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

Content is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Business Information & Services, Inc. or any of its affiliates, subsidiaries, officers or directors. If you would like to reproduce or redistribute any of the content found on MarketPulse, an award winning forex, commodities and global indices analysis and news site service produced by OANDA Business Information & Services, Inc., please access the RSS feed or contact us at info@marketpulse.com. Visit https://www.marketpulse.com/ to find out more about the beat of the global markets. © 2023 OANDA Business Information & Services Inc.