THE DRAWBACKS OF $30/BBL OIL

Welcome as it is for the financial lift it gives producers, $30/bbl crude oil has its drawbacks.

Welcome as it is for the financial lift it gives producers, $30/bbl crude oil has its drawbacks.

It makes consumers angry at oil companies, for example, which in turn encourages government officials to serve up make-believe remedies such as regional heating-oil reserves.

Thirty-dollar oil also produces contrary market effects that oil companies might profitably learn to turn into political advantage.

Consumers always get revenge. August reports by two government market watchers show that, contrary to recent lamentations about their victimization, consumers are extracting their revenge now.

Worldwide growth in oil demand is slowing noticeably. That means consumers are cutting back in response to high prices.

In its August Monthly Oil Market Report, the International Energy Agency trimmed its demand estimate for 2000 to 75.8 million b/d from the 77.1 million b/d it predicted in August 1999. One of the reasons cited by IEA: higher than expected prices.

The US Energy Information Agency, meanwhile, expects average global oil demand to increase only 1.3% this year to almost 76 million b/d-the lowest growth rate since 1993.

Price's dampening effect on demand is pronounced in the US gasoline market, where consumer outrage has been high.

In the second quarter, gasoline demand appears to have declined, although estimates remain subject to revision.

For the entire year, EIA expects gasoline demand not to grow at all.

"It seems that the increase in retail prices during the last 18 months has affected gasoline demand more than previously anticipated," EIA says in its August Short Term Energy Outlook.

Consumers have responded to a price jump by cutting consumption. It happens every time.

As a result, although refineries are still running at capacity and aren't filling heating oil stocks as they should this time of year, gasoline prices are falling.

EIA says weekly retail price averages fell 20

The central message of the August IEA and EIA demand numbers, however, is what oil companies should hammer home to their political detractors: Consumers have market power now clearly on display. As an antidote to elevated price, the choice not to consume works swiftly and creates no distortion.

This latest demonstration of the exercise of consumer power discredits howls about victimization. Consumers become victims only when markets aren't allowed to work.

Companies will progress politically if they can make that point with the officials who were calling them unflattering names only weeks ago.

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