Decline in U.S. economy creates a decline in oil demand

The oil industry in Texas, and throughout the United States, witnessed a decline in price recently as high inflation, rising interest rates, and troubles in the banking system have created fears of the economy entering a recession and further damaging demand.

Crude oil prices are down 40% from a year ago ($120 per barrel compared to $69 on Wednesday). Gasoline and diesel prices followed the decline in oil with the U.S. retail gasoline averaging $3.422 on March 20 down from$4.239 a year ago and diesel averaging $4.185 compared to $5.134 last year.

Federal Reserve Chairman Jerome Powell announced Wednesday the Federal Reserve Bank is increasing interest rates another 0.25% taking it from 4.75% to 5.00%.

He said inflation remains elevated and the Fed expects inflation to be 3.5% by the end of the year.

Chairman Powell also said the U.S. economy is slowing down, and he expects real GDP (gross domestic product) to grow slightly at a rate of 0.4%.

All of these factors point to a slowing economy and a decline in demand for petroleum products.

Crude oil inventories are up 14% since December. The Energy Information Administration (EIA) reported an increase of 1.8 million barrels this week, bringing total inventories (excluding Strategic Petroleum Reserve) to 481 million barrels. Inventories in December were at 420 million barrels.

EIA recently forecast crude oil will average $77 per barrel in 2023, which is $11 less than its previous prediction of $86. Gasoline also was revised down from $3.51 to $3.32, and diesel at $4.20 down 16%. Natural gas is expected to average $4.90 per million British thermal units, which is a 9.8% drop from its previous estimate of $5.43.

EIA based its projections on expectations of a slowing economy (0.5% growth in GDP), and an increase in global petroleum supplies.

EIA forecast global petroleum production will increase by 1% (1.1 million b/d) from 2022 to 2023.

“The United States and OPEC account for most of the increase in global production, offsetting production declines in Russia,” EIA said. “We forecast that Russia’s petroleum production will fall from 10.9 million b/d in 2022 to 9.5 million b/d in 2023 as a result of sanctions related to Russia’s full-scale invasion of Ukraine. We forecast that U.S. production will grow by 5% (1.0 million b/d) in 2023, and OPEC liquid fuels production (which includes crude oil) will increase by 0.5% (160,000 b/d) in 2023.”

The amount of oil produced and sold internationally by Russia remains uncertain. On Feb. 5, the European Union’s ban on seaborne imports of petroleum products from Russia became effective, which is expected to be more disruptive to global petroleum markets than the EU’s December 2022 ban on seaborne crude oil imports from Russia.

EIA said oil production in the U.S. will reach historic highs in 2023 averaging 12.4 million barrels per day (b/d), which would surpass the previous high of 12.3 million b/d in 2019.

"Implied builds in global petroleum inventories (when there is more petroleum production than consumption) are driving these declines in crude oil prices,” EIA said.

Alex Mills is the former President of the Texas Alliance of Energy Producers.