Crude oil has come under downward pressure recently, as China’s growth forecasts have dampened.
China is the world’s second-largest oil consumer.
Moreover, the slide in the price of oil is not just due to the recent oversupply and the decreased demand related to the events of this week, but equally to a more permanent decrease in demand.
Nobody wants to admit that there is a permanent structural shift that will affect the automobile industry and demand for oil, attributable to a generational paradigm shift that is permanent. Even with cheap oil, many Millennials see car-commuting as a chore that keeps them away from being connected electronically.
It’s an issue of elasticity of demand and substitution. The Millennials have technological replacements we did not have to automobile travel, a generation ago. There is a very strong trend among young people away from automobiles.
Every-time insurance rates increase, the Millennial will increase their incentive for using transit. Every time a Millennial is stuck in traffic wasting time and fuel, they will increase their incentive for transit.
The Millennial generation is more interested in being connected and time-management than their parents’ fascination with the inefficient car culture.
There is much empirical evidence that boomers and the millennial generation, the two largest demographic groups in North America are converging in a time-of-life moment where what they want is walkable, compact, higher density, service-rich, transit-oriented communities and destinations.
This is the reason that they are very unlikely to save the suburban based auto dependent model of urban development. These fundamental shifts need to be incorporated into the macroeconomic (econometric) models forecasting GDP growth, inflation, and tax revenues of Canada and the US. There is a permanent decrease in demand.
We are already seeing the effect on the Canadian dollar, a petro-currency. Moreover, the Bank of Canada’s latest interest rate reduction shows that with this permanent decline in the demand for oil, their use of the interest rate monetary policy tool will be limited going forward.