Free Markets, Free People

Energy prices are rising, but energy demand is declining.

We’ve been seeing some better—if not good—economic numbers lately, mainly in employment, but also in industrial production, and general business conditions. One might be tempted to believe there’s at least a mild recovery on the way. That’d be nice.

But I’m…troubled. First, there’s this:

Oil prices aren’t high right now. In fact, they are unusually low. Gasoline prices would have to rise by another $0.65 to $0.75 per gallon from where they are now just to be “normal”. And, because gasoline prices are low right now, it is very likely that they are going to go up more—perhaps a lot more…

In terms of judging whether the price of WTI is high or low, here is the price that truly matters: 0.0602 ounces of gold per barrel (which can be written as Au0.0602/bbl). What this number means is that, right now, a barrel of WTI has the same market value as 0.0602 ounces of gold.

During the 493 months since January 1, 1971, the price of WTI has averaged Au0.0732/bbl…

At this point, we can be certain that, unless gold prices come down, gasoline prices are going to go up—by a lot.

In other words, there’s at least an 18% price differential in the current price of oil compared to gold, compared to the historical average.

Another important thing to remember is that the current rise in energy prices does NOT appear to be related to demand for energy. According to the US Energy Information Agency, the US demand for both electricity and petroleum has been decreasing.

Statistics for energy use usually run a couple of months behind, but the recent figures for petroleum are that from August, 2011 until November 11, Total Crude Oil and Petroleum Products consumed, in thousands of barrels per month, fell from 593,757 to 562,019. Figures for the same months in 2010 are 609,517 and 569,312, respectively.

Similarly, the most recent electrical generation numbers, in millions of kilowatt hours, show that from August to November, 2011, total electricity consumption fell from 370,073 to 273,053. Both figures are about 2 million kWh less than the same months in 2010.

Now, maybe in the last two months there’s been a huge turnaround in energy consumption, but please note that the year-on-year demand is declining, and in general, has been since 2006.

So, if energy use is declining, while prices are increasing, and supply remains steady—or is increasing—then we can reasonably look to monetary reasons for the price increase, as the economic fundamentals do not explain the price changes.

The implications for energy prices, therefore, are not good. Start saving those pennies, kids.

For all the good it’ll do you.

Oh, and by the way, if the economy is recovering, why is energy demand decreasing, rather than increasing? Just asking.

~
Dale Franks
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24 Responses to Energy prices are rising, but energy demand is declining.

  • Three Point – Offshoring our manufacturing serves to offshore our energy consumption. – Oil supply is up as are oil prices, the opposite you would expect from a simple supply and demand paradigm, but unpredictability in the Middle East is driving a buying spree in the futures markets. Simply put, there is no shortage of supply, but investors are betting there will be. – US home vacancies have obviously gone up dramatically, while new construction has gone down dramatically, so assuming people are living somewhere, it is most likely in multi-family units which are more energy efficient in general. I do sometimes wonder if, as a nation, when we allowing drillng on public lands, we could fairly require that the oil extracted be refined and sold exclusively in the US. Is that an unfair requirement when we sell oil leases dirt cheap? (this is way out of my area, so I am just curious of what opinions (and realities) are on this concept)

    • @CaptinSarcastic Debase your currency and the goods you buy will be priced higher in that currency.

      • @TheOldMan @CaptinSarcastic

        Currency is a relative thing. The US isn’t the only one that’s been debasing their currency. The only big country that hasn’t I can think of is China and like Harun mentions below they peg their currency to ours.

    • @CaptinSarcastic Debase your currency and the goods you buy will be priced higher in that currency.

    • @CaptinSarcastic China’s exports aren’t growing as fast as they used to, and inshoring is the new trend. Just this Chinese New Year China gave all of its workers a 15% raise in minimum wage. I didn’t hear about them simultaneously imposing a 15% increase in productivity, so good luck with that China.

      • And note they have to do these wage hikes as food keeps going up, and funnily enough their currency is also loosely pegged to ours.

  • Nancy Pelosi clears things up for you.
    http://www.zerohedge.com/news/nancy-pelosi-issues-statement-soaring-gas-prices

    It is simply shocking that this woman holds a post above dog catcher. (apologies to any dog catchers out there)

    • @tkc882 Yes, oil from the future has been bought up based on the speculation that geopolitical crises will lead to oil shortages in the future. Obviously, the vast majority who do not benefit from oil prices going up are hoping that these speculators lose their collective asses. I get a little when this kind of money flows into oil futures because there is a point when it’s worth trying to cause the kinds of crisis that would make these investments profitable. I see the value of oil users hedging their bets, like Jet Blue a few years ago, but I really don’t see how higher oil prices today, caused by people who think there will a shortage in the future, provides any benefit to the rest of us now, or in the future.

      • @CaptinSarcastic @tkc882 Yeah. It’s probably George Soros.

        • @Neo_ @tkc882 Why not, I don’t put anyone above douchebaggery. Whoever it is, I hope they lose their shirts on this bet.

        • @CaptinSarcastic @Neo_ @tkc882 I don’t think they did last time Cap. I think it worked out pretty nicely for them, and I see them doing it again.

        • @looker @Neo_ @tkc882 Agreed, I am engaging in wishful thinking. The money is usually right, and I fear that it can become a self-fulfilling prophecy.

      • @CaptinSarcastic @tkc882

        It wouldn’t bother me if there was a corresponding price downswing from when there’s an oversold amount from people hedging and they stop buying causing a glut.

        But there never seems to be.

  • “Another important thing to remember is that the current rise in energy prices does NOT appear to be related to demand for energy. According to the US Energy Information Agency, the US demand for both electricity and petroleum has been decreasing.”

    China and India, of course.

    The world demand for energy goes up, even as US demand goes down. We can cut our usage, make energy-efficient machines, but if the rest of the world is chugging down the crude like crazy, prices go up because they’ll pay more, regardless of what we do.

    • @myweeklycrime Maybe its all the increase in demand for Molotov cocktails in Greece?

      China isn’t doing so hot right now either, but I don’t know their oil consumption numbers, so that’s a good question.

  • Prices can increase with decreased demand. Its called price fixing.

    I firmly believe OPEC has become a relatively effective cartel over the last decade.

    Energy (meaning, electricity & gas mostly) is controlled through a series of government approved local monopolies in most cases. The only recourse people have against high utility prices is to move and they’re not moving.

  • Right now Iran fears are driving up oil prices. In general, a very mild winter has meant much less fuel oil demand. I take my kids skiing at the local mountain two or three times a week and not once has it been cold — temps have been in the 20s and 30s. We’re lucky to still have snow. Everyone’s talking about how that’s been a godsend in terms of fuel costs, and it appears this is true across the country. Of course, OPEC has been producing at maximum output and it appears the Saudis had pushed production to an unsustainable level. It could be that oil production is at a peak and it would be smart to invest more quickly in alternatives. I went to geothermal for heating this winter (it gives us AC in the summer, which we never had before). It still uses fossil fuel for electricity (natural gas), but much less.

    • @scotterb Geothermal isn’t an alternative for your car, or power generation. “it would be smart” – yes, for consumers, like you did. And yeah, see that you’re not tempted to use your AC when you don’ t need it, which is about 340+ days of the year in Maine by my recollection.

      I see it here in Texas, the weather gets to 65 outside and some jackasses have their A/C on, you walk by their houses and the compressor is humming merrily along.

      So, enjoy the A/C when you need it, but not when you don’t.

      • @looker Last summer electricity costs were very close to the year before, so I don’t think we over used it in summer — but that’s definitely something I’m trying to stay conscious about!

    • @scotterb How has that geothermal worked for you ?
      The concept is the same as a “heat pump” but instead of removing or extracting head to/from air, it does it with the ground which is roughly 55F, a short distance from the surface.

  • “if the economy is recovering, why is energy demand decreasing, rather than increasing? Just asking.


    You know why. It’s the meme of the ‘terrible economy’ we had under Bush playing in reverse.

  • “It’s the easiest thing in the world (to) make phony election-year promises about lower gas prices,” Obama said.

    “What’s harder is to make a serious, sustained commitment to tackle a problem that may not be solved in one year or one term or even one decade.”