As Prices Edge Up, Department of Energy Mulls Lowering Oil Forecasts
This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.

The statistics arm of the U.S. Department of Energy is considering lowering its forecasts for U.S. and world oil demand, as high prices weigh on consumption.
Such a revision by the Energy Information Administration, after a number of upward adjustments in recent months, could be significant for oil markets. Searing demand has been a key factor behind the near-50% rise in oil prices in the past year, and the possibility that prices will begin to cut into demand is seen as one of the very few developments that could put the rally at risk.
The EIA now projects global oil demand will grow by about 2 million barrels a day this year and next, to 81.7 million barrels a day in 2004 and to 83.9 million barrels a day in 2005. The projections, however, are based on an assumption that oil prices will average about $38 a barrel.
With prices now hovering well above that level and likely to stay high, EIA economist Dave Costello said the agency is considering revising its forecasts downward.
“That’s exactly one of the things we’ve been talking about,” Mr. Costello said in an interview. “It’s possible that there would be an adjustment, and in the end demand weakens a bit, but it may not be huge.”
An internal EIA analysis concludes that a 20% spike in oil prices will cause oil consumption to stop growing, Mr. Costello said. Oil prices rose 18% in the month ended Friday.
“We can see that when we get those price increases, we do get some impact,” Mr. Costello said. “If prices go higher and stay up there, the growth in demand will not be so big next year.”
“There would be a negative reaction if prices were to stay over $50 a barrel,” Mr. Costello said.
Oil prices took a breather yesterday in their race to $50 a barrel. October light, sweet crude oil futures on the New York Mercantile Exchange were down 29 cents at $46.43.
A number of analysts have argued that economies and, in turn, oil demand are able to absorb higher prices than those prevailing now. German Chancellor Gerhard Schroeder said last week that oil prices aren’t yet affecting the global economy.
“The oil market is certainly looking for such evidence of prices putting a brake on economic growth and hence on oil demand growth,” Barclays Capital analysts Paul Horsnell and Kevin Norrish wrote in a research note Friday. “However, so far there seems to have been a rush to say that there has been no real pain.”
But there is evidence that prices are blunting growth in oil demand in America, which consumes about a quarter of the world’s oil. According to the EIA, American petroleum consumption compared with the same period a year ago flattened out in July and August amid the latest price surge after growing by 2.5% during the first six months of the year.
Slowing growth in demand for gasoline, which accounts for more than one out of every 10 barrels of oil used in the world and nearly half that used in America, is largely responsible. After growing by 2.3% to about 9 million barrels a day during the first half of the year, gasoline demand growth stalled in July and August, according to the EIA.
Much of the decline in the growth rate was due to high prices, which will weigh on gasoline demand for the rest of the year, Mr. Costello said.
“We think that gasoline demand is already growing slower than it would have if we didn’t have the spike in gasoline prices,” Mr. Costello said. “Gasoline demand growth will be slower in the second half, partly because of high prices.”
Figures from the American Petroleum Institute, an industry group, show a similar pattern, with gasoline demand growth slowing dramatically in May and June and sinking below year-ago levels in July for the first time in months. The group also attributed the drop to high prices.
The perception that demand can withstand high prices has encouraged traders to bid up crude oil futures. But with prices shooting toward $50, concern is rising about their economic effects.
Earlier this month, the Federal Reserve blamed the economic slowdown of recent months on the “substantial rise in energy prices,” though it projected the damage would be temporary. U.S. Treasury Secretary John Snow last week called oil prices the greatest threat to growth.
One optimist has had a change of heart as the rally in oil has continued upward. On August 11, as oil prices soared to $45 a barrel for the first time ever, James D. Hamilton, a professor of economics at the University of California at San Diego, put out a brief paper to soothe concerns about a sharp economic downturn.
“It is my opinion that, if prices increase no further than they already have, the oil price spike of 2004 will slow GDP growth by about 1%, but is not enough to derail the ongoing robust economic recovery,” he wrote.
Last Friday, as oil prices neared $50 a barrel, Mr. Hamilton sounded less sanguine.
“I’m a lot more concerned now than I was then,” Mr. Hamilton said by telephone from his office. “Prices have reached the point where they have significant potential to slow down the growth rate of the real GDP and oil demand.”
A potential decline in oil consumption is seen as the biggest downside risk to oil prices. As Hamilton noted in his paper, strong global demand, not a supply shortage, has been the backbone of the recent oil spike.
This year, global oil demand is expected to grow at its fastest rate in a quarter century, according to the International Energy Agency, the energy watchdog for the Organization of Economic Cooperation and Development. Much of that growth is coming from China. But American drivers – who together consume about 50% more oil than China – have also contributed. That has pushed suppliers to their productive limits, leaving them little leverage over the market.
“We believe that prices are unlikely to stop rising until there is the perception, or the reality, of a significant demand-side impact,” Barclays Capital wrote Friday. “In the absence of a strong negative demand signal, prices are likely to rise whatever producers do.”