Bernstein: Oil Inventories, Supply, Demand, and Price Signals

So, oil inventories fell again last week, for the fifth week in a row. It was an expected drop as U.S. demand continues to outpace constrained global supply.

Oil imports are up of course, but crude inventories are down 14% compared to a year ago, “indicating that the current pace of imports still isn't strong enough to sustain U.S. oil stocks” as Moody’s put it.

One interesting point to consider is that inventories are contracting along with demand (jeez, where would they be if demand was strengthening?). Once gas hit the $4 range, we finally started to see the price elasticity of demand kick in. Now we’re seeing the oft-cited 4% fall in miles driven in March 2008 compared to a year ago, diminished demand for gas—down 1.6% from last year—and the spread of the infamous summer “staycations.”

Yet, even with weakening demand, our oil market is undersupplied. The Saudi’s say they’ll kick it up a bit (500K bpd), but markets seem pretty unimpressed so far.

All of which raises the question: just what signal are these high oil and gas sending us? To conserve, to drill, some weighted combination (and if so, what are the relative weights)?

I understand and sympathize with the view that these signals are telling us to poke more holes in the ground—fast! Whether it’s the outer continental shelf or the Arctic National Wildlife Refuge, for some folks, the response to the price signal is always to find and tap greater supply.

But in terms of short-term impact, price relief from this direction is years, if not decades, away. Not to mention the environmental degradation, and the fact that poke all you want, oil is simply getting harder to find and recover. Sure, there will be price fluctuations one way or the other. But future gas prices are much more likely to go up than down.

To my ears, the price is signaling conservation: less driving, higher mpg, more public transit, and less sprawl (yes, the latter is also decades away). That’s the low-hanging fruit here, and from what I can see, the American driver is already picking it.


Jared Bernstein
Jared Bernstein

Jared Bernstein is a senior economist at the Economic Policy Institute and the author of "All Together Now: Common Sense for a Fair Economy."