U.S. Energy Demand Contraction Documented

Yesterday, the U.S. Energy Information Agency released its March 2009 Energy Monthly Report showing that total energy consumption fell 2% in 2008 while total energy production rose by 3.3%.  These trends help explain the sharp fall in hydrocarbon fuel prices during the second half of last year.  In the month of January, total energy consumption increased 2% from the same month in the prior year, but by December it was down 3%. 

If we look only at total fossil fuel consumption and production trends for last year, we find trends similar to those for overall energy - production up 3.3%, equal to overal production, but consumption wasdown more as it fell 2.9% in 2008, almost half again as much as the overall decline.

We found it interesting to look at the results of the December monthly data for these trends.  For December 2008, compared to the same month a year ago, overall consumption showed a 3% drop while production grew 4.9%, both greater moves than the yearly overall trends.  In the case of fossil fuels, consumption fell 4.4% while production increased 4.9%.  These monthly trends are subject to some impact from weather differences between the two months, but weather alone cannot explain the entire magnitude of the monthly change.

Weaker economic activity certainly played a role in energy consumption, and that has been supported by the Federal Highway Administration's vehicle miles driven data showing a steady fall that is now in its 14 consecutive monthly decline.  The growth in fossil fuel production can largely be explained by the fact that we had an increase, albeit small, in U.S. crude oil production and certainly domestic natural gas production has increased. 

It will be interesting to see how the energy consumption data develops during the first quarter of 2009.  We suspect it will prove better than the fourth quarter, weather adjusted, but probably not by a great amount as the job cuts, manufacturing cutbacks and service activity slowdown take their toll on energy consumption.  However, we also suspect that the pattern of energy consumption during the quarter will reflect a bottoming of the demand fall as the quarter unfolds.  While many investors and analysts are focused on oil and gas prices, we believe watching demand is much more important to guaging the pace of any energy market sustained recovery.