What's Cooling the Price of Oil? We Are.


Greetings from Washington, D.C., where some policymakers are becoming delusional about energy. Take the recent drop in prices. Some claim that President Bush deserves credit  for simply  talking. Even more hot air is comes from a small band of Congressmen blathering away in the U.S. Capitol, who claim their talking is affecting the enormous 85-million-barrel-a-day oil market.

Get real, folks. The biggest news is that as a  supplier of only 2-3% of global oil, Americans are starting to realize this talk about drilling is looking at the problem from the wrong end of the stick. Since we are by far the largest buyer in the global marketplace, the best way to affect global prices is by making more efficient use of this resource,  for example with more efficient vehicles. And in fact, as I've written about before, economics backs this notion.

Up until June, with global supply lagging expectations by 1.5 million barrels a day (mbd), supply/demand considerations favored higher and higher prices. Now that we are reacting by lowering consumption, however, this equation has broken down and so have oil prices.

Collectively, as U.S. consumers we have curbed oil consumption by 860,000 barrels a day over the first seven months of the year. This reduction in US demand has helped offset a 1.26 mbd increase in global demand over the same period, giving global supply a chance to finally catch up and check further price escalation. As can be seen in the table below from Energy Intelligence, the US reduced consumption by 4.2% during the second quarter of 2008, helping to offset a 7.9% increase from China during the same period.

Latest Demand Trends

000 b/d


Chg. vs.


Chg. vs.

Main Markets



2Q 08

2Q 07

United States










Europe Big 4










Other OECD





Total OECD-30















Other Non-OECD





Total Non-OECD





Total World





While it might seem strange that the US has been the main driver of reduced oil demand over the past few months, it makes sense since the US consumer is far more exposed to higher gas prices than consumers in other countries. As can be seen in the graph below, lower fuel taxes and a weakening dollar have made higher oil prices far more painful at the pump for Americans than Europeans over the past several years.

This ability of the US to influence oil prices from the demand side, even with China showing little sign of slowing their demand for oil, must be remembered by those scrambling to develop an effective policy response. Putting policy in place to push down the oil intensity of our economy – particularly surface transportation – also has the benefit of lowering consumer vulnerability to high prices in the future.
The bottom line is that we need to slash our reliance on gasoline, which as I wrote recently on the pages of another web site remains a commodity unlike most others. We have to use a lot of it, and there are few substitutes. The sustainable way to break the habit is to adopt aggressive policies that generate more choices for consumers, in the forms of efficient cars and trucks, transportation alternatives like commuter rail, and new energy sources for our vehicles.

Efficient oil use and clean substitutes for gasoline can solve our energy problem in a way that drilling never will and should be front and center for any credible policy response to our pain at the pump.

I'm exceedingly grateful to my colleague Andy Stevenson, who performed the analysis above and co-wrote this post.