Has the gasoline price shock already triggered the destruction of demand?  And where will gasoline prices go from here?

Has the gasoline price shock already triggered the destruction of demand? And where will gasoline prices go from here?

Has the gasoline price shock already triggered the destruction of demand? And where will gasoline prices go from here?

There is some demand destruction. But oil has rebounded again, gasoline could be next. My guess is a prolonged zigzag higher up.

By Wolf Richter for WOLF STREET.

Following the soaring gasoline prices, the question arises when demand destruction will occur, when people will start driving less, will start taking gas savings more easily when driving, or will start prioritizing vehicle more cheap in their garage. If enough people do this, demand starts to decline and gas stations have to compete for dwindling business. Destruction of demand is what would bring the price down again. We have arrived?

The Department of Energy’s EIA measures gasoline consumption in terms of barrels placed on the market by refineries, mixers, etc., and not by retail sales at service stations. The volume of gasoline supplied decreased for the third consecutive week. This is unusual at this time of year, when gasoline consumption normally increases during the summer.

The EIA reported Thursday that gasoline consumption fell to 8.61 million barrels per day in the week ended April 8 based on a four-week moving average (red line), the lowest since March 4, in 2.3% drop compared to the same period in 2021 (black line) and down 8.1% compared to the same period in 2019 (gray line).

Consumers began to react in January.

Notice how the past 11 months (red line) followed very closely the pre-Covid period three years earlier (gray line) until they began to diverge sharply, not just in March, but as early as mid-January, and are have been firmly below the 2019 Level since then.

Gasoline prices began to rise from plummeted levels in April 2020. In May 2021, the average price of gasoline, all grades combined, surpassed $ 3.00 per gallon, a multi-year high, and continued. In November 2021, it hit $ 3.40 per gallon and took a break. Then, in early February, it started to rise and in historic leaps it reached $ 4.32 on March 14.

But since mid-March, the price has dropped. Now at $ 4.09, it remains high on the nose but is slightly lower than before:

Gas stations don’t lower their prices for the goodness of their hearts. They lower their prices because sales are being hit and price competition has built up between gas stations in an attempt to maintain sales volume. And gas stations could lower their selling price without hurting their profit margins as their product costs have also dropped.

The destruction of demand affecting gasoline would then be transferred to the demand for crude oil. But crude oil has far wider uses than just gasoline, including the burgeoning petrochemical industry. And a small drop in US gasoline demand won’t shake global crude oil markets much.

The price of crude oil has already rebounded again.

WTI crude oil had risen to $ 130 a barrel and then fell back into the mid-range of $ 90. In the past few days, it has changed course again and now has reached $ 106. This is not a good sign for gasoline prices.

Clearly there has been some destruction in demand, and perhaps that was enough to bring the price of gasoline down a bit.

But maybe it wasn’t. Perhaps this destruction of demand was not the cause of the drop in gasoline prices. Perhaps they fell for some other reason, such as the current volatility that has affected everything. The wild dynamics of the commodity markets take care of this.

My guess: Gas prices will rise again.

I see the destruction of demand, but for now I remain doubtful whether it is large enough to cause a lasting drop in the price of gasoline. I wouldn’t be surprised if the price starts to rise again. Crude oil prices have already started to rise again. This could be a long-lasting process with very volatile and zigzagging prices higher and higher. This is my guess.

What we know.

Annual gasoline consumption peaked in 2007 and then it decreased in the following five years up to 2012 for a total of 6.3%. Then it increased again and peaked in 2007 again in 2016, and again in 2017, and in 2018 and again in 2019, without going any further. And then in 2020 consumption plummeted. In 2021, consumption recorded a strong recovery, but total annual consumption ended the year still down by 5.3% compared to 2007!

But the total miles traveled by the vehicle hit a record every year from 2015 to 2019. And in 2021, despite the collapse of 2020, the miles traveled increased by 6.6% compared to 2007. People drive more, but use less gas to do it:

Hence, there are many other factors that play into gasoline consumption, not just price. This includes long-term technological trends, such as more fuel-efficient vehicles and the arrival of electric vehicles on a scale that is now large enough to dent gasoline consumption.

Other changes also affect gasoline consumption, some of which date back over a decade, such as the construction boom of high-rise residential buildings in city centers that has reduced or eliminated commuting by car for residents; or the tendency to work from home at least part of the time which also cuts off commuter kilometers.

Pulling in the opposite direction was the increase in car holidays during the pandemic, which may now have been replaced by flying (domestic recreational traffic is on the rise).

Gasoline consumption is also highly seasonal, making it even more difficult to pinpoint where the destruction of demand due to price has occurred and where unusual seasonal patterns may be at play.

Do you enjoy reading WOLF STREET and want to support it? Using ad blockers – I fully understand why – but do you want to support the site? You can donate. I appreciate it immensely. Click on the mug of beer and iced tea to find out how:

Do you want to be notified by email when WOLF STREET publishes a new article? Sign up here.

Leave a Comment

Your email address will not be published.