So far, the story that has been written on the dramatic drop in the price of oil has been that of an increase of supply.
This part is true, based on data compiled by the Energy Information Agency. Worldwide production of oil is in fact up year over year as of August, from 89.9 million barrels of oil a day to 91.1 million a day. That’s a 1.39 percent increase.
But that is only half the story.
Missing from that analysis is the drop in consumption. In OECD nations, consumption of oil is down year over year as of July, from 45.9 million barrels of oil a day, to 45.7 million a day, a 0.35 percent drop.
Consumption was down the year before that, too, by 0.61 percent.
This is led by the continued slowdown in Europe and Japan, and don’t forget in China, too, which is not a part of the OECD. U.S. consumption was actually up, but not enough to offset the recession elsewhere.
It was into that environment that oil producers, led by the U.S. shale oil miracle, dramatically increased production.
Consider, per barrel a day production worldwide was up a net 1.2 million over twelve months. U.S. production alone was up by 1.5 million, from 11.9 million to 13.4 million.
But for the U.S. increase on the shale boom, global production would have dropped by 271,000 barrels a day upon weakening demand.
Many have called on Saudi Arabia to somehow rein in the global supply, but the truth be told, year over year as of August, the Saudis had only increased production by 326,000 barrels of oil a day.
Of course, how was anyone to know that consumption would be on a losing streak for two years straight?
Normally, when the economy is growing, a major production increase would be expected. But the economy is not growing globally.
Demand is down, and yet production continued unabated, and so the price has been cut in half.
If any oil producers are concerned about breaking even, perhaps they might consider slowing production down in the coming months. Or, double down and move more product to keep revenue up.
Either way, everyone should be bracing for what is a continued slowdown of the global economy. The truth is, less oil consumption signals a recession.
Robert Romano is the senior editor of Americans for Limited Government.
