Oil prices have been trading under $60 a barrel for much of October, the first time that the commodity’s been that “cheap” since February. Some bulls say that the mid-$50 range represents a floor for the foreseeable future, while the bears say that even lower prices are coming.
But while the future for a barrel of crude is hotly debated, the past at least is crystal clear, and from that history we can draw some fairly basic conclusions. To wit, the fundamental drivers that have brought us to the present state of energy pricing remain intact, as the latest Energy Information Administration data suggest. With the publication earlier this week of EIA’s Petroleum Supply Annual for 2005, the government has started finalizing its annual energy data for 2005, and the various trends embedded in those numbers look all too familiar and none too pretty.
As the chart below illustrates, which graphs EIA data with the newly dispensed 2005 numbers through the end of last year, not much has changed in the American economy when it comes to the big-picture analysis of oil when viewed from 10,000 feet. To summarize: domestic production keeps falling and domestic consumption keeps rising. Filling the gap is the old standby of imports, which continue to run higher.
Short-term analysis, by contrast, leaves room for hope. Quixotic hope, perhaps, but hope nonetheless. Consider the monthly data for 2006. Domestic production was up 7.5% in July 2006 vs. December 2005, while imports climbed just 2.1% over that span. Meanwhile, consumption slipped by more than 4% in July from the previous December.
In fact, a slowing economy will pare consumption every time. As such, if the slowdown has legs, overall consumption is likely to fall–temporarily. As the chart above reminds, temporary blips don’t change the secular trend. Domestic oil production has been generally falling since the 1970s, and that’s not likely to change. That’s not to say that secular trends can’t be redirected, subverted or even abolished, but it’s highly unlikely that such a change will come by way of major discoveries on U.S. territory. Meanwhile, it’ll take more than even a recession can muster to alter the basic facts of life for energy in these United States, which has is basically one of consume more, import more.
But the trend is starting to attract attention–even in Washington. President Bush is warning against energy complacency now that oil prices have fallen from all-time highs of late. “My worry is … that a low price of gasoline will make us complacent about our future when it comes to energy, because I fully understand that energy is going to help determine whether or not this nation remains the economic leader in the world,” he said yesterday. “We envision a day in which light and powerful batteries will become available in the marketplace so that you can drive the first 40 miles on electricity, on batteries, and your car won’t have to look like a golf cart.”
Such hopeful comments about alternative energy will inevitably be dismissed by some as just another instance of politicking. Maybe so, but sometimes reality intrudes even into the inner sanctum of politics.
Supply and demand, in short, will dictate the future when it comes to oil and energy in general. That future may not arrive next month, but it’s coming, and we’re pretty sure what it’ll look like. Only the timing and magnitude of the transition is in doubt.