Low Oil Prices and US Gasoline Demand Elasticity

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Fuel Marketer Intelligence: Supply Chain Dynamics to Retail Fuel Prices

A more than 30% drop in the US retail gasoline price average from the end of June to mid-December has spurred greater gasoline consumption in the United States, with two of the three highest weekly demand rates in 2014 occurring in November and December.

There have been a host of factors reducing the US consumption rate of gasoline, highlighted by improved vehicle efficiencies, with new light-duty vehicle sales averaging roughly five miles more distance traveled per gallon of gasoline then they did in late 2007, according to the University of Michigan Transportation Research Institute.

Behavioral changes have also reduced gasoline consumption, with oil above $100 bbl a chief factor in why Millennials—those born between 1980 and 2000, are driving less than their parents. Indeed, vehicle miles traveled by this generation between 2001 and 2009 dropped 23%, with high vehicle ownership costs atop of climbing pump prices discouraging driving.

The elasticity was on display again in June when crude prices spiked well above $100 bbl on geopolitical threats to supply, including the sudden rise of the Islamic State that directly threatened Iraq crude production. After strong gasoline demand in May, consumption fell off sharply, topping the five-year average for only four weeks through the end of summer.

Since mid-October, when the selloff in US and global crude markets was picking up steam, there have been only two weeks in which gasoline demand has slipped below the five-year average. One of those weeks followed Thanksgiving Day, when demand data can be skewed because of heavy pre-stocking ahead of the holiday. The second highest weekly implied demand rate per the Energy Information Administration took place during the week with the Thanksgiving Day holiday at 9.425 million bpd, and during the second week of December at 9.373 million bpd.

It’s odd to see gasoline demand peak outside of the summer months when driving is usually the strongest, although the week with the highest rate of demand was at the end of August, averaging 9.48 million bpd. Late year demand has boosted the cumulative demand rate through Dec. 12 to 8.838 million bpd, up 79,000 bpd or 0.9% from a year ago.

Most analysts see an extended period of low oil prices, as key members of the Organization of the Petroleum Exporting Countries signal no production cutbacks and potential increases to maintain and even grow market share.

Lower fuel prices are seen lifting discretionary spending for US consumers, although by how much is a question of debate. Wells Fargo Securities, LLC disputed the previous rule of thumb that for every $0.10 gallon decline in retail gasoline prices $3 billion is unlocked for consumers to spend on other goods and services. Their research found that for the past 20 years or so, “consumers have shown little positive response to falling prices at the pump,” with the food and beverage sector the exception.

In a recent report from UMTRI’s Michael Sivak studying the relationship between road transportation and economic activity since the end of World War II, Sivak found the distance driven per Gross Domestic Product were highest during the early 1970s through early 1990s before steadily decreasing.

“By 2012, the value of this measure decreased by 22% from its absolute maximum, which was reached in 1977. Some of the factors that likely contributed to the recent decline in the value of this measure are the decreased amount of personal transportation, decreased contribution to GDP of truck transportation, and the increased contribution to GDP of data services, information processing, and e-commerce,” said Sivak.