Recession Bets On Reduced Oil Demand May Be Misplaced

It currently feels as if people have been talking about an incoming recession for an entire year, and short positions in oil contracts continue to increase as a result. There is a chance though that the unique dynamics of remote work mean that commuting, and the related oil demand, actually increase in a recession. While commuting is just one part of the total energy demand equation, an increase during a recession would certainly be a surprise and the job of writers is to highlight what people may not be thinking about (and then for everyone to say it’s dumb).

The oil price has always been one of the better ways to place a bet on economic strength or weakness. In the past decade, it has even started to be viewed as one of the cleanest bets, as central banks have gained more and more influence over equity prices. If you don’t believe this, think about the market participants that made short bets to protect their investors as we witnessed the start of the largest pandemic in our lifetimes just a few years ago. Central banks immediately increased liquidity and stocks they shorted started reaching new highs in just a few months. They could have been right on absolutely everything except the level of central bank influence that occurred, which happened quickly.

A bet on reduced oil demand during the pandemic was more representative of the actual economic impact as the oil price took more time to recover, which was likely closer to what anyone running a business also felt. The impacts of that same pandemic may now result in a non-traditional oil demand response if unemployment does spike again. Specifically, increased remote work was the new normal post-pandemic. If unemployment starts increasing, we could see more people start commuting due to unique incentives, instead of stopping like in other recessions.

Research from the Society for Human Resource Management reveals a preference among managers for in-office work. Despite lots of examples that certain types of work are better in the office, and some are better remote, 72% of American managers prefer their employees to work in person. In-person is valued heavily by managers and regardless of whether it’s warranted or generational, these are what the numbers are.

A study conducted by GoodHire found managers reported that work-from-home productivity and engagement levels remained consistent when compared to traditional office-based work. Even so, 75% of these managers also expressed a preference for in-person work in some form.

As economic uncertainty looms, the fear of job losses becomes a reality for many. In such situations, it seems unlikely that employees would choose to work at home when the majority of managers have specifically expressed a desire for office work. If someone is worried about getting fired, or even simply in a bad job market, it seems unlikely they would pick the option that their manager doesn’t like. This is just human nature.

In historical recessions, all parts of the economy use less fuel. This includes leisure travel, industrial uses, and of course commuting. It would be very unexpected, but not an altogether unreasonable feedback loop, to see more people commuting during a recession based on the above dynamics.