Low Oil Has Disincentivized Fuel Efficiency

Fuel consumption is not very sensitive to a small change in prices in the short run, but if the price change is large enough and lasts long enough the amount used can change significantly.

The 60 percent decline in oil prices over the last two years has now been large enough and lasted long enough that it is starting to have a significant impact on the medium-term outlook for oil demand.

Most crude oil is used as a transportation fuel in aircraft, ships, trains, trucks and cars, which is where the biggest impact of lower prices on consumption is being felt (“Essentials of petroleum”, Frankel, 1946).

Between 2004 and 2014, the apparently relentless surge in oil prices resulted in a sharp focus on improving fuel efficiency.

Container ships and oil tankers switched to slower speeds to reduce fuel consumption, a practice known in the industry as “slow steaming”.

Fuel consumption rises with the third power of speed so even a relatively modest reduction in speed results in a big saving on fuel.

Slower speeds result in longer journey times and need more ships to move the same volume of freight but shipping lines were prepared to absorb higher capital costs in order to save on the running cost of fuel.

via Reuters

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza