Tuesday, March 26, 2013

API Reports Oil Use Drops To 20-Year Low In February And So Says Wrongly The Economy Must Be Slowing

The Great American Energy Diet is creating new rules for energy markets, and the pace of transformation is quickening, making it difficult to comprehend what was true 5 years ago is no longer so today.

The API reports that the demand for oil products fell to a 20-year low in February.  Gasoline is down 3.1% and residual fuel oil used in boilers fell more than 12% compared to February 2012. Big drops.

As a result of these petroleum product drops in demand, John Felmy, API's chief economist, questions the strength of the US economic recovery in the linked to article.  He says: "Although there's been some encouraging news on employment and manufacturing, fuel demand is an important indicator of where the economy is--and it is headed in a different direction."

Felmy is right about positive economic news. America created 236,000 new jobs in February 2013 and about 2 million from February 2012 to February 2013 so the national economy is creating enough jobs to lower the unemployment rate http://www.bls.gov/news.release/pdf/empsit.pdf.

But he is almost certainly wrong that the drop in demand for petroleum products means that job creation and economic growth are lagging.  The days are gone when economic growth meant necessarily similar increases in demand for petroleum products.  Indeed, US oil demand peaked in 2007, while the US economy has grown every quarter since July 1, 2009.

Demand for oil today is being decreased by the Great American Energy Diet and increasingly available and often lower cost alternatives to oil like natural gas, electricity, and biofuels. Indeed, oil is so expensive that falling oil demand can be a sign of a strengthening economy.  Whenever expensive oil is replaced by a more fuel efficient vehicle or a switch to lower cost natural gas or electricity, the national economy benefits from new disposable income that can be spent on goods and services other than oil or energy purchases.  Less oil demand also means exporting less cash to purchase the 40% of oil consumed here that is still imported.

Contrary to the suggestion made by Mr. Felmy, declining, not increasing, oil consumption is becoming an important indicator of a more efficient, stronger US economy.

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