In the good old days of energy shocks, consumers cut back when prices jumped. But cutting back is no longer popular sport in the current bull market for oil.

Long gone are the days in the 1970s, when higher oil prices eventually convinced Joe Sixpack to drive less, buy cars with more fuel-efficient engines, turn down the heat, and otherwise curtail the more-egregious energy-sapping activities. A chart in the oil chapter in new World Economic Outlook from the IMF (Figure 4.2) shows the collective result of that mindset of yesteryear: global oil demand fell sharply in the wake of the rise in the real (inflation-adjusted) rise in oil prices in the era when incumbent presidents went by the name of Nixon, Ford and Carter.
In the Bush II era, the rising price of energy has yet to materially lower global demand. Or, as Rodrigo de Rato, managing director of IMF explained in speech earlier this month, “So far, the effects of higher oil prices on global growth and inflation have been manageable….”
Meanwhile, the demand train rolls on. World oil consumption was recently averaging 82.2 million barrels a day, the International Energy Agency says. That’s up from less than 80 million barrels a day in 2003. Overall, demand growth is advancing at the fastest pace in 24 years, IEA advises via BBC News. The cause? Bubbling economies in China, India along and the U.S. (the world’s largest oil consumer), to name the primary suspects.
Economic growth, to restate the obvious, is a beast that’s still largely fed by oil. Yet the global economy appears to be less sensitive to oil’s price. Indeed, crude oil has been in a bull market since the end of 1998, but the trend’s having little effect on the consumer mindset. Is this because of a cultural shift that minimizes, if not dismisses the notion of sacrifice and conservation in favor of consumption at all costs? Or perhaps the explanation is that oil prices are still well below their real (inflation-adjusted) peaks that harassed the decade of the seventies. Maybe it’s because real interest rates have been artificially low. Then there’s the point about how economies are much less energy intensive these days: raising gross domestic product takes fewer barrels of oil today compared with 30 years previous.
Whatever the answer, it seems clear that oil demand will only drop materially with the arrival of recession in the U.S. and/or other leading economies. Indeed, a world that’s inured to high prices is necessarily a world that can afford to pay up.
Even better is the prospect of slower demand growth without recession. If that’s a sweet spot, the markets got a taste of it with yesterday’s news from the IEA that China’s thirst for oil slowed in the first two months of this year. That’s helped take some of the froth out of crude oil’s price.
Adding to the selling momentum of late in the oil futures trading pits is news from the Energy Information Administration that U.S. inventories of crude are rising fast, having reached their highest in several years in recent weeks. America’s oil stocks totaled 317.1 million barrels as of April 1, up nearly 5% since early March and almost 9% higher relative to mid-January. More of the same was on view today when the EIA released its weekly storage numbers and reported that crude inventories rose again for the week through April 8. The news triggered a wave of selling in oil futures, bringing prices below $51 a barrel intraday for the first time since March 1.
While the U.S. continues to stockpile oil at a rapid clip, Saudi Arabia forges ahead with pumping, and not necessarily with the blessing of Opec. Adam Sieminski, global oil strategist with Deutsche Bank in London, opines today in a report that the Saudis have recently started encouraging the buildup of oil stocks as a means of bringing prices down. “While OPEC debates the pros and cons of $50+ oil ahead of their June 15 meeting,” Sieminski and his team write, “the Saudis are already raising production and encouraging contango [higher prices in longer dated futures contracts] in the markets to allow stocks to build. Higher inventories will eventually lower prices at the front end of the curve to where the Saudis want oil to sell in 2005—perhaps closer to $40 than 50/bbl.”
James Williams of WTRG Economics today writes of the Saudis’ new-found penchant for pumping, explaining, “The Saudis appear to be looking down the road toward the possibility of a supply shortage next winter if inventories are not higher than normal going into the 4th quarter.”
In the short run, the Saudi-supported rise in oil inventories is convincing traders to sell. The decision to forgo the Jimmy Carter tactic of cardigan sweaters in place of turning up the thermostat has, for the moment, been bailed out by the recent tumble in oil prices. But reconciling the short term with the long term is a perennial challenge, and that starts with the best guess on what the future will bring. By the IEA’s estimate, the global economy will require 60% more energy in 2030 relative to 2002. The future, as always, starts now.