Personal consumption data portend weak oil demand

Total liquids product consumption fell by 4.1 per cent in the US in 2009, and the EIA’s forecasts for growth this year and next are fairly anaemic 1.1 per cent.

The big question is, how much of that demand lost in the recession will return, and how much is permanently destroyed? The IEA believes OECD oil demand won’t rise at all this year, and that longer term, less than a tenth of growth in demand will come from OECD countries.

Stephen Schork writes that oil market watchers should keep a close eye on the Q4 numbers for public consumption expenditure (PCE) , due to be published at the end of the month. The chart below shows the percentage of PCE on non-durable goods went on gasoline and other fuels:

Gasoline and energy expenditure fell dramatically from a peak of $461.4bn in Q3, 2008 to $271bn in Q1, 2009 – the lowest level, Schork writes, since Q3 2004.

As a percentage of broader consumption, the numbers are similarly impressive:

In relative terms, the average consumer went from spending 19.4% of their non durable goods expenditure on gasoline to 12.5%. With the recovery in prices, that expenditure has increased slightly, up to 14.5%, but the concern is how much demand destruction, if any, took place over the same period.

Consumption has since recovered somewhat; PCE on gasoline was $324.4bn in Q3 2009. This was a similar level to Q1 2007, although average prices are lower now ($2.55/gallon) than they were then ($2.66/gallon).

However Schork is not confident this growth will continue (emphasis ours):

Whether this rate of expenditure can be expected to continue is less certain. PCE on motor vehicles and parts remains anemic at $331.7 million, the same level as Q3 1998. Factor in inflation and that number becomes even weaker. On the other hand, PCE on transportation services held steady through the recession, never falling below 2006 levels. At $306.3 billion in Q3 2009, it is less than $4 billion away from its all time high in Q3 2008.

Schork says the decline can be partly explained by drivers switching to public transport:

This trend can be expected to continue if gasoline prices trend higher. Once drivers give up their gas guzzlers for a Prius they do not tend to revert, and the high unemployment rate amongst teenagers (27.1% in December) means new customers are not snapping up hummers like they were in 2006.

The bottom line is that we believe much of the recovery in PCE on gasoline and energy goods has already taken place. Thus the next BEA release should be approached with caution. However, this may not prevent the bulls from running prices beforehand.

If some of that US demand never returns, suggesting consumption patterns have permanently changed, what would this mean for oil markets, and for emissions?  The sentiment of the US car driver, for example, might have a big influence on other markets.

Related links:

The love affair with the road :Changing, not slowing down? (FT Energy Souce, 12/01/10)

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