Heavy Metal

Actually, Trade Wars Aren't Good (For Oil, Anyway)

One of the first casualties could be demand for gasoline.

"Trade wars are good"  is a thing you may have read Friday morning that happens to be not true.

Yet, having emanated from the Tweeter-in-Chief, and with swinging steel and aluminum tariffs apparently on the way, here we are.

For oil and gas producers, more expensive metal doesn't seem particularly favorable as outcomes go. But there's a macro problem, too. Back when President Donald Trump was elected, I was concerned about the potential for a trade war developing. We aren't there yet, despite the Twitter-rattling. But I think we can all agree we're a tad closer heading into the weekend.

Trade wars are, to offer a counterpoint, not good. The biggest risks include inflation -- stirring already like a forgotten, and unwanted, relative locked these many years in the attic -- and an economic slowdown as spending and, well, trading suffer.

The oil market today is largely obsessed with supply, especially in the U.S., OPEC and Russia. Demand is taken for granted. The International Energy Agency and OPEC anticipate oil consumption growing by a robust 1.4 or 1.6 million barrels of oil a day this year, respectively. Roughly 200,000 barrels a day of that is attributed to the U.S.

Yet monthly figures released this week by the Energy Information Administration suggest that half of U.S. demand -- gasoline -- stopped growing last year for the first time since 2012. Moreover, that happened despite an apparent increase in the number of miles driven by Americans:

Driving On Fumes

While the distance driven by Americans continued to rise in 2017, albeit at a slower pace, gasoline demand flattened out, especially towards the end of the year

Source: Energy Information Administration, Department of Transportation

Note: Change, year over year, in trailing 12-month data.

That mismatch is somewhat odd given buyers' enthusiasm for trucks in recent years. That said, the fleet overall became less thirsty in the decade after 2005, largely because of tightening fuel-efficiency and emissions standards.

It's interesting to note, however, that gasoline demand growth leveled off abruptly in early 2017 after two years of gains, and really slowed down toward the end of 2017. This is pretty much the mirror image of what happened with gasoline prices over the period:

Recovery Position

Gasoline prices collapsed along with crude oil in 2015 and 2016 but have since recovered some of those losses

Source: Energy Information Administration

Gasoline demand isn't just a function of price and fuel efficiency; employment and wages also have a big impact. Yet that is also cause for concern, as payroll trends have been good and gasoline demand still flattened out.

The data suggest U.S. drivers have become more sensitive to gasoline prices and demand elasticity may now be higher than it once was.

Should a trade war exacerbate inflation, gasoline demand could be an early casualty. This is especially so because the tariffs being contemplated would have a disproportionate effect on the construction and automotive industries, both deeply entwined with fuel demand and big employers.

Beyond America's shores there are, of course, the potential negative ramifications in the wider world, especially trade-dependent emerging markets such as China and southeast Asia, from which the majority of the growth in global oil demand springs.

It is too early to guess at the likely outcomes. It isn't too early to remember that demand is the other half of the oil market's equation -- and it isn't a constant.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Liam Denning in New York at ldenning1@bloomberg.net

    To contact the editor responsible for this story:
    Mark Gongloff at mgongloff1@bloomberg.net

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