Fuel for Thought: Sorry Americans, but it’s time to have the oil demand conversation

Nobody wants to hear this, but the way out of the oil price spike anytime soon will have to come from lowering demand, not increasing supply.

That's what RBC Capital Markets' Helima Croft and a growing number of analysts argue as oil prices are holding well above $100/b, while options for incremental new supply dwindle and yet more supply risks sit on the horizon.

"Political cycles do not make this easy to have that kind of conversation, but that is the conversation that needs to be had," Croft said.

European leaders have started talking to citizens about this need to lower consumption, but US politicians have yet to broach the subject. What's holding them back?

"It's the specter of Jimmy Carter," Croft said during a June 28 webinar by the Carnegie Endowment for International Peace.

Echoes from the 1970s

In what became known as his "malaise" speech, Carter urged Americans in July 1979 to accept a shared sacrifice of conserving energy to reduce dependence on foreign imports and slow inflation that was gripping the country just like it is 43 years later.

Carter outlined a plan for reducing US dependence on foreign oil including through import quotas, developing domestic energy supplies, funding solar power, and requiring utilities to slash oil use. While the speech was reportedly well received, Carter's firing of his cabinet two days later led to his political downfall and eventual landslide loss to Ronald Reagan the following year.

Political advisers these days know how hard it would be to ask citizens to put aside their travel plans, especially after two years of canceled trips and family vacations because of the pandemic.

That said, high gasoline prices might already be curbing demand from some US drivers, as Energy Information Administration data showed June 29 that consumption has run about 5% below average in the past three weeks.

Total US liquid fuel consumption has returned to pre-pandemic levels, but US demand for gasoline and jet fuel are still slightly lower than they were in the summer of 2019.

'Not too much to ask'

Jason Bordoff, co-dean of Columbia University's Climate School, and Meghan O'Sullivan, director of the Geopolitics of Energy Project at Harvard University's Kennedy School, argued in a June 29 Foreign Policy column that all recent efforts to increase fossil fuel production — "drill and pump, push refineries to the limit, construct multibilliondollar LNG facilities" — are appropriate but not enough to offset Russian supply and ensure secure and affordable fuel for consumers.

"Amid the focus on boosting renewable energy sources and fighting fossil fuels, the world has sadly lost sight of one of the most important energy facts: Efficiency investments and demand conservation are often the cheapest and quickest ways to cut the use of oil, gas, and coal — and to reduce the need for replacing Russian supplies (not to mention carbon emissions)," Bordoff and O'Sullivan wrote.

They said "even if some immediate conservation measures do require modest behavior changes, such as adjusting the thermostat, it is not too much to ask consumers in nations with the highest rates of per capita energy consumption to use a bit less when Ukrainians are paying the ultimate sacrifice with their lives."

No quick fix

The November midterm elections in the US, which Democrats seem poised to lose, increase the political costs of an appeal to lower energy demand.

Still, Croft said leaders should say that a confluence of factors are making energy prices and inflation hard to solve, and lowering demand is the price we have to pay for holding values of supporting Ukraine and standing against Russia invading a sovereign nation.

"The more we focus on things like the SPR or gas taxes, I sometimes think the American public believes that there's some quick lever to pull, like if only you could restart Keystone XL," Croft said.

"This is not a situation that is going to be solved quickly through additional supply. It's a situation unfortunately that's going to be solved through demand as long as this war continues."