Industry Market Trends

U.S. Oil Demand Drops, But Production Hits Historic Highs

Feb 15, 2013

Credit: Joshua Delaughter. Credit: Joshua Delaughter.

According to Bloomberg, U.S. oil demand is falling to levels not seen since the second Clinton administration -- not just dipping a bit, we're talking plummeting -- 2012 saw the United States's lowest levels of demand for oil since 1996.

"Total petroleum deliveries, a measure of demand, dropped 2 percent from 2011 to 18.6 million barrels a day last year," Bloomberg said, adding that "for the month of December, demand slid 2.1 percent from a year earlier to 18.4 million barrels a day."

And on top of an overall drop, imports of oil are falling too. Shale oil production coming online from production in North Dakota and Texas "has the U.S. on a course to cut its reliance on imported crude oil to about 42 percent this year, the lowest level in two decades," according to a BusinessWeek report.

BusinessWeek cited Adam Sieminski, the head of the U.S. Energy Information Administration, saying in August 2012 that while in 2005 the U.S. imported 60.3 percent of its petroleum consumption and in 2011 the U.S. relied on imports for 44.8 percent of its petroleum consumption, the figure should end up at about 42 percent for 2012.

Part of the drop is due to lower economic growth. When times aren't so great economically the country needs less oil to power things. And in another coincidental finding, Bloomberg also noted that the American Petroleum Institute reported that American domestic output "surged the most in more than 150 years," since 1859.

The Wall Street Journal put it in its historical context: "It is the biggest annual jump in production since Edwin Drake drilled the first commercial oil well in Titusville, Pa., two years before the Civil War began."

John Felmy, chief economist of the API, told Bloomberg that weak gasoline demand "is tied to employment and retail sales. And you've got weak diesel demand that reflects a slowdown in the manufacturing sector."

As far as manufacturing goes, what experts are seeing is the return of manufacturing without the return of jobs. In other words, we're making things here again, but we're using robots to do so. This will still mean lower oil consumption, since robots don't drive to work every day.

So how does the drop in American manufacturing relate to the drop in oil consumption?

Back to the future. The 2012 rise in crude output was the largest since U.S. oil production began in 1859 at a well owned by Edwin Drake (right) in Titusville, Pa. Photo Credit: The Wall Street Journal. And thanks to fracking, "domestic oil production jumped 779,000 barrels a day in 2012, or 14 percent, to 6.43 million," the API said, placing American oil production at its highest level in 15 years.

It's certainly no secret that manufacturing has decreased substantially in the United States. According to an exhaustive study published by the Brookings Institute, over a 30-year period the United States lost 41 percent of its manufacturing jobs, from manufacturing employment's peak in June 1979 to December 2009.

The 2012 study reported that 2000-2010 saw the most severe manufacturing job losses in U.S. history -- "Manufacturing's share of total employment fell from 13.2 percent in January 2000 to 8.9 percent in December 2009." That timeline matches roughly with the slide in U.S. oil consumption.

There has been a bit of a rebound in manufacturing, the Brooking study says, citing the fact that since 2010 some companies are bringing previously offshored work back to the United States. Ironically enough, case studies find that rising oil prices are one significant "hidden cost" of bringing offshored production to the domestic market.

But concerns about manufacturing as recently as late January caused benchmark oil for March delivery to drop 12 cents to $96.56 per barrel, "at late afternoon Bangkok time in electronic trading on the New York Mercantile Exchange," according to the Associated Press.

The AP said that a report by the Federal Reserve Bank of Richmond indicated a drop in manufacturing in the central Atlantic region, which Michael Hewson of CMC Markets said "raised concerns about the U.S. manufacturing sector once again." Any drop in factory production would likely reduce demand for energy and cause prices to fall, the AP notes, adding that the fact that there are healthy supplies of oil and gasoline already on hand is "also weighing on prices."

So in short, the amount or price of oil on hand today isn't affecting manufacturing. Rather, it's the case that the amount of manufacturing, and the resultant demand for oil, is affecting the price of oil. The proper question, then, is not "What effect does the drop in American oil demand have on manufacturing," but "What effect do fluctuations in American manufacturing have on the demand for oil?"

It skims dangerously close to basic common sense to observe, as the U.S. Energy Information Administration does in a report produced at the end of 2012, that "current and expected levels of economic growth heavily influence global oil demand and oil prices. Commercial and personal transportation activities, in particular, require large amounts of oil and are directly tied to economic conditions."

Simply note that when China decided to become the world's manufacturer of choice, its oil demand -- and coal demand, and nuclear demand, and solar demand, and natural gas demand -- skyrocketed. Then when all that prosperity created a Chinese middle class anxious and able to buy cars, oil demand spiked again.

"Many manufacturing processes consume oil as fuel or use it as feedstock, and in some non-OECD countries, oil remains an important fuel for power generation," the EIA report says, concluding, quite reasonably, that as a result, "oil prices tend to rise when economic activity and in turn oil demand is growing strongly."

This is why manufacturing demand drives oil prices, not the other way around. Today in the United States, oil meets 36 percent of U.S. energy demand, according to the Institute for Energy Research, "with 70 percent directed to fuels used in transportation - gasoline, diesel and jet fuel. Another 24 percent is used in industry and manufacturing, 5 percent is used in the commercial and residential sectors, and 1 percent is used to generate electricity."

Supply of oil won't be a problem going forward. No matter what Saudi Arabia decides to do, with fracking and other improving extraction techniques there's a real possibility that America could be self-sufficient in oil production within a relatively short time.

As the Institute for Energy Research writes, the American energy resources of oil shale are beyond most people's estimation. The huge deposits of American oil shale in places like Colorado, Utah, New Mexico and Wyoming "contain the energy equivalent of over 2 trillion barrels of oil," according to the IER, which puts that number in perspective by saying "the world has used 1 trillion barrels of oil since the first oil well was successfully drilled in Pennsylvania in 1859."

American manufacturing shouldn't have to worry about a reliable oil supply.