Today I wonder may be the start of an important turnaround.
For the last few months Ive watched the US oil inventory numbers and seen the inventory buildup. Last few weeks though have shown increased gasoline consumption Vs this period last year. That's interesting and perhaps it shows how the cheap gas - even with our sour economy is too tempting for the average American to resist. This time last year the prices were in the $3 range - now were paying $1.75 or so.
So now inventory fell for the first time this year (the first time since about august of last year?) Imports were down (maybe the OPEC production cuts starting to bite?)
I didn't pare the figures down to see which regions were down or where the imports came from (or didn't come from) but I wonder if this is the start of a new trend. Global demand is indeed falling - but perhaps very slowly. Maybe global production is catching up and overtaking.
Anyway I made a chart for the oildrum that seems overdue. I should have thought of this a long time ago.
Its the relationship between supply and demand and explains the volatility in prices.
The trick with this chart is to take each curve by itself. The supply curve for example is well known and can be plotted with available data - Ill try to dig it up. I approximated it for our purposes.
the demand curve is much more difficult to resolve because its dependant on other factors - the main one being the availability of alternatives.
Demand is realtivley unchanged when the fuel is cheap. Even if you give the fuel away for free there is little more demand than just "cheap" fuel. Once the price starts to rise to levels seen in 2008 we find some demand destruction of a few percent. Demand will fall in the following ways
1) people drive less (combine trips, a little carpooling here and there)
2) next purchase is more efficient
3) next home purchase or job change is made with reduced commuting distance
All those things have a slow effect, but persist with time as people gradually adapt.
When things get really expensive though people start looking for wholesale alternatives. this is how we got through the last oil crunch. We quit using oil to make electricity. By switching to only coal and natural gas we were able to continue growing for another 30 years.
Its possible that wholesale shift could occur for passenger cars. Gasoline makes up more than half the total demand for oil. Heating oil, diesel AND jet fuel combined dont even account for half of the oil used.
for this to occur we need an alternative. EVs (lithium batteries?) plug in hybrids, natural gas powered cars, or some combination of those.
With a viable alternative a price ceiling could be reached. The demand curve therefore shows to basic points:
1) The demand if the product is given away for free
2) the price at which demand goes to zero (price ceiling)
The whole curve can of course move to the left or right depending on the overall size of the global economy.
Where the supply curve and the demand curve cross - thats the "correct" price for the commodity.
Fun huh?
