High Prices and Winter Destroying Demand

Jim Brown
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U.S. gasoline demand at the pump fell -13% to the lowest level since Hurricane Katrina for the last week in December according to the MasterCard Spending Pulse report.

The blizzard between Christmas and New years added to already falling demand due to high prices to cut consumption of gasoline to8.41 million barrels per day, down from 9.61 mbpd. The largest decline was in the central Atlantic region where consumption fell -15%.

The average pump price rose to $3.06 per gallon and 17% over the same period in 2009. The highest demand in 2010 was the week ended May 28th at 9.71 mbpd.

The Spending Pulse report is produced from information collected at 140,000 U.S. gasoline stations as credit cards are swiped at the pump.

Winter is killing demand even worse than the $3 per gallon. The new blizzard that began in Washington state this weekend and is pushing lower across the entire Midwest and the one in the North East is likely to weaken demand again. This time cities will be ready for the snow and drivers should not be snowbound but winter weather always slows demand.

The IEA warned OPEC last week that high prices were in danger of damaging the fragile economic recovery. The IEA wants OPEC to produce more oil so there is no danger of a price spike to $100 or higher. The IEA claims the 34 developed countries that make up the OECD have seen their import costs rise from $200 billion to $790 billion at the end of 2010. The high prices are equal to a loss of 0.5% of GDP.

Fatih Birol, the IEA's chief economist, warned, "The oil import bills are becoming a threat to the economic recovery. This is a wake-up call to the oil consuming nations and to the oil producers."

OPEC members have appeared unconcerned over rising prices and several had said $100 would be a fair price and they would not increase production just because the price hit $100. Last week the Kuwait oil minister said OPEC "might" increase production if prices hit $110 in a "quick" fashion. OPEC is back to using the "speculation" term again whenever they discuss prices. By blaming the high prices on speculators it absolves them of any responsibility but they still reap the benefits.

Saudi Arabia remains the moderating force with its $70-$80 is fair comments. Saudi pumped an average of 8.4 mbpd of oil in 2010 and 1.8 mbpd of natural gas liquids. The NGLs are not subject to the OPEC production quotas. Total liquids hit 10.2 mbpd. An analyst at the IEA said they would probably increase the production estimate for Saudi Arabia in their next report.

The analyst also pondered the spare capacity question in the same Saudi context. Since production numbers are really only available for the crude exported how do we know how much Saudi is actually producing and using internally? Analysts point to various data sets showing Saudi burning more oil to generate electricity and to desalinize water for the kingdom. If they consume more oil internally and don't tell anybody does it matter? Obviously it does because it reduces Saudi's spare capacity even though they are not reporting it. Eventually this internal OPEC usage is going to jump up an bite us in the backside and it will be a serious shock to the system when it happens.

The kingdom pumped 8.25 mbpd in December and that was +4.3% above their quota of 8.051 mbpd. It will be interesting to see if Saudi's output grows in January in a private effort to hold prices down by increasing supply. They are the only ones that could make it happen and they have done it before.

Jim Brown

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