Oil demand

As you watch the fluctuating cost of oil, we are looking at a commodity which is likely never going to recover the peak demand of a few years ago. There are two reasons for this. The first is that the world economy has contracted and will take up to five years to fully recover. The other factor is oil will lose market share during that time to alternate energy sources, such as natural gas and renewable energy.

As far as the contraction in the economy, I think it is obvious and with a 15% contraction and even if we see 3% growth a year, the math speaks for itself. However, the recovery in energy usage may take even longer. There are changes going on in America where some of the habits that led to significant oil consumption are starting to change. It is hard to predict the ultimate impact of things like on-line shopping, video conferencing instead of travel and telecommuting instead of having to go into an office. However, there is an impact and there are significant savings associated with these alternatives so they should become more popular.

The second factor is the ongoing reduction in market share of oil. With the investments in alternate energy sources, the growing realization that natural gas is a viable alternative to foreign oil, and the renewed interest in other energy generation sources such as nuclear and clean coal, even as energy use climbs, oil use will grow at a slower pace.

If oil gets cheap enough, it may grab a somewhat larger share of the market, but I find it hard to imagine we will relive the 1980s and 1990s where we simply forgot the lessons of the oil crisis of the 1970s and ultimately regressed. Of course, there is always that possibility, but I like to think we are smart enough to not repeat the same mistake.