Fuel Marketer Intelligence: Supply Chain Dynamics to Retail Fuel Prices
US crude production growth is the critical catalyst driving world oil prices to four year lows and into a bear market, as the rapid expansion of domestic supply pushes out imports while ramping up exports of oil products. Slowing growth in US oil demand is another factor cutting prices.
Expanding economies use more energy, although growth in oil consumption in the United States has not kept pace amid structural changes in the gasoline market, namely improved vehicle mileage efficiencies. A low labor participation rate of abled body US citizens, which hovers at a more than 36-1-/2 year low, is another factor.
Consider data from the Energy Information Administration that shows the share of world demand consumed by the US has dropped from 24.4% in 2006 to 21.0% in 2013 and still headed lower. Part of this decline is due to increased demand from countries like China that expanded its share of world oil demand from 7.9% in 2006 to 11.8% last year, and countries in Latin America, the Middle East and elsewhere.
However, vehicle efficiencies are also having a big effect in cutting demand from the world’s largest oil consumer, with this trend to continue. CAFÉ standards require manufacturers to continue to lower miles per gallon for light duty vehicles through 2025 when they need to reach 54.5mpg, up from 31.3mpg this year. Consider, too, before the Obama administration increased the CAFÉ standards during his first term, they were flat at 27.5mpg from 1990 through 2010.
Based on these efficiencies, analysts with the University of Michigan Transportation Research Institute determined 614 million gallons of fuel was not consumed in September, roughly 6% of the average US monthly fuel consumption.
“Because of their improved fuel economy, the vehicles sold since October 2007 saved a cumulative total of about 15.1 billion gallons of fuel—the equivalent to the current total consumption of all vehicles in the US for about 33 days,” said Michael Sivak and Brandon Schoettle with UMTRI, with October 2007 the month they began their research.
From October 2007 to September, new light duty vehicle sales, which include cars, pickup trucks, vans, and SUVs, have improved their mileage efficiency from 20.1mpg to 25.3mpg their research shows.
As these efficiencies work their effect into the market, the country’s population ages as Baby Boomers gradually retire, cutting into US gasoline demand, which the EIA projects will decline from this year to 2015. Their retirement has also skewed the US labor participation rate according to a working paper from the Peterson Institute for International Economics, a nonpartisan think tank.
According to authors William R. Cline, senior fellow at Peterson and research analyst Jared Nolan, roughly one-half to two-thirds of the 3% decline in the US labor participation rate from late 2007, 66%, to early 2014, 63%, is because of the aging population in the US. In September, the rate dropped to 62.7%, the lowest it’s been since February 1978. They suggest additional retirements would limit gains in the rate going forward.
The authors argue their research implies a 1.5% higher US unemployment rate than what is now reported by the Labor Department’s Bureau of Labor Statistics, which last said the national jobless rate for September was 5.9%, suggesting a “true” rate of 7.4%. Historically, there has been a close correlation between the US unemployment rate and gasoline demand, with the evidence suggesting the aging population is another structural change sparking lower fuel demand.