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ANALYSIS
March 2, 2009
Sagging Index no longer reflects what’s going on in the market, some say, Replacements? Google it, to start.
March 2, 2009
Downward price spiral will actually boost the cost of capital for most companies. CFOS, take note.
March 2, 2009
The latest bailout at AIG could be a preview of how the president will deal with Wall Street.
March 2, 2009
No corporate defaults. Big debt offerings. Percolating CP issuance. Things may be looking up in the capital markets.
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August 11, 2008 12:01 AM ET
Warnings that the supply of oil has peaked have supported the meteoric rise in the price of oil and gasoline this past year. But amid the clamor, less attention is being paid to the concept of peak demand—and it is on that side of the supply-demand equation that relief will appear over the next year. We've seen this before, as almost exactly 30 years ago the high price of oil drove a reduction in global demand of stunning proportions. We aren't there yet, but contrary to popular opinion, we believe the world will reach similarly low demand in the months and years to come. The balance of statistics points to oil prices falling considerably by this time in 2009. Specifically: * Demand is moderating at a time when supply is accelerating. * The decline in the dollar appears to be over. * Both U.S. presidential candidates have come out in strong support of the development of alternative sources of energy and higher gas mileage requirements for automobiles. It may seem unfathomable that demand for oil could already be pulling back, yet the number of vehicle miles driven in the U.S. fell during the month of March, for the first time since 1979. The March drop was estimated to be a remarkable 4.3% from the year-earlier level. The number of miles driven has continued to fall since then, declining by 1.8% in April and 3.7% in May. Given that transportation accounts for about 65% of all oil usage in developed nations, such changes in driving habits are perhaps the most important indicator of future oil consumption. Going back to 1979, that year provides historical guidance for how the world economy may react to the current period of high energy prices. As the U.S. staggered under a similar energy shock throughout the 1970s, high prices drove the economy into a period of stagflation. The resulting decline in oil consumption reached amazing levels: * After peaking in 1979, the world's consumption of oil did not surpass that level until 10 years later, in 1989. * U.S. consumption did not surpass the 1979 level until 18 years later, in 1997. * Canadian consumption did not surpass the 1979 level until 20 years later, in 1999. * European consumption still remains 5% below the 1979 level today. * Germany's consumption remains 26% below that level today. * France's consumption remains 21% below that level. At the same time Americans are driving fewer miles, there is a steady movement toward driving cars that get better gas mileage. U.S. sales of hybrid cars rose by 46% in April 2008 from April 2007 and have more than doubled over the past two years. Hybrid sales now represent 3.2% of all vehicles sold in the U.S. and 5% of all cars (excluding trucks). Toyota Prius sales rose by 67%, compared with an 8% increase in U.S. sales for all Toyota vehicles. Hybrid sales represented 21% of total car sales for Toyota during the month. There should be an increasing amount of interest in hybrid cars as the first plug-in hybrid electric vehicles (PHEVs) come to market over the next two years. General Motors, Think, Nissan, Toyota and others are expected to introduce competitive products in this space. The impact of these plug-in hybrids on gasoline consumption is potentially enormous. Hybrids get about twice the fuel economy of a conventional car of the same size and capacity, and plug-in hybrids will get about twice the fuel economy of a standard hybrid. As demand declines, there is still a scramble to increase supply. The U.S. Energy Information Administration is predicting that global oil output will rise from 86.2 million barrels a day to 89 million barrels a day next year. This increase in supply is important, but the continued drop in demand will be the key to significantly easing oil prices in the near term. Matching and surpassing the post-1979 decrease in demand is a high expectation, but one that is within reach. Patrick McVeigh is president and chief investment officer of Reynders McVeigh Capital Management in Boston.
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