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Economy in Brief

Some Demand and Supply Factors in the US Oil Market
by Carol Stone May 21, 2004

We noted here this past Tuesday the push in retail gasoline prices above $2.00/gallon for the first time ever. The price of the US benchmark crude oil has closed above $40/barrel every day since May 11. The oil market is a world-wide one and highly sensitive to geo-political forces as well as more quantifiable production and demand factors. We don't presume here to interpret the impact of the Iraq War, for instance. But we can illustrate some of the more traditional economic aspects of this price situation.

Most prominently, demand for gasoline in the US is growing rapidly. According to Department of Energy data, gasoline consumption was up 4.5% year-on-year in the four weeks ended May 14 (volume, measured in thousands of barrels/day). The prior couple of months have seen similar magnitudes. These are higher growth rates than prevailed over the preceding three years and among the highest in the 16-year history of these data. In contrast, the demand for other petroleum products is soft. This spring, consumption of all petroleum products, including gasoline, is virtually flat with year-ago volumes, a striking development in view of the rapid growth in the overall economy.

Supply factors are responding to the upward price pressure. Oil production in the US has been drifting downward for years. But in recent months the number of operating drilling rigs has climbed noticeably. While still well below the level of 20 years ago, expansion of production operations is quite distinct. From a low annual average of 830 in 2002, the May 14 week showed 1,162 active rigs, according to the Baker Hughes tally.

World oil production has been increasing as well. Data through February (only published on May 10) shows total crude production up 3.7% from a year ago following two months averaging more than 7% gains. Production actually fell in 2001 and 2002. OPEC has participated in the production upturn.

Selected Oil Market Indicators May 14 Apr Mar Year Ago 2003 2002 2001
US Demand for Gasoline
  (000 b/d)
9168 8913 8644 8810 8887 8767 8544
  Year/year % Change 4.5 6.5 3.0 -- 1.4 2.6 1.1
US Demand for All Refined Product
  (000 b/d)
19949 20010 19833 19962 20004 19565 19628
  Year/year % Change -0.1 -0.1 -1.2 -- 2.2 -0.3 0.1
Feb Jan Dec Year Ago 2003 2002 2001
World Crude Oil Production
 
(000 b/d)
71936 72266 72126 69343 69458 66841 68056
  Year/year % Change 3.7 6.7 7.8 -- 3.9 -1.8 -0.2
OPEC Production 
  (000 b/d)
29413 29483 29283 28810 28005 26369 28318
  Year/year % Change 4.6 10.2 12.3 -- 6.2 -6.9 -2.7
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