See Oil Demand! See Oil Demand Fall!

"Fall, Demand, Fall!…Fall! Fall! Fall!"

If only the Wall Street Journal would produce a "Weekly
Reader" version, we might be reading sentences like these
in upcoming editions. We might also be reading sentences
like, "See Oil Prices!…See Prices Fall!"

Energy demand worldwide is falling. So says the
International Energy Agency; and so says the weight of
anecdotal evidence worldwide. Because energy prices have
been climbing to very high levels – and staying at very
high levels – the world’s energy consumers are beginning to
trim their consumption. Falling energy prices would seem,
therefore, like a likely and enduring consequence.

Net-net, the recent selloff in crude oil, unleaded gas,
energy stocks and almost everything else related to the
energy complex may be both justified and enduring. At a
minimum, we investors should consider this possibility.
(For the record, we still love oil stocks, but we’re a
little leery of buying them at this very moment).

Let’s take and unscientific world tour of energy demand.

· The International Energy Agency’s (IEA) estimates of
global oil demand topped out in March and have been
ratcheting lower ever since. As the nearby chart
illustrates, rising oil prices are clearly to blame for the
falloff in demand.

U.S. gasoline consumption slumped 4% in the week
ending September 2, according to the U.S. Energy
Department. Nationwide, sticker-shock at the pump seems all
but certain to restrain consumption. (An acquaintance
informs me that he will begin charging his teenage daughter
a "fuel surtax" to shuttle her back-and-forth from parties
on the weekend).

· Chinese and Indian energy demand growth is also
ebbing. These two countries, by themselves, account for
nearly three quarters of the IEA’s recent cuts to its
demand estimates. "Asian demand is faltering," Bloomberg
News reports, "as soaring crude oil costs disrupt supplies
to refiners in China, the nation that led global growth
this decade."

· Slowing demand for other commodities corroborates the
idea that energy demand might also slow down. Copper
consumption dipped 2.1% in the first half of 2005,
according to the International Copper Study Group. Copper
consumption in the U.S. tumbled a whopping 9.7% during the
first half.

Energy demand seems likely to fall even more, as many Asian
countries raise the price of government-subsidized oil
products. Since oil prices have more than tripled since the
end of November, many Asian governments are feeling the
heat to reduce subsidies and relax price controls. They
simply can’t afford to suppress the true cost of energy
products.

The State-owned Indian Oil Corporation, for example, is
losing almost $12 million per day, thanks to various
government mandates that force the company to sell petrol,
diesel, LPG and kerosene below the cost of production. Not
surprisingly therefore, the Indian government jacked auto
fuel prices by seven percent last week. Likewise, Brazil’s
state-controlled oil company, Petrobras, just raised the
price of gasoline and diesel fuel for the first time this
year. Both motor fuel prices saw a stiff of 10% or more.

In the name of protecting the poor," notes Andy Mukherjee,
a columnist for Bloomberg News, "governments in China,
India, Indonesia, Malaysia, Thailand and Sri Lanka have
either subsidized fuel prices from thei own budg4ets. Or
what’s worse, ordained tht they be kept low by twisting
retailers’ arms.

"The result," Mukherjee asserts," is that one half of the
world is distorting prices for the other half."

To the extent that countries like India and China migrate
fuel prices toward global levels, the more that demand
growth in these two countries might slow. And the more that
demand might slow, the lower the price of gasoline might
become in place like, say, New York City.

The Indonesian government provides gasoline to its citizens
for 87 cents a gallon. Motorists in Bangkok pay about $2.42
a gallon. In Beijing, the official government price of
gasoline is $1.59 a gallon. No wonder that Asian energy
demand is soaring. But last week’s round of price hike’s in
Asia and elsewhere, coupled with the soaring price of
energy here at home, threatens to alter consumption
patterns around the globe. In other words, demand might
fall…and so might prices…at least for a while.

And the Markets…