There is demand destruction. But oil bounced back, gasoline could be next. My guess is a long drawn out zigzag higher.
By Wolf Richter for WOLF STREET.
With gasoline prices skyrocketing, the question is when will demand be crushed as people start driving less, save on gas when driving, or prioritize the most fuel-efficient vehicle in their garage. When enough people do it, demand begins to fall, and gas stations have to compete for dwindling business. Destroying demand would cause the price to fall again. Are we already there?
The Department of Energy’s EIA measures gasoline consumption in barrels brought to market by refiners, blenders, etc., rather than retail sales at service stations. The amount of petrol delivered has fallen for the third week in a row. This is unusual at this time of year when fuel consumption typically increases over the course of the summer.
The EIA reported Thursday that gasoline consumption fell to 8.61 million barrels per day in the week ended April 8, the lowest since March 4, based on a four-week moving average (red line). , representing a decrease of 2.3% compared to the same period in 2021 (black line) and 8.1% lower than the same period in 2019 (grey line).
Consumers began to react in January.
Notice how the last 11 months (red line) tracked the pre-Covid period three years earlier (grey line) very closely until they started to diverge sharply not just in March but as early as mid-January and have been solidly below since then at the level of 2019.
Gasoline prices started to shoot up from collapsed levels in April 2020. By May 2021, the average price of gasoline, all grades combined, surpassed $3.00 per gallon, a multi-year high, and held up. In November 2021 it hit $3.40 a gallon and paused. It then started to climb higher in early February, hitting $4.32 in historic jumps on March 14th.
But since mid-March the price has come down. Now at $4.09, it remains at a nosebleed high but is slightly lower than it was:
Gas stations don’t lower prices out of pure heart. They lower prices because sales are falling and price competition has started among gas stations to maintain sales volume. And gas stations could lower their retail price without jeopardizing their profit margins since the cost of their product also fell.
The demand destruction that hits gasoline would then be passed on to crude oil demand. But crude oil has much broader uses than just gasoline, including the booming petrochemical industry. And a small drop in US gasoline demand won’t shake global crude markets too much.
The price of crude oil has already recovered.
WTI crude was up to $130 a barrel and then fell back into the mid-$90 range. In the last few days, it has changed course again and now reached $106. That doesn’t bode well for gas prices.
Clearly there was demand destruction, and perhaps that was enough to bring the price of gas back down a bit.
But maybe it wasn’t. Perhaps this demand destruction wasn’t the cause of the fall in gasoline prices. Perhaps they fell for another reason, such as the current volatility that has hit everything. This is ensured by the wild dynamics of the commodity markets.
My guess: Gas prices will rise again.
I see demand destruction, but for now I remain doubtful if it’s big enough to cause a lasting fall in gas prices. I wouldn’t be surprised if the price goes up again. Crude oil prices are already pointing upwards again. This could be a lengthy process where prices are very volatile and zigzag higher and higher. That’s my guess.
what we know
Annual gasoline consumption peaked in 2007 and then declined by a total of 6.3% over the next five years to 2012. It then rose again, again reaching the 2007 peak in 2016, 2017, 2018 and 2019 without exceeding it. And then, in 2020, consumption collapsed. In 2021, consumption recovered strongly, but the total annual consumption at the end of the year was still 5.3% below 2007!
But the total kilometers driven hit a record every year from 2015 to 2019. And in 2021, despite the collapse in 2020, the kilometers traveled increased by 6.6% compared to 2007. People drive more, but use less petrol:
So there are many other factors that affect gas mileage, not just price. These include long-term technology trends such as more fuel-efficient vehicles and the adoption of electric vehicles on a scale now large enough to reduce gas mileage.
Other changes are also affecting gas mileage, some dating back well over a decade, such as the high-rise apartment building boom in urban centers that reduced or eliminated commuting for residents; or the trend to work from home at least part of the time, which also saves on commuter miles.
The increase in holiday trips by car during the pandemic, which may have been replaced by flying again in the meantime (leisure travel in Germany is increasing), had the opposite effect.
Gasoline mileage is also highly seasonal, making it even harder to see where price has destroyed demand and where unusual seasonal patterns might be at play.
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