Americans Get a Sudden Thirst for Oil

When crude oil prices began to collapse last winter, the conventional wisdom held that the world wouldn’t see any big increase in the use of gasoline and other forms of fuel. An energy-shocked populace had supposedly built too many efficiencies into the economy.

“People aren’t going to tear the insulation out of their houses or go out and buy a gas guzzler,” was a common analysis.

Probably not. But as the summer driving season comes to a close and the Organization of Petroleum Exporting Countries officially begins its September-October effort to cut production of crude oil, there is mounting evidence that the nation is getting thirsty for oil again.

Gasoline use this summer now appears to have surged by 5% or more compared to last year, or double the increase some expected; the use of fuel oil by electric utilities and industrial firms has jumped sharply after years of decline, and jet fuel has recorded a dramatic increase in sales in the past few months.

Statistical Controversy

There’s disagreement on what the statistics mean. Some say that the surge in consumption is as fleeting as today’s bargain prices or that it is due to such routine factors as economic growth and gains in disposable income--not any basic change in attitudes.

And energy economists agree that there is such a huge glut of both crude and refined oil on the market that even if OPEC succeeds in cutting production, which is highly uncertain, the increase in demand is too small to have much effect on prices over the next several months.

But others also argue that forecasters badly underestimated how readily the U.S. economy would begin sopping up more petroleum products if prices fell by half, as has occurred this year.

“They were wrong,” said economist Scott T. Jones, a vice president at Chase Econometrics in Bala Cynwyd, Pa. “Conservation and fuel switching unwinds a lot faster than it winds up. This is a very big switch by historical standards. Six months ago, 3% growth was as high as anybody would guess.”

Even after the extent of the oil price collapse became clear this spring, most government and private economists were predicting growth in overall energy demand--and oil demand--in the 2% to 3% range this year.

Outlook Steady

With oil accounting for only about 40% of all energy consumption, the jump in petroleum demand isn’t changing the total energy outlook much.

But this month, the industry-funded American Petroleum Institute, which has been trying to call attention to the dangers of reduced domestic oil production, took a look at the summer performance and concluded that “the underlying growth rate” for all petroleum products is 4% to 5%.

If it continues, the institute says, the spurt in demand will begin to strain the nation’s shrunken refining capacity sooner than some had expected, hastening the time when OPEC can renew its dominance of world oil markets and sending prices back up.

In fact, the available statistics beg comparisons with 1978, the eve of the Iranian crisis, when gasoline was cheap and the world used more oil than at any time in history. According to the institute, which defines demand as the movement of all petroleum products from refineries into bulk storage tanks, those deliveries climbed 5.7% in July over the previous July after increasing 4.3% in June--the biggest such year-to-year increases since the record year of 1978.

“This is significantly higher than many people expected several months ago,” said Edward Murphy, director of statistics for the petroleum institute.

“I think it’s true that nobody’s going to rip the insulation out of their walls, but they’re going to keep their homes warmer than they did. We’re seeing a real shift in the rate of growth.”

A preliminary estimate by the Lundberg Survey, based on gasoline taxes collected by the 50 states and thus a closer indication of actual gasoline sales to consumers, found a big 7% nationwide increase in June to 9.67 billion gallons--the biggest gasoline splurge since June, 1978.

In California, the nation’s biggest market, motorists in June broke the 1978 record for the month, according to Jan Lundberg of the Los Angeles-based Lundberg Survey. It was the fourth straight month of record billion-gallon-plus sales in the state.

Though no demand estimates for total petroleum products are yet available for August, the heaviest driving month, a Petroleum Institute spokesman said “the evidence so far is it’s going to be a very, very big month.”

Surge in Driving

A third measure--vehicle miles traveled--supports the notion of a change in behavior this year. The 22 mechanical monitors operated around the state by Caltrans show that after a slow start, Californians have driven 65.3 billion vehicle miles in the first seven months of this year--a 6.2% increase from last year. Again, it is the biggest percentage increase since 1978.

Gasoline for cars and trucks is easily the biggest user of oil, accounting for about 43% of all U.S. petroleum consumption.

The second-biggest use is for heating oil, which will soon enter its peak-demand period. Third in size is residual fuel oil, used by big industrial plants and by electric utilities to fuel their boilers to make electricity, which has posted the biggest percentage increase of all.

The ratcheting up of oil prices in the 1970s caused a massive switch away from fuel oil by the major commercial users, who can change fuels at the flick of a switch and were increasingly using natural gas or coal. Overall demand for residual fuel oil had dropped an average of 14% annually for the past five years.

This year, the price collapse has caused an abrupt switch back to fuel oil by hundreds of utilities and private companies. Through July, this year’s demand was up 17%. In July itself, deliveries surged 38%.

But the jump in fuel switching carries with it the likely seeds of its own demise, and thus it helps illustrate why some energy authorities are skeptical that any fundamental, long-term changes in energy demand are necessarily afoot.

The higher demand for residual fuel oil will itself tend to boost prices and quickly eliminate its advantage to industrial users, who will then switch back to natural gas or coal.

Though it is a much smaller factor in the market than gasoline, residual fuel oil has accounted for about as much of the overall demand increase this year as gasoline.

Considered Temporary

“I consider the switching to be temporary,” said Joseph A. Stanislaw, director of international economics and head of the European office of Cambridge Energy Research Associates, Cambridge, Mass.

Stanislaw said that he remains a “demand skeptic” and that a growth rate of 4% to 5% in U.S. demand for oil will subside to 2% to 3% later this year, consistent with other industrial nations.

Like a number of observers, Stanislaw said the summer travel in this country was artificially inflated by vacationers avoiding terrorists and nuclear fallout in Europe.

But the role of vacation travel in the burgeoning of the gasoline market is belittled by the Petroleum Institute, which says vacations account for just 5% of summer gasoline use.

Another who is unimpressed by the increase in demand for oil products is Thomas Burns, the manager of Chevron’s economic staff, who calls it “nice, but not overwhelmingly large.”

Because of the slow start in consumption early in 1986, before crude oil price declines were fully felt at the gasoline pumps, Burns still expects the growth in gasoline use for the full year to be around 2.5%.

“It’s going pretty much like we expected,” he said.

The reason for the intense debate over energy demand is symbolized by today’s beginning of an effort by the OPEC nations to cut their production for two months to a rate of 16.7 million barrels a day from the current 20.7 million barrels. It was OPEC’s overproduction beginning late last year that created the glut that sent prices plummeting.

Widespread doubts remain that the OPEC members, whose economic needs and oil capabilities vary drastically, will be able to achieve their goal--a production cut that analysts think would eventually raise crude oil prices from today’s $13 to $15-per-barrel range to $18 to $20 per barrel.

Stanislaw, a respected observer of OPEC and the international oil scene, gives the accord a “better than 50-50 chance” of lasting the scheduled September and October but wouldn’t speculate on whether the cartel would be able to extend the agreement.

Would Need Extension

Many analysts believe that a 60-day cut in production would do little more than whittle away some of the glut that the OPEC nations have created with a sharp production increase in July and August.

Thus, an extension of a quota agreement would be essential to materially boost prices and revive the sagging OPEC economies.

Chevron’s Burns says the recent spurt in demand and the approach of the winter heating season aren’t significant enough factors to have much short-term effect on the severe oil glut but would add to the upward pressure on prices created by a sustained OPEC production cut.

“The main factor will remain how OPEC manages its excess capacity,” Burns said. “If they continue to overproduce, that overwhelms any other factors by a long shot. But if OPEC succeeds, then these other factors at this time of year do work to make it easier for them.”

If the growth in demand then survives price increases to the $20-per-barrel range, said economist Jones of Data Resources, “in the next two or three years we’re going to have to begin to think about potential shortages in American refining capacity.”