Transport Sector to Give Lift to Oil Demand
Demand for oil is intimately connected to the demand for transportation in the United States and the other advanced industrial economies.
Cars, trucks, airlines, railways and shipping accounted for 71 percent of total U.S. oil consumption in 2013, according to the U.S. Bureau of Transportation Statistics.
Petroleum-derived fuels, including gasoline, diesel, jet fuel and fuel oil, met 97 percent of the transportation sector's energy needs.
Before the oil shocks of the 1970s as much as half of U.S. oil demand came from power producers and for heating homes, offices and factories.
But following the sharp rise in prices, oil's role in other parts of the economy was largely replaced by cheaper coal, gas, nuclear and eventually renewables, leaving oil as a transport fuel.
The same pattern was repeated across the other advanced industrial economies. Oil demand has become inseparable from the demand for transportation services.
But the relationship is a complex one involving trade-offs between capital investment, operating practices, speed and fuel bills.
Fuel consumption is strongly affected by the mode of transport chosen. Air services consume far more fuel per passenger or per kg of freight than ships, railroads, trucks or cars.
Fuel costs are also influenced by decisions about investment (whether to replace older engines with newer more fuel efficient ones) and operational behaviour (how fast to run the plane, ship or truck, and whether to run it part loaded or fully loaded).
Broadly speaking, there are trade-offs between capital investment and operating costs. Replacing old aircraft, locomotives, ships and trucks with more fuel efficient ones is a major capital expense but can cut fuel bills substantially.
There are also trade-offs between speed and fuel consumption.
The most obvious is between air transport, which is fast but uses enormous quantities of fuel, and surface shipping, which is slower but less fuel intensive.
As a result, air freight tends to be reserved for small high-value items (batteries and aero engines) and perishables (cut flowers) while heavier, bulkier and lower value items go by sea, rail and truck.
But there are also speed/fuel trade-offs within a single mode of transport.
For example, the faster a container ship or oil tanker moves through the water the bigger the bow wave it generates and the more fuel is required to overcome the resistance.
For a ship, fuel consumption rises even faster than speed. So when freight rates are high and fuel prices are low, it makes sense to sail faster despite the increase in fuel costs to generate more income with the same number of ships.
But when freight rates are low and fuel prices are high, it is more cost effective to travel slowly to reduce fuel consumption even if journeys take longer and more ships are needed to carry the same amount of cargo.
"The speed of a vessel has a dramatic impact on fuel consumption because the speed is related to the propulsive power required by approximately a third or fourth power relationship," according to the American Bureau of Shipping. "Roughly this means if you double the speed you increase the power required by a factor of at least 8."
"Likewise, sailing at 90 percent of the design speed requires only 75 percent of the power. The corresponding reduction in total fuel consumption is offset a bit by the longer time spent to complete the voyage. So by slowing down 10 percent the vessel can save about 20 percent in fuel" ("Ship Energy Efficiency Measures").
The phenomenon of "slow steaming" is well known in the shipping industry as an important way to cut operating costs when oil prices are high. However, speed also plays an important albeit smaller role in fuel consumption for aircraft and trucks.
In recent years, U.S. airlines and trucking firms have ordered staff to cruise at marginally slower average speeds to save fuel. Speed and capital (larger fleets are needed) have been sacrificed to cut expensive energy consumption.
Transport operators have also resorted to a host of more obscure operational changes to cut fuel bills. Airlines have cut the amount of fuel and water flown by employing computer models to calculate exactly how much will actually be needed during the flight.
Crews of aircraft, ships and trucks have been instructed to turn off main engines when stationary and switch to ground power at airports, ports and truck stops.
Pilots have been warned against employing excessive thrust during takeoff. Truckers have been ordered to plug into electric power at rest stops to use air-conditioning.
At the most fundamental level, some individuals and businesses responded to higher fuel prices by cancelling discretionary journeys and some firms reportedly shortened their supply chains to cut freight-miles.
The number and length of car journeys fell in the United States and a number of other advanced economies between 2008 and 2013. In some instances, businesses began to switch from distant suppliers to nearer ones to save on shipping costs.
Taken individually, each of these fuel saving strategies made only a small difference. In combination, however, the fuel saving has been enormous.
Total energy consumed by all modes of transportation in the United States increased almost 30 percent between 1990 and its peak in 2007.
But six years later, in 2013, energy consumption was still 10 percent below its previous peak, according to the Bureau of Transportation Statistics.
Consumption of gasoline, road diesel and jet fuel in the United States all peaked between 2005 and 2007 then started to fall both absolutely and compared with the previous trend.
By 2013, total oil consumption across the United States, Europe and the advanced economies of Asia had fallen around 8 million barrels per day compared with the pre-2005 trend, according to a calculation by James Hamilton at the University of California.
LOWER FUEL PRICES
Some of those changes are now deeply entrenched in the economy.
The more fuel efficient aircraft, ships, locomotives and trucks ordered between 2002 and 2012 will be in use for decades. Businesses will not easily unlearn some of the operating practices they were forced to adopt during the years of high fuel prices.
But other changes in the fuel economy are softer and could be reversed, at least partially, now fuel costs have plunged.
Container ships and oil tankers are already voyaging faster. The former focus on slow steaming has been replaced by an emphasis on cutting journey times.
Airlines are trying to win back some of the cargo trade they lost to cheaper and slower surface shipping during the years of high fuel prices.
With the U.S. economy strengthening and diesel cheaper, logistics firms are once again focusing on getting deliveries done as fast as possible, even if that means using a bit more fuel.
The pressure to avoid travelling with part loads, and avoid empty backhauls, that became so intense during the years of high fuel prices, is easing.
And businesses and private motorists who were deterred from making discretionary journeys may now jump in their cars and onto aircraft more often.
RISING FUEL DEMAND
Fuel consumption is notoriously hard to measure in real time. But all the contemporary indicators available point to a gradual rise in fuel consumption which started in early 2014 and then accelerated towards the end of the year in response to lower prices.
Sales of motor fuels in California and Texas and fuel consumption by U.S. airlines are all increasing, according to state and federal records. And container ships and oil tankers are voyaging faster, according to consultants at RS Platou, which implies higher fuel consumption.
Some of this increase is due to a stronger economy, but some is down to cheaper fuel.
Just as high fuel prices forced thousands of barely perceptible small changes that caused an enormous shift in total oil consumption between 2002 and 2012, so low prices are now beginning to have a gradual effect in the opposite direction.
By John Kemp