Another US oil refinery suffering losses has shuttered operations, with Hess Corp. officially closing its Port Reading refinery in NJ on February 26. There are a host of reasons for refinery closings in the United States, with a critical factor in eroding profit margins being one of less demand for gasoline by the world’s largest consumer of oil.
As we consider the driver of lower gasoline consumption by a populous seemingly impervious to conserving on fuel in the not too distant past, and here too there are several features at play in whittling down gasoline use, consumer behavior is proving to be an enduring characteristic.
A recent white paper by The Boston Company, “End of an Era: The Death of Peak Oil”, offers several observations affecting the global oil market, including their belief that the US has “reached a point of elasticity.” Long believed to be largely inelastic—an economics term loosely meaning the price of a good had little effect on its demand because of its sheer necessity, the authors contend that the US consumer has switched gears and “American oil consumption has become a price-conscious decision.”
US oil demand as late as 2007 accounted for 24% of all oil consumed in the world. That figure, per statistics from the Energy Information Administration slid to a 21% share in 2012. Part of the decline is due to growth in oil demand by emerging economies, especially in Asia, that are consuming a larger share of the world’s oil. However, US oil demand is down substantially, sliding to a 16-year low in 2012, and a more price sensitive consumer is a key factor in this evolution.
The authors, the Global Natural Resources Team at The Boston Company, derived their findings by studying US Gross Domestic Product dating back to World War II, observing a more cautionary consumption pattern when oil prices reach 3% of GDP. A spike by oil prices to 6.5% of GDP exhibits “sharp price elasticity.” Their research finds the ratio above 3.5% since 2009.
Understanding this dynamic should move to the forefront of those in energy risk management considering oil procurement for a refinery to expansion activity to acquisitions. Regional economic factors, one might extrapolate, could fine tune the data more precisely for a better business response for that locality.
Consider too, that although US oil consumption has declined, the behavior by US consumers will continue to have a global effect on the supply-demand balance considering the sheer size of the market. The interaction between the oil industry and economic performance remains linked at the hip, prompting a measurable component for those in energy management.
With thanks to the team in Boston, we now have a formula to consider what might be turning those gasoline consumption figures in the states.