed to cast doubt on that notion
this week when he said he saw no reason to support further output cuts. But
a few analysts say oil's four-year surge could be ending.
"The bubble is bursting," said Frederic Lasserre, head of commodity research
at Société Générale in Paris. "The sentiment has changed, and for the first
time since January 2002, the hedge funds are going short at the start of the
The signs of waning demand for oil began bubbling up early last year. Saudi
Arabia began to quietly cut back its output in April because it couldn't
find buyers for all its crude. Iran, OPEC's second-largest producer after
Saudi Arabia, was forced to store unsold oil in tankers last summer.
Yet oil prices were sending contrary signals, peaking on July 14 at $77.03 a
barrel because of fears that geopolitics or natural disasters were bound to
reduce supplies. At the time, supplies were perceived to be tight, with
little spare production capacity available globally to offset sudden losses.
Since then, oil prices have fallen by 34% despite supply cuts by OPEC to
shore up prices.
Mr. Lasserre's take on the situation is that prices of close to $70 a
barrel -- they averaged $66.22 a barrel for 2006 -- marked a turning point.
"People wanted to know the point at which oil prices would affect demand;
now they have the answer," he said.
One factor that could insulate the world from a big price rebound,
paradoxically, is OPEC's recent output cuts. By trimming production, the
cartel has swelled the world's volume of spare oil-pumping capacity,
particularly in Saudi Arabia, thus easing fears of a supply disruption in
some part of the vast global oil chain.
Oil buyers are watching for signs of OPEC's next move. Some OPEC members,
such as Venezuela and Iran, were clamoring for further production cuts,
though Mr. Naimi shot down that idea this week.
Some analysts see larger, game-changing forces in motion. One is the rise of
nonoil transport fuels. "Last year was a tipping point in a lot of ways,"
says Philip Verleger Jr., an oil economist who heads PK Verleger LLC.
"Biofuels will take bigger and bigger bites out of petroleum demand," Mr.
Verleger said, noting climate-change and security concerns relating to the
supply and use of petroleum. "Alternate fuels will take up all the growth,
leaving petroleum demand static in the next two or three years."
Forecasts by the IEA suggest biofuels output could rise to the equivalent of
more than five million barrels of crude oil a day by 2011, close to triple
output of such fuels in 2005. Global oil demand last year rose by 780,000
barrels a day to 84.4 million barrels a day, the latest IEA data show.
According to data published yesterday by the IEA, oil demand last year fell
in all three major OECD regions -- North America, Europe and the Pacific.
The latter two regions have from time to time had weak oil demand when
economic growth was weak. But growth in U.S. oil demand had typically offset
this weakness for the OECD as a whole.
But last year, the picture changed more noticeably. "Maybe they started to
use less when we hit $3-a-gallon gasoline," Adam Sieminski, an oil analyst
at Deutsche Bank, said of U.S. consumers. "Perhaps, toward the middle of
2006 we hit a tipping point."