Publications: Notes at the Margin

Demand Destruction; Recession Impact on Emerging Market Economies; Comparison of Oil Market Disruptions (April 25, 2022)


This week’s report covers three topics: demand destruction, the impact of higher interest rates on oil consumption in emerging market economies (EMEs), and a comparison of the current oil market disruption’s severity to that of past ones.


We begin by assessing demand destruction. Many in the oil industry assert that demand is returning to pre-pandemic levels. An extremely foolish 100-page report by a JP Morgan analyst published on April 20 emphasized this argument. In contrast, the excellent data posted by tax collectors (which oil companies cannot obfuscate) shows that US gasoline consumption, for one, is falling well short of pre-Covid levels. Furthermore, the “pandemic gap” is widening in California, which has rapidly embraced electric vehicles (EVs). We put the US difference at more than five hundred thousand barrels per day and expect it to expand.


We follow this discussion with our thoughts on how the coming recession will affect EMEs. More than six months ago, we warned that the energy price increases in Asia and Europe would cut economic growth rates. Our view has proven correct. The war in Ukraine will make the downturn worse. The coming slump will likely depress oil use in 2023 by more than one and probably two million barrels per day from 2021 levels. The recessionary impact could be as big next year as in 2009, when consumption dropped by 2.2 million barrels per day from 2007 use. Forecasts for the overall economy have not yet accounted for the coming recession because the macroeconomists developing them are “gradualists,” meaning they modify projections in increments. For example, the most recent International Monetary Fund forecast for global growth in 2022 was 3.6 percent, down from the previous forecast of 4.4 percent. Had the IMF economists been bold, they would have lowered the current 2022 forecast to a negative two percent, so dire is the situation today.


In a year, OPEC will likely be begging for buyers again.


Finally, we discuss the present crisis in the context of past disruptions. We have written two books on oil: Oil Markets in Turmoil (1982) and Adjusting to Volatile Energy Prices (1993) (both titles sound relevant today). Since the first book’s publication, we have tracked more than twenty-five disruptions. Here, we compare the ongoing one to prior episodes. The hard data—a resource most pundits avoid like the plague—suggest the overall disruption is less severe than past events. The diesel market disruption, however, is quantitatively the worst ever.


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