Art Berman Newsletter: July 2022 (2022-6)

The second half of 2022 began with the largest single-day drop in WTI price since March 9 (Figure 1).

The narrative of tight oil supply has clashed with the the opposing narrative of weaker demand for most of 2022. The weaker demand narrative came out ahead at least for a while.

In last month’s Newsletter, I explained that the extraordinary increase in oil price and inflation over the last 18 months would almost certainly reduce oil demand by a substantial amount. In January, I wrote,

“The market will send price signals to producers based on its sense of medium-term supply urgency. Prices will rally until inflation and a fragile economy end the rally. This is the dialectic that I expect will dominate oil markets in 2022 and probably beyond.”

The July 5 drop in oil prices suggests that we may have arrived.

The mainstream narrative is that U.S. oil consumption has recovered from its 2.4 mmb/d decrease in 2020 and is now stronger than ever. In fact, total oil demand remains about 750 kb/d less than in 2019 and transport fuel consumption has not recovered to pre-pandemic levels.

2022 U.S. gasoline, diesel & jet consumption is -790 kb/d less than in 2018 (Figure 2). Gasoline use is -430 kb/d lower, diesel -170 kb/d and jet -180 kb/d.

In fact, consumption of all U.S. refined products is lower in 2022 than in 2015 through 2019 except hydrocarbon gas liquids which has increased +1.1 mmb/d since 2015 (Figure 3).

The decline in transport fuel consumption is reflected in vehicle miles traveled (VMT) which has decreased since November 2021. Neither total nor per-capita VMT have regained pre-pandemic levels (Figure 4).

Looking at the same data from 2000 to the present, per-capita VMT has declined since January 2006 (Figure 5). Americans are driving less and higher gasoline prices are probably a key factor.

Fewer vehicle miles traveled in not due to an increase in the number of electric vehicles (EVs) because VMT data is not based on fuel type. Moreover, there are not enough EVs to affect gasoline or diesel consumption. Electric cars accounted for less than 1% (1 million EVs) of the U.S. light-duty vehicle fleet (126 million cars) in 2021 and are not expected to increase to more than 9% by 2050 (Figure 6).

Increased fuel efficiency does not explain lower vehicle miles traveled either. U.S. fuel efficiency has been flat for the last five years and the trend in efficiency change has been down since 2007 (Figure 7).

Efficiency gains, while impressive, are part of the myth that technology will somehow save humans from their bad behavior. They are infrequent and are largely one-off events that cannot be sustained.

The spectacular fuel efficiency gains after the oil shocks in the 1970s and 1980s were easily accomplished by reducing auto weight. The more modest advances of the early 2000s came mostly from recycling waste heat. Future gains will be even more difficult to accomplish.

We find a similar phenomenon in the use of more efficient fuels over time.

Figure 8 shows evolution of fuel types from 1800 through 2019. Per-capita energy consumption increased steadily from about 1830 to 1940 as more of the world’s population began using coal as an energy source in addition to physical labor and biomass. This was followed by about 15 years of flat consumption from 1925 to 1940.

After 1940, per-capita energy use increased at its fastest rate in history as oil became a primary energy source. This increase stalled for about 25 years following much higher energy prices after the oil shocks of the 1970s and 1980s.

Another sharp increase in consumption occurred from about 2000 through 2008 as relatively inexpensive natural gas became widely available with the shale gas revolution. That increase was short-lived and per-capita energy consumption has been on another plateau for the last decade or so. The promise of wind, solar and other renewable energy sources has thus far failed to produce another increase in consumption. That is probably because the renewable percentage of total consumption is too small.

The belief that progress results chiefly from human ingenuity is thus erroneous. Most of the improvement in living standards after World War II was because oil became the main source of global energy.

We now have more context with which to understand the present market concern about lower oil demand.

Figure 9 separates natural gas plant liquid (NGPL) production from conventional refined products for the U.S. NGPLs have accounted for more than 25% of U.S. oil output over the last 5 years.

Figure 9. U.S. natural gas liquids production has more than tripled since 2006. Crude + condensate output has more than doubled. Source: EIA & Labyrinth Consulting Services, Inc.

Natural gas liquids are included in oil production but most of these liquids come from natural gas. U.S. hydrocarbon gas liquids production has increased from 2.5 to 6.7 mmb/d since 2010 (Figure 10). Only “liquefied petroleum gas” comes from the oil refining process.

After the pandemic in 2020 and 2021, most analysts assumed that oil demand would recover and return to the steady growth observed over the previous 3 decades. It still may but the research described in this newsletter indicates that a progressive shift to gas liquids has substantially distorted how we measure oil demand. This change began long before the pandemic.

Paradigms change before most of us are aware that they have.

WTI closed almost $1.00 lower today, July 6 at $98.53 but it was trading as low as $95.10 earlier today. I suspect that oil prices will recover back to levels before July 5 sooner than later. At the same time, I will treat calls for much higher oil prices with the same suspicion that I have since the Ukraine invasion.

John Authers said yesterday,

“Markets run on narratives, and as the second half of the year begins there is a new story.”

It turns out that the story has been developing for many years but it burst onto oil markets this week as if it were new. It came with a vengeance.