U.S. Oil Demand Recovers
January 29, 2019
Oil imports into the United States are falling, and the country even became a net oil exporter for one week in November 2018. This dramatic transformation is rightly attributed to the boom in oil production. But oil demand was, until recently, a co-equal partner. U.S. oil consumption fell by 11 percent between 2005 and 2012, or 2.3 million barrels a day (mmb/d), making a larger contribution to net imports than rising production (from 2005 to 2012, total petroleum production rose by 2 mmb/d). But oil demand has since recovered. According to preliminary data for 2018, oil demand surpassed 20 mmb/d for the first time since 2007 and will be just shy of the 2005 peak (20,524 mb/d versus 20,802 mb/d in 2005).
This reversal partly reflects the strong fundamentals in the U.S. economy: growth in petrochemicals, a rebound in freight movements, and more travel by car and plane. But it also signals a failure to implement strict efficiency policies—a failure made more acute by the complacency of the current administration, which has touted the lowering of carbon emissions as one reason to be less stringent about regulation. Improved energy efficiency—doing more with less—is one of the few policy recommendations that has near-universal support. The latest data suggest a slippage in meeting that target and a need to refocus efforts on energy efficiency.
The Numbers in Brief
Oil consumption depends on three dynamics: the underlying activity for which oil is used (passenger travel, freight, industrial output, heating, etc.); the relative competitiveness and market share of oil versus other fuels (like coal, natural gas, etc.); and efficiency, an all-encompassing term that links underlying activity to fuel use. In simple terms, rising activity has mostly offset fuel switching and rising efficiency: the market share of oil peaked in 1977, and efficiency today is greater than in the 1970s, but oil consumption kept rising until 2005.
The decline in oil use between 2005 and 2012 came from all sectors, but unevenly: around 41 percent of 2.3 mmb/d decline came from transportation, 23 percent from industry, 19 percent from electricity, 13 percent from the residential sector, and 4 percent from the commercial sector. There was, in short, a reduction in oil use across all sectors. The rebound in oil use from 2012 to 2018, however, has been a more limited affair—owing to four drivers.
The first has been petrochemicals. Around 33 percent of the increased demand for oil has come from “hydrocarbon gas liquids,” a broad term that includes “ethane, propane, normal butane, isobutane, and natural gasoline, and their associated olefins, including ethylene, propylene, butylene, and isobutylene.” These liquids are largely tied to natural gas production, and there has been an increase in petrochemical capacity in recent yeas to absorb this extra output. This is also one area where increased consumption is a clear signal of strong industrial activity and where reduced consumption is unlikely to be a desired objective (although improved efficiency always helps).
The second is passenger transport by vehicle: gasoline made up 30 percent of the increase in oil demand. There are two drivers here. The first is that vehicle-miles traveled, which flattened from 2009 to 2013, rose again after 2014. There is a plateau in 2018, but miles traveled are still at all-time highs in 2018. Second, fuel economy is improving very slowly (and not at all in 2016, the last year for which we have data). More importantly, there is a gap between states with higher efficiency standards (like California) and the states that follow federal rules. Simply put, demand is flat or falling in the former but rising in the latter.
The third is diesel use, which made up 19 percent of incremental demand, due to freight movements and industrial use. Diesel use for transportation is at an all-time high—the August 2018 monthly figure is the highest recorded ever. It is too soon to disaggregate between highway and rail transportation, but the freight transportation index compiled by the Bureau of Transport Statistics, which encompasses both, has risen by ~24 percent relative to 2012, and on a seasonally adjusted basis, the September 2018 value is the highest ever. But here too, efficiency gains have petered out: energy use per ton-mile for Class I rail has been flat from 2009 to 2015 (latest data), after declining for years. The same trend is observed in trucks.
The fourth is air travel. Jet fuel accounted for 15 percent of the rise in oil demand. Passenger-miles have risen by a third between 2010 and 2017, and the data for 2018 show a year-on-year increase of 5.5 percent (through September). In the early 2000s, as oil prices rose, there was an increase in capacity factors—more people in a plane, which muted the relationship between travel and fuel use. But since 2012-2013, capacity factors have stabilized at 82-83 percent, and now increased travel means more fuel use. The energy efficiency of air travel—energy used per passenger-mile—is also to blame: it improved steadily since 1970, but the latest data, to 2016, show a slowdown in gains. That too is leading to more fuel use.
These numbers show that the decline in oil use, which came after 2005, was based on drivers that are no longer able to arrest the growth in oil demand. A rise in oil consumption can be interpreted in different ways, of course: The growth in petrochemicals can be seen as a welcome development—leveraging cheaper feedstock to bring investment and jobs to the United States. Even in other sectors, growing demand can be seen positively: more people are driving and flying, more goods are being transported—these are signs of economic vitality. But in a broader sense, it is clear that the gains in efficiency are slowing. This is true in passenger travel, trucks, rail, and planes. This is the same pattern that the United States saw after 1973—more fuel use despite efficiency improvements.
In an era of rising U.S. oil production, conserving oil use has become a secondary focus. The Trump administration has even said that reducing oil demand is no longer an economic imperative—an unfortunate but not unexpected position. This short-sighted approach will ripple through the U.S. energy system. Even if the United States produces more oil, consumers will pay more for fuel if efficiency gains stop; there will be less oil to export, undercutting the effort to use energy to lower the country’s trade imbalances; the U.S. auto sector could again find itself in a difficult position when consumer sentiment shifts, and the sector is not producing the fuel-efficient vehicles that customers want; and less efficiency means more emissions, of the local kind that drive air pollution, and of the global kind that drive climate change. The trajectory toward that world is clear—absent a policy reversal or a recession, the United States will resume its path towards more and more oil consumption.
Nikos Tsafos is a senior fellow with the Energy and National Security Program at the Center for Strategic and International Studies in Washington, D.C.
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