Commodities | Jun 07 2006
By Rudi Filapek-Vandyck
Wells Fargo economist Michael Swanson believes the oil market is in for a "shocker". Too bullish for too long would be his summary of current market opinion.
Swanson notes the US gasoline CPI has risen above the general CPI for only two periods. The first time it happened was in the third quarter of 1979 and it lasted until the third quarter of 1983. At its peak, the gasoline CPI rose as high as 24% above the general CPI and this, as one would have expected, prompted a change in the US consumers’ energy usage patterns.
It happened a second time and we’re currently in the middle of the event. Swanson notes gasoline CPI has started to rise above the general CPI from the third quarter of 2005 onwards. The gasoline CPI hasn’t stopped rising since then. Currently, the gasoline CPI exceeds the general CPI by 14%, and yes, Swanson notes it is already starting to change energy consumption again. Management teams at Ford, Chrysler and General Motors know all about it.
Swanson believes the current high relative cost of gasoline in combination with slower economic growth throughout the rest of 2006 and 2007 (a fact few economists will dispute) is going to slow US energy demand growth and probably quite significantly so.
Wells Fargo’s inhouse model shows that real GDP change and oil prices explain approximately half of the variation in US driving miles. With both of these factors working against oil demand in the US, still the world’s largest oil importer, Swanson believes import growth for the country is poised to weaken significantly.
To make things worse, he notes similar conditions are at work in other OECD countries and even in China.
"As lagging production investment catches up and demand growth slows on higher prices, expect the rollercoaster of prices to change direction yet again. And, expect the so-called experts to be surprised", Swanson predicts.