As crude price falls oil demand climbs—but not uniformly

This article was edited after posting to correct an error in the fourth paragraph.

Behavior that defies logic implies deficiency either of the logic itself or of companion analysis. If this were not so, economists could not charge for their work.

Economic logic argues that, for a given commodity, consumption rises when price falls.

Oil demand last year, for example, exceeded predictions because the price of crude oil underperformed expectations.

But the effect wasn’t uniform. In some countries, retail prices rose.

How can this be?

In its recently published World Oil Outlook, the Organization of Petroleum Exporting Countries notes that the effects of crude-price changes vary among countries. Other factors are involved.

Among the industrialized members of the Organization for Economic Cooperation and Development, OPEC notes, the crude price accounts on average for less than 45% of vehicle-fuel prices. Why? Variations in costs of refining, distribution, and marketing and in—most importantly—taxes.

In countries such as the UK and Italy, crude accounts for less than 35% of retail prices, taxes more than 55%.

In the US, by contrast, taxes account for only 14% of retail prices. US consumption thus is more sensitive to the crude price.

Heavy taxation of oil products, a longstanding irritation to OPEC, isn’t the only reason demand responses vary.

In Brazil and Russia, gasoline prices have increased since April 2014 despite the plunge in crude prices. Both countries have fast-rising inflation and sharply depreciating currencies.

Structural changes also limit oil-demand responses to price changes. They include efficiency improvements, conservation, and increased use of nonoil fuels. Another change with geographically varying effect is expansion of public transit.

Further limiting demand growth despite falling prices are laws, such as those enacted in China to fight air pollution, that restrict car purchases and use.

And, of course, economic performance, another demand influence, varies.

So, once again, analysis rescues logic. This alone might count for a good day at the office by OPEC’s economists, who went boldly on to predict the price of crude would reach $70/bbl in 2020 and $95/bbl in 2040.

(From the subscription area of www.ogj.com, posted Dec. 28, 2015; author’s e-mail: [email protected])