Issues in Brief

U.S. Oil Consumption Declines

Senior Economist
January 8, 2013

While the recent attention paid to rising U.S. oil production clearly is warranted, the other side of the coin—the trend in U.S. petroleum consumption—also deserves recognition because it is no less dramatic, especially against the backdrop of long-term forecasts made just a few years ago.

It once appeared inevitable that economic growth would be accompanied by increased consumption of oil and petroleum products. Now, long-term projections of relatively flat growth in petroleum consumption coupled with projections of increasing oil production (which will add to the diversity of world oil supplies) point to an improvement in the U.S. energy balance. As petroleum imports fall, the U.S. trade deficit will decrease. Further, slower consumption growth will put less pressure on world oil markets, thereby helping to moderate increases in the price of oil due to rising petroleum consumption in developing countries.

Recent Trends in Petroleum Consumption
GDP grew at an annualized rate of 3.1 percent in the third quarter of 2012. Since the recession officially ended in mid-2009, total GDP has grown by 7.5 percent. Yet petroleum consumption in September 2012 was just 18.17 million barrels per day (b/d), less than the 18.21 million b/d in May 2009 when the recession was at its trough and 3.5 million b/d below its record high of 21.67 million b/d set in August 2005. With the exception of September 2008, when the economy was jolted by the financial crisis, one has to go back to May 1996 to find a month when petroleum consumption was lower than it was in September 2012.

As shown in Figure 1, total petroleum and gasoline consumption have edged downward in recent years. For example, gasoline consumption peaked at 9.6 million b/d in the summer of 2007. By September 2012, it was down to just 8.6 million b/d—a decline of 1 million b/d. The trend in distillate fuel oil consumption has been relatively flat. Most low-sulfur diesel fuel is used in trucks for hauling freight and thus diesel sales are sometimes used as a barometer of overall manufacturing activity. Taken together, recent trends represent a remarkable reversal of long-term consumption trends.

What Is Going On?
The main determinants of petroleum consumption are economic growth, the price of petroleum, and population growth. In an environment of relatively stable energy prices, economic growth is associated with increased energy consumption. For example, from 1985 through 2003, the inflation-adjusted price of crude oil was relatively stable while real GDP grew at an average annual rate of 3.1 percent. Total U.S. petroleum consumption over this same period grew by 1.4 percent. Conversely, when the price of petroleum rises, consumption is impacted. Part of the explanation for current consumption trends is the significant rise in the prices of crude oil and petroleum products in recent years. Between 2005 and the third quarter of 2012, the inflation-adjusted refiner acquisition cost of crude oil (an average of prices paid by refiners for oil) increased by 103 percent. The immediate effect of changing prices on petroleum consumption is small; over time, however, they have a measureable impact.

Other factors, including conservation, energy efficiency, weather, the structure of the economy, regulation (e.g., efficiency standards), and even changing demographics, affect the trend in consumption. For example, as the population ages, the average number of miles driven per vehicle will likely fall, holding all else constant. As shown in Figure 2, the intensity of U.S. energy consumption as measured by the ratio of physical energy consumed to the constant dollar value of GDP has steadily declined over time. This decline largely reflects conservation efforts and energy efficiency, both of which are influenced by the price of energy. To some extent, the decline also reflects the changing nature of the U.S. economy. In recent decades, the service sector, which is less energy-intensive than manufacturing, has grown relative to manufacturing. Some manufacturing activity has moved offshore and this has contributed to reduced energy consumption.

Still, most of the decline in energy intensity reflects conservation and energy efficiency. For example, average automobile fuel efficiency was 11.9 miles to the gallon in 1973; by 2010 (the latest year for which data are available), the average mileage was 17.5, a 47 percent increase. Automotive fuel efficiency will continue rising as gasoline prices climb and as new corporate average fuel economy standards (CAFE) increase from 35.5 miles per gallon in 2016 to 54.5 miles per gallon in 2025.[1]

The net result of all of these factors has been significant downward revisions in forecasts of future petroleum consumption.[2] In 2005, the Department of Energy’s Energy Information Administration (EIA) forecast that petroleum would grow at an average rate of 1.5 percent between 2000 and 2030. In its latest forecast, petroleum consumption is expected to decline at an average annual rate of 0.1 percent through 2040.[3]

Natural Gas Consumption Continues to Increase
In contrast with trends in oil and petroleum, natural gas consumption reached a record high of 24.3 trillion cubic feet in 2011, up 2.2 percent from 2010. Based on the first nine months, natural gas consumption is on track to grow by 4.2 percent in 2012, thereby setting another record. The falling price of natural gas—a result of advanced hydraulic fracturing techniques coupled with horizontal drilling—explains the rise. EIA’s long-term forecast has natural gas consumption growing by an average annual rate of 0.6 percent through 2040. Given the rate of growth in the past two years, this forecast may be on the conservative side.

The electric utility sector has accounted for most of the increase in consumption—its consumption grew by 39 percent between 2004 and 2011. In 2004, the electric utility sector accounted for 24.4 percent of total natural gas consumption; in 2011, it consumed 31.2 percent. Natural gas consumption in the industrial sector declined somewhat steadily before the recession, but has been on the rise since 2009. Some manufacturing activity that relies on natural gas as a feedstock that moved offshore 10 years ago is now being returned to the United States because the price of natural gas has fallen significantly.

Despite the increase in consumption, U.S. production of natural gas is growing even faster. Thus, U.S. exports of natural gas are likely to rise, contributing to an improved balance of trade.


Footnotes

[1] The fuel standards pertain to fleet averages, not every automobile and light truck. Further, given that the average automobile age is currently in the neighborhood of 11 years, it is clear that the fuel efficiency of a sizable portion of the total fleet in 2025 will not approach 54.5 miles per gallon.

[2] “Petroleum products” in EIA’s forecasts include ethanol and biofuels. Given that the latter are expected to increase in relative importance, the growth of oil consumption is likely to be slower than the growth rate of petroleum products as defined here.

[3] Energy Information Administration, Annual Energy Outlook 2013 Early Release Overview, www.eia.gov/forecasts/aeo/er/pdf/0383er(2013).pdf.


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