In recent months the oil price appeared intent on defying gravity, but finally last week checked its unrelenting rise. With $150 a barrel in sight, it corrected by falling $6 — one of its largest drops on a single day.
The fall was in reaction to United States’s Federal Reserve chief Ben Bernanke’s comments about the state of the US economy.
The correction is seen by some analysts as oil finally finding a level which will damage the world economy by curtailing growth and in consequence, the demand for oil.
Consumers worldwide have been cutting back on fuel consumption by travelling less, telecommuting, working shorter weeks (but with longer hours), driving more fuel-efficient cars and using public transport where available.
Stanlib economist Kevin Lings said the trend also applies to South Africa. He noted that weekend sales of fuel have fallen, an indication that motorists are cutting back on leisure-related motoring.
Developed economies are showing a sharp decline in fuel consumption and figures for the first quarter of this year show that South Africa experienced a 0,9% drop in petrol demand.
North America, the largest consumer of oil in the world at around 29%, has seen a significant change in consumer behaviour.
Discretionary petrol purchases have declined, more telling is that sales of the US’s favourite car, the SUV, have fallen while sales of smaller vehicles held steady.
This week Toyota said that it would start producing the Prius hybrid in the US and shut down truck and SUV production to meet changing consumer demand.
General Motors, hit by a financial crisis because of a sharp decline in vehicle sales, announced that it would accelerate plant closures as it aims to move away from a reliance on SUVs and light trucks.
Airlines have also been hit by 100% increase in jet fuel prices, reaching $4,36 a gallon (about R9,70 a litre).
Unable to pass increased costs onto consumers, both American Airlines and United Air are to ground 413 aircraft to cut their fuel consumption.
Globally 25 airlines have gone under because of rising fuel costs and falling consumer demand. Among these are US budget airline Frontier Airlines and Silverjet, a United Kingdom business class-focused airline.
Canadians are also experiencing a significant switch to smaller car sales and tourism is expected to be affected negatively this summer. Victoria, Canada’s holiday capital, expects its worst summer for tourism as Canadians refuse to drive across state at the current petrol price of Can$1,50 (about R11,5) per litre.
Lings said the developed world faces what is economically known as “demand destruction” for fuel. The US is leading the cutback and its fuel demand is expected to drop around 2% this year.
He said that while this might not sound significant — considering that Opec’s spare capacity is only 2% of current demand — half a percent drop in demand would result in a significant increase in capacity.
Inefficient data collection in Europe and Japan masks the fact that they have seen similar falls in demand for fuel, said Lings. But unlike some developing economies, these do not have subsidies and tend to have heavy fuel taxes, so that any price increase hits consumers’ pockets immediately.
OECD countries have also increased their oil usage efficiency since the 1980s and as a result the increase in demand for oil has not kept up with global growth. Oil demand over the last 15 years has averaged 1,6% compared to global growth of 2,9%.
Lings says it would be unusual for this more dramatic change in behaviour only to come from US consumers, not always known as global leaders in belt-tightening.
The International Energy Agency (IEA) expects oil demand to increase by only 0,9% compared to the longer-term average of 1,6%. If the developed world, which currently accounts for close to 60% of oil demand, sees a dramatic downturn in fuel consumption, this would significantly increase Opec’s spare capacity.
While demand has not yet let up in the developing economies, this could soon change. The era of fuel subsidies seems to be over as governments can no longer afford to keep them in place. Already Brazil, China, India, Malaysia, Taiwan and Indonesia have started to reduce their oil subsidies.
Lings said once consumers in these countries feel the full effect of the oil prices, demand destruction will follow.
So while the supply of oil will continue to be under pressure, analysts and investors need to start watching the impact of a significant drop in demand because of changes in consumer behaviour. This could lead to a drop in oil prices over the shorter to medium term. Over the longer term at these prices, there is also significant financial benefit in investing in alternative energy sources and switching from oil.
Recession fears drive oil prices lower
Oil prices tumbled by the biggest amount in three-and-a-half years this week as dealers sold on fears that the world’s leading economies face a sustained economic downturn.
United States crude futures slumped by over $10 (about R76) at one point to just below $136 (about R1 041) a barrel, having earlier traded as high at $146,73, (about R 1 117) less than $1 a barrel below the recent record high. It later recovered to above $137 (about R1 048).
The fall was not enough to overcome stock market fears about the British banking sector and the UK’s FTSE suffered another sharp fall of 2,4% to its lowest close since October 2005.
The FTSE’s fall, to 5,172, was partly due to falls in Shell and BP’s share prices in response to weakening oil prices, but the main culprit were falls in bank stocks after US Federal Reserve chair Ben Bernanke warned that many markets remained under “considerable stress”.
Legendary investor George Soros reiterated his view that the world was seeing “the most serious financial crisis of our lifetime”. He added that the crisis with US mortgage groups Freddie Mac and Fannie Mae would not be the last of its kind.
Stock markets fell heavily in Europe and Asia too.
“We’re back into the panic mode we experienced back in mid-March. The distrust is at a very high level and it is totally justified,” said Marie-Pierre Peillon, analyst at Groupama Asset Management in Paris. “The US housing crisis is getting worse, and it has now spread from the ‘sub-prime’ segment to the ‘prime’ segment, ” she added. — Ashley Seager,