Part of the answer lies in the U.S., where crude oil production has risen to over 13 million barrels per day (Figure 3).  Increased U.S. production has replaced roughly one third of output cuts by OPEC+ and has kept crude and product inventories at levels close to the average of recent years (Figure 4). 

Another part of the answer lies in China, the world’s largest importer of crude oil.  Over the past three decades, China went from being a net oil exporter to importing around 10 million barrels of oil per day. However, in 2022, the most recent year for which the Energy Information Administration has complete data, Chinese consumption of crude oil fell, its first year-on-year decline in a quarter century (Figure 5).

Since 2005, as Chinese demand surged, crude oil prices often changed with the pace of Chinese growth with a lag of about one year.  For example, the pace of Chinese growth crested in 2007, 2010, 2017 and 2021.  WTI prices reached peaks in 2008, 2011, 2018 and 2022.  Likewise, when Chinese growth weakened, oil prices often declined in tandem, sometimes with shorter lags on the downside. 

When China lifted its COVID restrictions in late 2022, there were expectations for a strong rebound in growth.  That rebound, however, hasn’t materialized yet.  Growth remained slow in 2023 and, according to the Li Keqiang Index, which measures rail freight volumes, electricity production and growth in bank loans, slowed further in Q1 2024 to around 3.6% year on year, its slowest pace since the early pandemic lockdowns in 2020 (Figure 6). 

While the overall pace of growth in China may be weighing on oil prices, it’s not the only demand-side factor.  In 2023, 35%-40% of all vehicles sold in China were electric. The growing share of EV among auto sales in China and elsewhere also weighs on demand for crude oil.

The advent of EVs accentuates a trend towards greater fuel efficiency that underscores the technological leaps of the past half century.  Since the 1973 and 1979 oil supply shocks, which sent oil from $3 per barrel to as high as $40, there have been two revolutions in the automotive industry.  The first efficiency revolution occurred between 1975 and 1985, involving reducing the weight and engine power of cars and thereby improving gas mileage. 

The second revolution came after a different sort of oil shock -- soaring demand in China and other emerging markets sent oil prices from $12 per barrel in 1998 to as high as $140 in the summer of 2008. It was a revolution of engine technology with greater efficiency gains among combustion engines, the introduction and popularization of hybrids and the advent of EVs to wider audiences in the 2010s.  By 2022, the average car weighed about 7% more than a vehicle produced in 1975, had nearly twice the horsepower and burned only half as much fuel (Figure 7).

On average, drivers keep their cars for about a dozen years.  Between 2010 and 2022, the U.S. Environmental Protection Agency (EPA) data show that the average car sold in the U.S. went from 22.6 miles per gallon to 26.35 miles per gallon, a 16.7% improvement in fuel economy.  If one assumes that each year one-twelfth of the vehicle fleet is replaced, that means that the overall fleet uses about 1.25% less fuel to drive the same distance as they did the previous year. 

Crude oil suffers from one final headwind, which is that people aren’t driving as much as they did in the past.  U.S. drivers, for example, travelled 1% less in total distance in January 2024 than they had in January 2020, despite a 3% rise in the size of the U.S. population (Figure 8). While we don’t have figures from other countries that are as up to date as those in the U.S., we can assume that Americans aren’t the only ones who have discovered the wonders of online shopping and working from home, both of which tend to reduce fuel demand.

As such, the oil market appears to be balanced for the moment between geopolitical tensions which might be keeping prices higher than they might be otherwise and economic forces which have been more bearish than bullish.