US Oil Consumption Is About To Surge

The Diet Is Over: US Oil Consumption Is About To Surge

Date 22/08/2008

The Right Side

Garry White

The diet is over: US oil consumption is about to surge "Oil consumption has fallen enough to bring prices sharply lower," declared the Vancouver Sun on Monday morning.

This means oil will plunge below $100 a barrel, it said.

Oil responded by rallying 8% over the course of the week. The October contract now stands at $121.45, some way off the magic $100 mark.

The editorial in the Vancouver Sun was totally and utterly wrong. Consumption may have been falling, but now it’s set to rise. I think this trend is about to reverse for two main reasons.

Let me tell you why...

1. It’s Little Prince and Little Princess Time

I’d like to start with an email I received from one of our US readers overnight:

"Not all American kids go to school in big yellow buses, like I did. US schools shut down the first week of June and open first week of Sept. With the big yellow buses and the urban & suburban school run off the roads for three months, you could expect 'gas' consumption to drop... till next week."

Traditionally, gas consumption falls when the summer driving season ends and school starts again. The summer driving season is the normal peak of consumption.

Shortly after Labor Day (the first Monday in September) prices can fall to their lowest point of the year and often remain low all the way to February.

But things have been different this year.

In June 2008 Americans drove 12.2 billion fewer miles than they did in June 2007. This represented a 4.7% decline.

This statistical anomaly has been caused by people staying home over summer. As I explained yesterday, this demand is relatively elastic.

But some trips just can’t be cut out... and the school run is one of them. This type of demand is relatively inelastic.

2. There’s a chill in the air

The Farmers’ Almanac went on sale in the US this week.

The 192-year old publication claims an 80%-85% success rate with its weather predictions. It expects this year to be cold. Very cold.

"Numb's the word," was its summary of winter conditions in the US.

The almanac predicted at least two-thirds of the country could expect colder than average temperatures this winter, with only the Far West and Southeast in line for near-average readings. The almanac’s forecasts are prepared by a reclusive forecaster called Caleb Weatherbee. He uses a "secret formula" based on sunspots and the tidal action of the moon.

Of course, it is impossible to predict the weather, but when the temperatures plunge, people reach for the heater. This type of demand is relatively inelastic as well.

So, should temperatures plummet, heating oil demand will soar.

I think too much has been made about the fall in consumption in the US. It’s easy to go on a diet for a short time.

In order to reduce long-term consumption, American needs to buy more fuel efficient cars, insulate their (generally badly built) homes and switch to appliances that use less power.

This process cannot happen over the course of a few months. It will take years and years to achieve these savings. People are getting too excited far too soon.

So the great summer 2008 consumption story looks like it is about to end... and this has to be bullish for oil prices.

Smart Commodities looks at investment opportunities in the global resource, energy and infrastructure sectors. Click here to discover more about profit opportunity in the resources sector.

Regards

Garry White
Editor
Smart Commodities UK

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