Canute got wet feet

27 May 2008 By Martin Hutchinson

Data on miles driven and oil products consumed in the US suggest the price elasticity of oil is currently around 16%. If that applies globally, $200 oil would cause a 12m bbl/day drop in consumption. Speculators who tried to hold the price there would run out of money fast.

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The US Department of Transportation reported May 26 that US vehicle miles declined by 4.3% in March 2008, 11bn miles fewer than in the previous year, the sharpest yearly drop since records began in 1942. Real gasoline prices in March 2008 averaged 21.5% higher than in March 2007. These data would suggest gasoline price elasticity of 20%.

The Energy Information Administration estimates crude oil and petroleum products supplied in the United States in February 2008 were down 3.7% on the previous year; gasoline prices in February were up 27.5% on the previous year and heating oil prices up 27.3%. These data would suggest oil products price elasticity of 13.5%.

Oil investor T. Boone Pickens warned on May 20 that oil prices could hit $150 per barrel by the end of the year; he said global oil supply is a maximum 85m barrels/day while demand is 87m.

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