AP Report: 2% Drop in Energy Consumption Means It's 'Evaporating,' Suddenly Frets Over Supply

Earlier today, in a story on falling oil prices, Mark Williams of the Associated Press bemoaned "evaporating" consumption, warned that the abrupt prices drop would cause a decline in exploration, and cited the need for trillions of dollars of investment to find more fossil fuels.

Contrary to or not in what Williams wrote:

• Consumption has barely fallen.
• The American electorate has chosen a new president who thinks exploring for new oil is a bad thing, and the need for that oil can be eliminated through proper tire inflation.
• The new president and the Congressional majority want investments in alternative energy, and to tax the alleged "windfall" profits of oil companies, which would of course take money away from exploration.

Here are the key paragraphs from Williams's report:

Oil prices hit a new 22-month low Thursday on reports that the world's developed economies are in recession and that energy consumption is evaporating.

Crude has fallen 12 percent this week alone under a daily barrage of economic predictions that industries and consumers have cut back on spending. Gasoline prices have fallen 50 percent since hitting a record national average of $4.11 per gallon in July.

While tumbling gas prices are a relief for consumers who have been shaken by job losses and declining home prices, economist now fear that the resulting decline in exploration and production by oil companies will lead to a massive price spike when economies rebound.

..... on Thursday in Paris, the International Energy Agency slashed its demand forecast more than it has in a decade.

The agency now expects global oil demand to average 86.2 million barrels a day this year, nearly flat compared with 2007, and 86.5 million barrels a day next year. The cuts come on top of those already made in the IEA's October and September reports.

Oil demand within the 30 OECD countries now is forecast to fall by 2.7 percent this year and by 1.6 percent in 2009, in the IEA's latest view.

The agency warned on Wednesday that more than a trillion dollars in annual investments to find new fossil fuels will be needed for the next two decades to avoid an energy crisis that could choke the global economy.

But investment by the oil industry looks increasingly unlikely, at least in the near future.

A less than 3% drop in demand hardly constitutes "evaporation." Since oil is an elastic good (small changes in supply can cause big changes in prices), this drop does explain a lot of the huge oil price drop. But Williams ignored another major factor, namely the stronger dollar. A Reuters report today noted that the greenback is up 20% against the euro since July. That change would explain roughly a third of oil's drop during that time.

As to exploration cutbacks, you would have thought that high prices were a good thing during the presidential campaign season. John McCain's idea of a gas tax holiday was roundly criticized in the press, while Barack Obama was only troubled by how quickly prices rose, not the fact that they rose.

The fact that Williams reports the need for trillions in investment is really hard to handle, as it was Obama and the Democrats who steadfastly opposed offshore drilling on the Outer Continential Shelf until it was clear that impatient voters wanted it. Congress then let an exploration ban that had been renewed annually for decades expire in September. Now that they don't have to fact the voters for a couple of year, word has it that they plan to reinstitute it at their earliest opportunity.

Congress also has flirted with the idea of preventing any form of shale oil extraction. Obama and Congress have also frequently called for "windfall profits" taxes on oil companies, and has acted as if the miracles of alternative energy will negate the need for fossil fuels in the relatively near future. How interesting, then, that a reporter for the wire service that gullibly swallowed such claims during the campaign season now frets that the oil companies won't have the money to invest.