4 Reasons Why Oil Demand is Still Weak

crude oil

According to my economics professor, as the price of a product decreases then the quantity demanded increases. In theory, the demand for oil should increase since the price of crude oil has dropped by 50 percent over the past year.

“There is always a flaw in the system!” (Beetee from the movie Catching Fire / Hunger Games)

Cruel oil is primarily refined into a variety of fuels as shown by the chart below:

Usesofpetroleum

Reason # 1 – Fuel Efficiency

Planes, trains and automobiles are much more fuel-efficient today than ever before. For example: Jet aircraft efficiency is improving, between 1960 and 2000 there was a 55% overall fuel efficiency gain based on the Boeing 707 model. Moving freight by train is about 3 times more fuel-efficient than doing so by highway. Are you old enough to remember “muscle cars” that used to get 10 miles per gallon. Today those same cars get over 30 mpg.

rail  train

Reason # 2 – Fuel Taxes

If you are Canadian, have you ever wonder why the price of gasoline was always cheaper in the United States compared to filling up in Canada? Consider that Canada has an overabundance of oil and 99% of our oil exports goes to the U.S. The missing component is gasoline taxes in Canada are about $0.72  a gallon higher than the United States. See how U.S. gasoline taxes compare to some other countries;

Country Tax Per Gallon
United States $0.53
Average Euro Zone $2.62
Australia $1.40
Canada $1.25
Chile $1.93
Iceland $1.97
Ireland $2.95
Japan $2.16
United Kingdom $3.44

 

Reason # 3 – Currency Exchange Rates

Crude oil is priced in U.S. dollars so price movements in the foreign exchange markets can have an impact on the price of fuels. For example; in August of 2014 when cruel oil was at $90, I would have paid $1.09 Canadian for $1 U.S dollar and now it will cost me $1.31 or 20% more. In simple terms the price of gasoline in Canada is 20% more expensive than in the United States based just on exchange rates. The same holds true for Europe since the exchange rate for the Euro has gone down from $1.31 in Aug. 2014 to $1.11 U.S., a drop of 15% in value in just one year. There are of course other factors in fuel pricing  so these numbers are not exact by any means.

Reason # 4 – Increased Spending on Public Transportation 

The use of public transportation is growing leaps and bounds. I was in London, England 20 years ago. I was amazed that I could get off a plane, jump on a train and arrive at my hotel. Toronto has the busiest airport in Canada and train service from the airport to downtown was just established this year. Other major cities in North America are jumping on the band wagon and constructing more rapid public transportation systems.

(Bloomberg) — China is investing more than 800 billion yuan ($128 billion) in domestic railway construction in 2015, the same as last year’s final target, while pledging to increase its railway makers’ overseas market share.

In reality, oil prices, in other countries are not as low as investors think. The demand for oil will still be weak because prices haven’t dropped that much outside of the United States. However, the biggest consumer of crude oil is still the United States, followed by China, Japan, India and Russia. The U.S. consumer should benefit the most from the current price of oil.

OPEC has realized that the demand for oil will not increase enough to reduce the oil glut in world markets.

OPEC forecasts oil prices will grow by no more than $5 per barrel a year to reach $80 by 2020, with rival non-OPEC production growth slowing but not fast enough to fully clear the current oil glut, according to OPEC sources.

Add slower than normal economic growth around the world to the equation and the price for oil will stay relatively weak for quite a long time.

 

 

 

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