OIL CONSUMERS NOT POWERLESS AGAINST OPEC

Are American oil consumers really so powerless against the Organization of Petroleum Exporting Countries that they need their government to run interference in the market?

Apr 14th, 2000

Are American oil consumers really so powerless against the Organization of Petroleum Exporting Countries that they need their government to run interference in the market?

No way. But you wouldn't know it from the political rhetoric.

In fact, the US has market power at least equivalent to that of OPEC. Where OPEC exerts its influence with adjustments in supply, the US exerts its influence with adjustments to demand.

As an international body, OPEC has to coordinate its actions. The US just has to let economic nature take its course.

Other consuming countries have market power, of course. The US just happens to be the biggest single consuming nation, accounting for one fourth of the world's oil use. OPEC's slightly greater share of the world's oil output-roughly one-third-gives it a bit of an edge in the comparison.

But OPEC is saddled with the nasty challenge of mustering agreement among nations of varying interests. The US only has to let consumers respond rationally to price movements.

The Apr. 11 edition of International Energy Agency's Monthly Oil Market Report notes that retail gasoline prices in the US during March were 56% higher than their depressed levels of a year earlier.

"In theory," it says, "the short-term response to US gasoline prices that are 56% higher would be gasoline demand 4.5% lower; in practice the first response is switching from premium gasoline to midgrade or regular."

But a demand response is becoming evident, however difficult it is to measure at this stage.

IEA notes how official monthly estimates for total oil demand in the US bounce around through revision: November's initial estimate went from 6% to 2% growth after revision, December's from 2% to 6%, and January's from 1.5% growth to a 1.3% decline. Sporadic chills explain part of the flux.

A separate estimate of contemporaneous demand with some ability to smooth out the trends, Oil & Gas Journal's rolling 4-week average, nevertheless indicates a slowdown in overall demand growth.

OGJ's Apr. 17 issue estimates average, total US demand for the 4 weeks ending Apr. 7 at 19.146 million b/d, down 1% from the same period a year earlier.

The year-to-date average through Apr. 7 was up only 0.1%--well below the roughly 2% growth seen by most forecasts for US demand in 2000.

Among individual products in the 4-week average, residual fuel scored the largest decline: 19.5%. But resid volumes are relatively small-less than 1 million b/d.

Among the more important products, gasoline demand showed a gain of only 0.8% year on year, and distillate-which includes diesel fuel and heating oil-was down 4% during the 4 week period. Jet fuel demand was up only 0.1%.

Some of the distillate decline had to do with weather. But weather can't explain all of the apparent flattening in total consumption-especially with gasoline and jet fuel looking so weak.

At this point it's impossible to measure the volumes, but there can be little doubt that in response to elevated prices consumers are cutting their oil use.

That effect is as important in the recent subsidence in prices of gasoline and other products as OPEC's agreement to raise production was to subsidence in the price of crude.

OPEC's most important members know from experience that consumers aren't powerless in the oil market. US politicians need to heed the lesson and quit threatening to impose market interventions that would only weaken the influence.

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