(John Kemp is a Reuters market analyst. The views expressed are his own)
By John Kemp
LONDON, March 12 North America's shale fields are the most visible symbol of the energy revolution, but they tell less than half the story. An even bigger transformation is taking place in the engines and fuel tanks of cars and trucks across the United States.
High oil prices, recession and tougher fuel economy standards have combined to cut 5.5 million barrels per day from projected U.S. oil consumption in 2020, according to an analysis of forecasts published in recent years by the U.S. Energy Information Administration (EIA).
In the 2004 edition of its "Annual Energy Outlook" (AEO), EIA projected liquid fuels consumption in the transport sector would hit 37 quadrillion British thermal units (Btu) by 2020, equivalent to about 19.7 million barrels of gasoline per day, up from 27.3 quadrillion Btu in 2004.
But that prediction was made when oil prices were averaging just $40 per barrel, before they doubled to an average of almost $100 in 2008, and before the federal government enacted aggressive petroleum reduction measures with the ethanol mandate in 2005 and 2007, and stricter fuel economy standards for road vehicles in 2011 and 2012.
In the 2013 AEO, EIA now projects liquid fuels consumption in the transportation will be just 26.4 quadrillion Btu in 2020, equivalent to 14 million barrels of gasoline per day, about 30 percent less than it was predicting in 2004.
The recession has played a big part in putting fuel consumption onto a different long-term path, cutting perhaps 2 quadrillion Btu from the baseline, around 1 million barrels per day.
But aggressive conservation and substitution measures have pushed consumption onto a new trajectory, and account for more than four-fifths of the prospective reduction in demand by the end of the decade.
Between 1950 and 2007, liquid fuels consumption increased at a compound annual rate of about 2.6 percent. But between 2000 and 2020, EIA projects there will be zero growth (link.reuters.com/qaf66t).
EIA's forecasts include ethanol blended into the fuel supply, so the reduction in demand for conventional liquid fuels derived from oil is even greater than the raw energy consumption numbers imply.
Projected fuel savings are bigger than the liquids output of any country, with the exception of Saudi Arabia, Russia, the United States and China.
TEMPORARY AND PERMANENT
Previous price spikes (1973-4, 1979-81) and recessions (1980-2, 1990-1) all reduced liquid fuels consumption, but none on quite this scale.
Previous falls in consumption were also transitory. Demand picked up once prices fell and the economy started growing again. But EIA expects the current reductions to be permanent because many of them are the result of changes enacted into law and regulation, which will prove hard to undo even if oil prices decline.
Reduced gasoline and diesel consumption in the U.S. fleet of cars and light trucks is only the largest and most visible aspect of a broader shift away from expensive products refined from crude oil gradually gathering pace worldwide.
The United States has more scope to cut its consumption of liquid transport fuels than most of the other advanced economies because it made fewer efficiency gains following the previous oil crises, and allowed them to reverse during the long period of low prices in the 1990s and early 2000s.
But the EU and other developed countries plan to tighten their fuel economy standards in the next decade, which will take another small chunk of demand out of the market.
In China and other emerging economies, efficiency gains from phasing out very old cars and trucks are likely to be more offset by continued growth in underlying demand for transportation services as output and incomes rise.
But even here, consumption of liquid transportation fuels is likely to grow more slowly than before as the market mechanism gradually forces more emphasis on conservation, and worries about the competitive impact of energy-intensive growth begin to bite.
Speaking at CERA Week in Houston this month, the head of Saudi Aramco, Khalid al-Falih, confirmed world oil demand growth has moderated because of environmental pressures and lifestyle changes, as well as energy policies.
BEHAVIOURAL AND STRUCTURAL
"Demand destruction" is a broad term that embraces everything from a short-term, temporary loss of oil consumption as a result of cyclical factors, such as a recession; behavioural changes, like buying a more fuel efficient car or using public transport; to more long-lasting and irreversible changes, such as replacing an oil-fired boiler with a gas or coal-fired one.
Demand destruction takes places across a variety of time-scales and the permanence of its impact is highly variable.
The simplest and fastest forms, such as taking fewer journeys or using public transport, tend to be the easiest to reverse once oil prices fall and the economy starts growing again. By contrast, structural changes, requiring heavy investment in expensive and long-lived equipment, like new boilers and engines, or mandated by regulation, occur slowly, but once costs are sunk are essentially irreversible.
The higher oil prices rise, and the longer they stay there, the stronger the incentive to find ways of using oil more efficiently or replacing it with cheaper alternatives. Recent stories about companies experimenting with natural gas to power railway locomotives and shipping suggest this sort of long-lasting demand destruction is starting to take place.
Every year that oil prices remain high in real terms, and threaten to rise further, the incentives to cut consumption become sharper.
FAIR VERSUS REALISTIC OIL PRICES
Falling oil consumption, relative to trend, and rising production, again relative to trend, pose growing challenges for OPEC.
Founded in 1960, the organisation's founding statute commits it to "ensuring the stabilisation of prices" (Article 2B) to secure "a steady income to the producing countries" and "a fair return on their capital to those investing in the petroleum industry" (Article 2C).
In practice, "fair" prices and returns have often meant the highest price member countries - especially Saudi Arabia - think they can get away with economically and politically.
But it may be time for OPEC members to start thinking about "realistic" prices instead. OPEC members still control the bulk of low cost supplies and reserves. But the market is gradually finding ways to work around their monopoly from both the supply side (shale, deepwater and Arctic drilling) and the demand one (substitution and conservation).
In the 1970s, and again in the 1980s, OPEC ministers set up something called the Long-Term Price Policy Committee, which attempted to peg the organisation's target oil price to the cost of alternatives (at the time coal-to-liquids plants like the one eventually built many years later in North Dakota).
The Committee failed. At the time the cost of alternatives was far above the current market price of crude, but OPEC never managed to push prices anywhere near the marginal cost of making diesel and gasoline from coal. The full story is set out in Morris Adelman's book "Genie out of the bottle" (1995).
Now oil prices are actually above the marginal costs of alternative forms of supply, and OPEC risks losing market share to other crude suppliers as well as alternative fuels.
If the Long-Term Price Policy Committee was recreated, it would almost certainly fail again, not least because of rivalries between Saudi Arabia and others in the organisation.
But OPEC and other oil producers, including the international oil companies, need to start thinking hard about what price is sustainable from both a supply and demand perspective, because market forces are already starting to drive substantial changes in both production and more importantly consumption as the market seeks a new equilibrium.
Conservation and substitution look set to add more barrels back into the market over the next decade than any single source of new supplies.
Aramco, at least, appears to understand the dangers. Despite forecasts of healthy demand growth at global, rather than U.S., level al-Falih warned his audience: "Although we are on the right track, if our history teaches us anything, it is that such rosy forecasts will not always materialise."
"Even if you are on the right track, you run the risk of being run over if you just sit there." (Editing by William Hardy)