Free Markets, Free People

energy consumption

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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