Drop In U.S. Oil Consumption A Two-Edged Sword

The Energy Department has reported the steepest drop in oil consumption in more than a quarter century. The slowdown in U.S. energy use is one of the major factors pulling crude oil prices down from their historic highs of a month ago.

Oil prices have fallen more than 20 percent since early July, closing Tuesday just above $113 per barrel on the New York Mercantile Exchange. The average price of gasoline nationwide has fallen well below $4 a gallon.

But for many people, that's still too high.

"I drive a 10- to 12-hour shift and usually spend $45 to $50 on gas," says taxi driver David Khoshal, as he waited for a fare outside the San Diego airport. "Sometimes it's slow when the conventions are not here. And [with] the gas prices, it's really difficult for taxi drivers."

There's the rub: The drop in oil and gasoline prices is largely the result of a slowing economy.

As consumers and businesses hit the brakes in the first half of the year, oil consumption in the U.S. fell by 800,000 barrels a day, the biggest decrease since 1982.

"It's certainly a response to higher prices, whether it's taking fewer trips to the market or purchasing a car instead of an SUV," says Tancred Lidderdale, an economist with the Energy Information Administration, the Energy Department's statistical arm.

High energy prices are forcing consumers and businesses to reconsider both short-term and long-term decisions, from where to go on vacation to where and how to organize production lines. Some of those changes will be long-lasting. Once you've invested in a more efficient car or factory, the energy savings remain even as the economy rebounds. But behavioral changes are more fleeting. There are already signs that drivers are backsliding on the steps toward conservation they made earlier this year.

"As prices retreated from $4 [a gallon], you're starting to see demand increase again," says Mike Fitzpatrick, an energy analyst with MF Global. "Consumers are going back to their old behaviors. Let's face it: We live in a car culture."

Fitzpatrick says that makes it unlikely that oil prices will fall back to the levels of a year ago. In fact, he thinks prices may rebound to $120 a barrel, especially when the weather turns colder and demand for heating oil picks up.

"Right now, people can change their behaviors. It's nice weather outside. They can walk to the store. They can ride their bicycles," Fitzpatrick says. "But I think as winter sets in, it's going to be much more difficult for people to do that."