Released on March 11, 2009
(Next Release on March 18, 2009)

Changing Expectations

A lot has changed over the last several months, here in Washington with the new Administration, and across the U.S. and the rest of the world as economic conditions continue to deteriorate. It has been the latter change that has impacted EIA’s short-term global oil market forecast. In the latest Short-Term Energy Outlook (STEO), just released yesterday, EIA is projecting 2009 global oil demand to be 3 million barrels per day lower than we projected as recently as six months ago, in our September 2008 STEO. Why have we changed our view of 2009 so dramatically in such a short time?

In the first half of 2008, the record rise in world oil prices reflected growing world oil consumption (even in the face of record high prices), and this growing demand stretched world oil production that was already at, or near, full utilization. Price was the sole remaining arbiter to balance supply and demand, and it rose in order to ration a scarce, valuable resource. This situation changed in the second half of 2008 with the abrupt downturn in the global economy. In 2008, world GDP (weighted by share of oil consumption) grew by 2.8 percent year-over-year in the third quarter and 0.7 percent in the fourth quarter, versus average growth of 4.8 percent over the previous four years. With oil demand growth evaporating, prices fell swiftly over the second half of 2008, before stabilizing somewhat in the first part of 2009.

The downturn in the world economy that became apparent in the second half of 2008 curbed, and ultimately reversed, world oil demand growth, something that rising oil prices between 2004 and 2008 did not achieve. While consumption in the Organization for Economic Cooperation and Development (OECD) began to react to higher oil prices in late 2005, non-OECD consumption continued to rise unabated. Demand growth in large non-OECD oil consumers seemed immune to higher oil prices, because: 1) growth was largely driven by their rapidly expanding economies, and 2) many domestic consumers were shielded from world market prices by domestic price controls and subsidy programs.

EIA’s view of 2009 reflects a dramatic change in the consensus estimates of world economic growth. Our assumptions regarding the global economy are based on the IHS Global Insight macroeconomic model. In June 2008, we assumed that the world economy would grow by about 4.2 percent in 2009. In September 2008, that assumption fell to 3.8 percent growth. However, in this month’s Outlook, we assume that the world economy will decline by 0.8 percent. The events of the past several years have only highlighted the strong linkage between economic activity and oil demand growth. Just as world oil demand was growing rapidly from 2004 to the first part of 2008 as the global economy exhibited robust growth, so too, has the reverse occurred. Consequently, as the full extent and magnitude of the global economic crisis has emerged, our expectation of world oil demand growth in 2009 has been correspondingly reconsidered.

Our current forecast assumes that a recovery in global economic activity begins sometime in the second half of 2009. If this timing assumption proves to be correct, then world oil prices should begin to rise gradually later this year. The onset of a price increase is dependent upon this assumption, and a slower or later recovery would delay it. While the actual path of prices may be volatile, we do not expect to repeat the sharp sustained upward price march that characterized markets from 2004 through mid-2008 given crucial differences between the oil market dynamics of then and now. First, members of the Organization of the Petroleum Exporting Countries (OPEC) currently hold roughly 4.8 million barrels per day (bbl/d) of surplus production capacity, while they held an average of 1.5 million bbl/d from 2004 to the peak of the market in 2008. Second, the lagged impact of high oil prices in recent years will continue to affect oil demand in the short term. During 2007 and 2008, WTI averaged $86 per barrel; these historically-high prices will influence the decisions that individuals and firms make going forward, which will tend to dampen the rise in world oil demand engendered by the return of global economic growth.

Early last year, given the expectations of many that the world economy would continue to grow, concerns about how the world would continue to supply enough oil to meet the increasing demand fed into higher and higher prices. But a 180-degree shift in expectations about the global economy also caused a dramatic shift in EIA’s short-term global oil market forecast. Some may wonder how expectations might change over the next six months. Clearly, EIA and others will be closely monitoring developments over the next several months and beyond.

Residential Heating Fuel Prices Drop Again
Residential heating oil prices fell for the eighth consecutive week during the period ending March 9, 2009. The average residential heating oil price dropped 3.8 cents per gallon last week to reach 218.2 cents per gallon, a decrease of 149.5 cents per gallon from this time last year. Wholesale heating oil prices sank 4.5 cents per gallon to reach 131.3 cents per gallon, a drop of 178.9 cents per gallon from the same period last year.

The average residential propane price dropped 2.8 cents per gallon from last week to reach 224.6 cents per gallon. This was a decrease of 35.7 cents from the 260.3 cents per gallon average for this time last year. Wholesale propane prices slipped 3.4 cents per gallon, falling from 75.8 cents to 72.4 cents per gallon. This was a decrease of 87.3 cents when compared to the March 10, 2008 price of 159.7 cents per gallon.

Midwest Diesel Price Slips Below $2 per Gallon
The national average price for regular gasoline increased for the second week in a row, creeping up only seven-tenths of a cent. At 194.1 cents per gallon, the price was 128.4 cents below the price a year ago and 217.3 cents below the all-time high set on July 7, 2008. Once again the price changes were mixed; prices in most regions slipped down by a penny or less, while prices in the Midwest and Rocky Mountain regions increased by roughly 2 to 3 cents. On the East Coast, the price slipped four-tenths of a cent to 191.8 cents per gallon. The largest increase took place in the Midwest, where the price increased by 3.1 cents to 191.8 cents per gallon. The average price in the Gulf Coast shrank a penny to reach 181.9 cents per gallon. In the Rocky Mountains the price rose 2.4 cents, but remained the lowest of any region at 181.4 cents per gallon. The price on the West Coast was essentially unchanged, declining by only two-tenths of a cent to 216.8 cents per gallon. The price in California inched up seven-tenths of a cent to 219.6 cents per gallon.

Once again, diesel prices fell throughout the country. At the national level, the average price fell for the eighth consecutive week, dropping 4.2 cents to 204.5 cents per gallon. This was 177.4 cents below the price a year ago and 271.9 cents below the all-time high set on July 14, 2008. The price on the East Coast, the highest among the major regions, declined 3.1 cents to 212.2 cents per gallon, 174.8 cents below a year ago. The price in the Midwest not only remained the lowest in the country, dropping 4.2 cents to 198.8 cents per gallon, but marked the first time any region slipped below $2 a gallon since February 21, 2005. The price in the Gulf Coast dropped 3.7 cents to 200.6 cents per gallon. For the second week in a row, the average price in the Rocky Mountains fell the most of any region, slumping 7.4 cents to 201.7 cents per gallon. The price on the West Coast declined to 212 cents per gallon with California falling 6.9 cents to 207.5 cents per gallon, 188 cents lower than a year ago.

Propane Inventories Continue Lower
With winter weather still lingering in some regions of the Nation, propane inventories continued moderately lower by over 0.5 million barrels last week and settled at an estimated 37.7 million barrels as of March 6, 2009. A late winter storm last week contributed to push East Coast inventories lower by 0.2 million barrels, further extending the region’s inventories below the average range since the start of the heating season. While Midwest inventories gained 0.5 million barrels last week, the Gulf Coast lost 0.7 million barrels during this same time. The combined Rocky Mountain/West Coast region also showed a decline last week, down 0.1 million barrels. Propylene non-fuel use inventories remained relatively unchanged last week but reported a slight gain in its’ share to total propane/propylene inventories to 6.6 percent, compared with a 6.5 percent share from the prior week.

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