What Next for US Oil Demand?

US oil consumption peaked twelve years ago in 2005, at 40.3 quadrillion btu. And, since the great recession ended, US oil consumption has made a weak recovery from lower levels. Last year, US oil consumption reached 36.02 quadrillion btu; still more than 10% below the 2005 peak. None of this is surprising. Nor is it news.

What has surprised, of late, is that US oil demand has flattened out in 2017. Through the first ten months of the year (OK, call it 43 weeks), the EIA data series covering weekly product supplied shows no growth at all compared to 2016. Bloomberg’s Liam Denning started noticing this flattening early last month. A comparative review of the EIA data series covering monthly motor gasoline supplied, through the first eight months of the year, also showed no growth vs the same period of 2016. Perhaps US oil demand will get going again in the final eight weeks of the year. Or, the various EIA data series will be revised upward.

One comparison that might illuminate where US oil demand is headed next is the recent evolution of Light Duty Vehicle (LDV) sales growth, and changes in US motor gasoline consumption. US LDV sales absolutely soared coming out of the great recession with very strong YOY demand growth. That progression slowed greatly, however, from 2015 to 2016 as total LDV sales rose to a final peak. In 2017, LDV sales are falling, and are expected to fall for the next two years.

The chart shows the year-over-year growth rate of LDV sales, compared to the year-over-year growth rate of motor gasoline demand, from 2010 through the first 8-9 months of 2017.

We might plausibly say the following: coming out of the great recession, LDV sales, feasting on rock-bottom interest rates and incentives, largely replaced existing autos, and did not place new upward pressure on gasoline demand as the overall economy was still very weak, during 2010 through 2012. However, starting in 2013, the continued growth of LDV sales and a recovering job market started to impact gasoline demand. During the four years through 2016, even as the growth rate of LDV sales was softening, the growth of gasoline demand put in a solid run. So, what next?

An extended LDV sales growth cycle has now certainly come to an end. Electric vehicles in the US, by contrast, will enjoy sustainable growth. The EIA has just put out a new reference case that projects global petrol demand from LDV to start falling after a peak next year, 2018. In the UK meanwhile, oil industry consultant Harry Benham is observing that petrol demand is now slightly down, or flat, compared to last year—even though VMT (vehicle miles travelled) has continued to rise. This leads directly to a phenomenon that many oil market observers either don’t know, or don’t want to know: even without fast EV deployment rates, the continued march of fuel efficiency in cars has already curtailed petrol demand growth, and will continue to do so.

Whether 2016, 2017, or 2018 sees a second, lower peak for US oil demand won’t make much difference in hindsight. What does matter, however, is that the global oil industry was just starting to get comfortable with the idea that OECD oil demand had finally stabilized. Combined with continued oil demand growth in Asia, the prospect for a market rebalancing, therefore, had been the industry expectation for the past 12 months. Now, just as that story seems to have come together, it seems likely that US oil demand growth could turn down again—not swiftly perhaps, but steadily—shrinking once again the remaining regions where the industry had hoped to find the next leg higher of oil use, and adoption.

–Gregor Macdonald

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Further reading: EIA US Liquid Fuels Outlook, STEO.