(Bloomberg Opinion) -- Draw a schematic diagram of the global economy, and one pictures a vast collection of cogs, gears, chains and pulleys — all labelled with national flags and currency signs. Bucket loads of lubricant smooth their interactions. The faster the economic wheels turn, the more grease is needed, and vice-versa.
The real economy isn't very different to its schematic version. Essential but unnoticed, petroleum-derived lubricants are everywhere, turning the least sexy products of a barrel of oil into a key indicator of the business cycle. Right now, that niche market is signaling an ominous message about the outlook for 2024. “Demand is really just falling,” Sinead Gorman, Shell Plc's chief financial officer, said last week about lubricants. Take the warning seriously: The British oil major is, alongside ExxonMobil Corp., the world's largest lubricant producer.
From engine oil to hydraulic fluids to heavy-duty grease, lubricants feature in most things the human race has built, from door hinges to the arms of industrial robots in assembly lines. Their ubiquity means they provide important clues about the global economy. While the Federal Reserve won't raise or lower interest rates just because America consumes more or less grease, one can still draw a line from lubricant demand to industrial activity — and from there, to monetary policy.
For decades, growth in demand for lubricants could be taken largely for granted, closely tracking the increase in gross domestic product. Consumption rose as the world industrialized. It's only recently that oil executives have started to notice a change in the trend, coinciding with a contraction in industrial activity in many countries.
The US offers one of the clearest snapshots of the forces currently in play. At an average of about 92,000 barrels a day this year, US lubricant consumption has fallen to the lowest level in at least 42 years, according to Bloomberg Opinion calculations based on data from the Energy Information Administration. Some of the decline likely reflects structural changes in the American economy, as heavy industries have relocated to China, India and other emerging nations, permanently reducing demand. Still, the recent weakness goes beyond the previous trends, and suggests that a cyclical slowdown is at play.
Unsurprisingly, oil executives say demand is also weak in Europe, where industrial activity has been hurt by high energy prices. Unexpectedly, lubricant demand is also weak in India, with consumption year-to-date up by less than 1% over the same period of 2022. Chinese demand is also soft, as the construction sector — a major consumer of engine oil and hydraulic fluids — cools down.
Wherever one looks, from Europe to the US to China to India, the message is uniform: The machines that power economic growth aren't running as fast as they did in previous years. That echoes other indicators of industrial activity. JPMorgan Chase % Co.'s global manufacturing index has notched 14 consecutive months below the 50 level, which indicates a contraction. Diesel consumption has also weakened in many countries, another sign of factories slowing down.
If central bankers need to pay attention to the liquids that reduce friction in the world economy, so do Saudi Arabia and its OPEC+ allies. Despite their importance, lubricants account for a tiny portion of global petroleum demand. The numbers are hard to come by, but output of so-called base oils — the feedstock for lubricant production — equals about 1.2 million barrels per day, or less than 1.5% of global oil consumption. On their own, they matter relatively little for Riyadh and Moscow, anxious to fine-tune their output to demand to keep crude as close as possible to $100 a barrel. But what's important is their signal. Weaker lubricant demand indicates a slowdown in industrial production, which in turn matters for diesel demand, a far larger market than lubricants.
Commodity traders have for years nicknamed one of the base metals “Dr. Copper,” as if the red metal had a PhD because demand closely mirrored the business cycle, making it a great guide to the global economy. While engine oil hasn't yet graduated with a doctorate in economics, its lessons about the outlook for growth are worth paying more attention to.
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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Javier Blas is a Bloomberg Opinion columnist covering energy and commodities. He is coauthor of “The World for Sale: Money, Power and the Traders Who Barter the Earth's Resources.”
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