The End of Growth: Why Oil Prices are Falling

Paradigms hold on until they can no longer offer believable explanations for what’s happening. Oil markets and the global economy are now in the middle of such a shift.

On Tuesday September 10, Brent futures price fell to its lowest level in three years as prices dropped more than $12 in fourteen days (Figure 1).

The old paradigm of “inventory deficits” has faded, swiftly replaced by “China weakness.” Ironically, inventory deficits remain as persistent as ever, while serious concerns about China’s economic slowdown have been prevalent for at least the past two years.

These paradigms ignore the fact that geopolitics have consistently driven oil markets. While analysts tend to focus on market fundamentals like supply and demand, geopolitical events act as catalysts, shaping the market’s actual direction.

The recent 15 percent price collapse was nothing new. Prices fell 15 percent in July (“Jul 2024” in Figure 1). Before that, they fell 15 percent in April and May (“Apr 2024” in Figure 1). Prices dropped 19 percent in October through December, 2023 (after “Hamas War” in Figure 1). All of these shifts were triggered by geopolitical events and the eventual easing of tensions.

The reality is that weak oil demand has been the main force pushing prices down in recent years, but geopolitical factors—including OPEC production cuts—have repeatedly stepped in to prop them up. The longer geopolitics artificially sustains the market, the more severe the price correction will be once the next crisis fades.

How have many analysts overlooked this? Mainly by forcing the data to fit their pre-existing paradigms, rather than allowing the data to reveal the true story.

Transportation is responsible for 60 percent of global oil consumption, and gasoline and diesel account for 54 percent of total petroleum use. Since 2021, the Energy Information Administration (EIA) has been projecting flattening consumption for these refined products. In its International Energy Outlook 2023, EIA data indicated that world diesel consumption would only increase about 1 million barrels per day (mmb/d) by 2035, and that gasoline use would probably decrease about 1.4 mmb/d (Figure 2).

It’s difficult to get reliable data on current world consumption by fuel type but the United States is a major exporter and U.S. export data is a good proxy. The amount of crude oil going into U.S refineries has stabilized at more than 1 mmb/d lower than 2018-2019 average levels over the last two years. About half of that decrease is because U.S. consumption is lower, and the rest reflects lower global demand of which the U.S. is a big part—the U.S. uses about 25% of world gasoline and diesel.

U.S. export levels signal a decrease in global demand year-over-year. In 2023 and 2024, growth in U.S. crude oil and petroleum product exports has dropped by 40% compared to the levels seen between 2017 and 2019 (Figure 4).

The markets have made their stance abundantly clear. Last week, fund managers held a net short position in Brent crude oil futures and options (Figure 5). “Net long or short” represents the difference between long positions and short positions held primarily by commercial hedgers and investment funds.

Oil traders are more bearish now than at any point in the history of the Brent futures market. That’s not just noise—it’s a signal you can’t ignore.

A colleague of mine shared the following observation on this phenomenon.

“Calling all contrarians! Not only is net length (ie. financial demand for oil) at its lowest level in history, but the paper market for Brent is now NET SHORT…first time in history. All the while physical global oil inventories are at or near ALL TIME LOWS. What a set up!”

Eric Nuttall

The “set up” is that markets anticipate an oversupply of oil over the next six to twelve months, leading to a lack of urgency regarding supply. Nuttall is conflating current conditions with future expectations, mixing up present inventory levels with how traders anticipate them to be later this year and in 2025. Regardless of how you analyze the data, the message from the markets to producers is clear: stop drilling.

Figure 6 compares supply urgency between 1995-1996 and 2020-2022. The orange data represents WTI comparative inventory versus oil price from June 2020 to June 2022. On the right side of the chart, the slope of data points is fairly flat, indicating low supply urgency due to the Covid pandemic and reduced economic activity. As the world began to recover, and the Ukraine War affected oil supply, the slope became steeper, reflecting higher supply urgency.

The blue data is from January 1995 to March 1996, when comparative inventory hit its most negative level until the Ukraine War in 2022. Despite this, the slope of data points is flat, suggesting low supply urgency throughout the period. This was influenced by globalization, which lowered commodity prices, and Japan’s economic stagnation, which was just beginning.

Low supply urgency is the reason oil prices are dropping today, even as inventory levels decline. This is largely due to the slowdown in global economic growth, which goes beyond post-pandemic inflation or rising interest rates.

The globalization of trade and manufacturing, which accelerated in the 1980s, gave a major boost to struggling developed economies. China’s rapid rise was a defining feature of this period, but its growth peaked in 2007.

That was also about the time that U.S. oil, gasoline and diesel consumption reached their maximum levels (Figure 7). U.S oil consumption peaked in 2005 at 20.9 mmb/d. Diesel consumption peaked in 2007 and gasoline in 2017. None have recovered to pre-pandemic levels.

How does the peak in China’s economic growth relate to U.S. oil consumption? The global economy is interconnected, and the lines between developed and emerging markets have always been blurred, despite economists treating them as distinct in a convenient but oversimplified model.

“I wear my “DM = EM” (developed markets = emerging markets) T-shirt and wish those
thinking they know what’s going on in the US economy from looking at Bloomberg ‘good luck’. I’ve lived in and covered many EM, with eccentricities, conspiracies, and oddities: let’s see how those who’ve only lived in and covered DM cope if/as this structural shift continues.

Michael Every

The global economy has matured. While there are regions where growth remains strong and others just beginning their development, the overall patterns are becoming clearer. It seems increasingly unlikely that we will see another China story—a rapid economic rise on the same scale.

Figure 8 shows that while world gasoline and diesel consumption continues to rise, its rate of increase is slowing (consistent with Figure 2 above). In fact, data through July suggests that 2024 consumption is likely to be flat with 2023.

As critically, world gasoline & diesel per-capita consumption peaked in 2015. That reflects a fundamental demographic shift. World population growth peaked in 1964 and has decreased in steps since then (Figure 9). Population growth has fallen -0.04% per year since 2014.

At its most fundamental level, oil and refined product consumption is directly tied to population growth. The United Nations projects that world population will continue to increase into the mid-2080s but in most advanced economies, growth is slowing, and China’s population size has actually declined since 2020.

The global oil market is undergoing a significant transformation driven by a complex interplay of geopolitical events and shifting market fundamentals. ​ While traditional paradigms have heavily focused on supply and demand metrics, it’s becoming increasingly clear that the influence of geopolitical factors has been consistently underestimated.​ As the world grapples with slowing economic growth, changing consumption patterns, and demographic shifts, the oil industry is adapting to these new realities faster than other sectors.

Geopolitical risks to oil supply and concerns about an overextended and slowing global economy have been the dominant factors shaping oil price trends in the 21st century (Figure 10). Moving forward, a more nuanced understanding that integrates both fundamental and geopolitical analyses will be essential for navigating the future of global oil markets.

Paradigms don’t change easily. They’re entrenched, comfortable, and persist until reality can no longer be ignored. Cracks start to show, anomalies pile up, but no one acts—at least not until the situation becomes critical. Only then, when the old model collapses under its own weight, do we see a shift. It’s not a smooth transition; it’s messy and uncomfortable, but the crisis forces us into a new understanding. Reality usually wins in the end in spite of human preferences for a different outcome.

Analysts and economists continue to force today’s realities into obsolete models. Oil isn’t just a commodity; it’s the foundation of the global economy. It signals where the future is heading. Right now, oil markets are flashing a clear message: the era of growth is over—not just for oil but for the global economy.