API: Higher prices in US reduced oil demand in 2005

Jan. 19, 2006
A climb in crude oil prices that was already significant when Hurricanes Katrina and Rita hit the Gulf Coast reduced US oil product demand in 2005, the American Petroleum Institute reported on Jan 19.

Nick Snow
Washington Correspondent

WASHINGTON, DC, Jan. 19 -- A climb in crude oil prices that was already significant when Hurricanes Katrina and Rita hit the Gulf Coast reduced US oil product demand in 2005, the American Petroleum Institute reported on Jan 19.

Demand, as measured by total product deliveries, fell 0.6% last year to an average 20.61 million b/d, API said in its yearend statistical briefing at its Washington, DC, headquarters.

Gasoline delivery growth was limited to 0.4% as deliveries averaged 9.15 million b/d in 2005, down from increases averaging about 1.9%/year in the previous 3 years.

"The strong economy would normally have contributed to stronger growth in demand for goods and services such as gasoline, but higher retail prices spurred consumers to use fuel more efficiently," observed Ronald J. Planting, information and analysis manager in API's statistics department.

The petroleum trade association's latest monthly statistical report noted that the national average price of unleaded gasoline started 2005 at $1.78/gal, about 18% higher than a year earlier and already reflecting crude oil prices that had risen to more than $40/bbl from about $33/bbl in early January 2004.

Further increases in crude prices, combined with Gulf Coast refining disruptions by Hurricanes Katrina and Rita, led to gasoline prices averaging $3.07/gal by early September before retreating to $2.20/gal by the end of the year.

Contributed to inflation
API's briefing came a day after the US Department of Labor reported that inflation, as measured by the consumer price index, climbed at its highest rate in 5 years during 2005.

The department's Bureau of Labor Statistics said the CPI finished December 3.4% higher than a year earlier as overall energy prices jumped 17.1%. The increase matched the CPI's growth in 2000, when energy prices climbed 14.2%, BLS figures indicated.

"Clearly, gasoline and other energy prices contributed to the total," said John C. Felmy, API's chief economist. "But we haven't seen that much of a change in the core inflation rate due to conservation and increased efficiencies."

That core rate, which excludes energy and food (the price of which grew 2.3%), rose 2.2% in 2005, the BLS said.

Felmy said DOL statisticians give gasoline a weighting of 3.9 out of 100 points now, down from about 8 points in 1981.

"Also, increased competition from overseas has made it harder for US manufacturers to pass higher energy costs through," he said.

Declining sales of sport utility vehicles are a clear consumer response to higher gasoline prices, according to Felmy.

Planting said, "Consumers should get a lot of credit for looking at higher prices and finding other ways to handle their transportation needs."

Combining errands into a single trip, car-pooling, and other conservation actions resulted in gasoline demand declines in September and October, when prices were highest, before modest recoveries in November and December, when prices eased somewhat, he noted.

Felmy said markets worked, with suppliers and consumers responding to market signals. "This is a dramatic difference from supply shocks in the 1970s, when markets were not allowed to function and consumers suffered in widespread, long gas lines," he said.

Diesel fuel demand
Low-sulfur distillate fuel oil deliveries grew 2.1% to an average 3.04 million b/d last year, according to API. Deliveries of ultralow-sulfur diesel fuel remained small since it is not mandated for highway use until later in 2006, it added.

"We're very concerned about changes in the diesel fuel market with the introduction of ultralow-sulfur diesel and what it could mean," Felmy said.

He said he does not expect US refineries to have trouble producing ULSD, but questions remain about possible contamination downstream of refineries.

Planting said that while other product imports surged in 2005, tight world markets made it difficult to find additional distillate overseas. "Thus, despite strong domestic demand for diesel, imports only held about steady," he said.

Overall, product imports jumped 13.9% to an average 3.48 million b/d in 2005, reaching a record domestic consumption share of nearly 17%, API said.

"The growth was especially strong for gasoline, imports of which rose more than 20%. They surpassed 1 million b/d for the first year ever," said Planting.

The higher product imports led to an overall increase of 2.6% to an average 13.15 million b/d despite a 0.8% decline in crude imports to 10 million b/d. US reliance on crude and product imports reached 65% of total consumption last year, Planting said.

Domestic crude and condensate production fell 6.6% to an average 5.06 million b/d, while natural gas liquids production dropped 5.4% to an average 1.71 million b/d in 2005.

Impact of hurricanes
API said that of the record 27 named storms in 2005, a record 10 developed in or invaded the Gulf of Mexico. Seven of them affected offshore production. They included three Category 5 storms—Katrina, Rita, and Wilma.

API said production shut in by hurricanes totaled more than 115 million bbl of crude and 591 bcf of gas, equivalent to 7.5% of crude production in the Lower 48 states and 3% of total domestic gas production.

API reported that in December, Lower 48 production rose above 4 million b/d for the first time since August as Gulf of Mexico operations recovered.

"While the industry has succeeded in restoring much of its damaged assets to full production, some remain offline as repairs are made," said Felmy.

"Restoration of production has moved as rapidly as possible, given the need to restore operations only when certain that the environment will not be adversely affected. Much work remains to be done," he said.

Although its latest quarterly drilling statistics showed gas wells running ahead of domestic wells drilled by about 2.5:1 in 2005's final 3 months, API's overall statistics do not include gas.

In its latest short-term energy outlook, however, the US Energy Information Administration said total basic domestic supply reached 22.42 tcf of gas in 2005, matching total demand.

US work at the wellhead continued to grow. DOL figures, compiled by the BLS, showed that domestic employment in oil and gas exploration and production and related services grew 2.7% to about 127,500 positions in December 2005 from about 124,100 jobs in December 2004.

Contact Nick Snow at [email protected].