I see gasoline prices still rising despite this modest short-term and long-term demand destruction.
By Wolf Richter for WOLF STREET.
The price chaos at the pump is now causing some demand destruction. We have seen signs of it. We are at the start of the driving season, but gasoline demand is not following the classic pattern of a seasonal surge.
The Department of Energy’s EIA said gasoline consumption, at 8.85 million barrels per day (four-week rolling average), was down 2.7% from the same period in 2021 and by 6.1% compared to the same period in 2019. Consumption in 2022 (red line) does not follow the wave of summer driving: it has only increased by 1.3% compared to the beginning of March. But in May 2019 (grey) consumption was up 5.2% from March, and in May 2021 (black) consumption was up 11.9% from March.
Note that the EIA measures gasoline consumption in terms of barrels supplied to market by refiners, blenders, etc., not retail sales at gas stations.
In October, November and December of last year, gasoline consumption exceeded 2019 levels. It was when the gasoline price shock began to ripple through consumers that consumption took a hit, but it hasn’t taken a big hit yet, and consumers seem to be getting used to the pain and the demand destruction hasn’t gotten any worse in the past few weeks:
What consumers are facing at the pump is a majestic spike in gasoline prices, which included a small dip in April to confuse everyone and spread false hope that the price spikes were over. In May, price spikes resurfaced to reach new highs. On Monday, the EIA’s weekly metric hit $4.59 per gallon of regular fuel:
Long-term demand destruction is happening, but it’s a slow process.
The peak years for gasoline consumption were 2016, 2017, 2018 and 2019, all at around 9.3 million barrels per day, and just slightly higher than 2007, with a low of -6.3 % between the two. During the summer driving season, peaks reached 9.7 million barrels per day.
The years 2016-2019 may have been the peak of gasoline consumption in the United States. The current price spike is once again shifting vehicle buying habits towards more economical vehicles, including smaller vehicles and hybrid powertrains, and we are already seeing signs of this. These changes in buying habits have long-term consequences on fuel consumption.
Mainstream automakers are finally rolling out electric vehicles, and although large-scale production is still hampered by the various shortages, especially the shortage of semiconductors hitting automakers across all their models, there is huge demand for electric vehicles and long waiting lists. The 1.44 million electric vehicles on the road in the United States represent only 0.5% of the 280 million vehicles on the road, but sales of electric vehicles are booming and sales of ICE vehicles are falling, and each percentage gain in the share of electric vehicles represents a visible drop in fuel consumption.
And the wave among office workers of working from home during the pandemic has turned into something of a permanent trend of working at least part of the time from home, with commuting no longer a daily thing, but maybe one thing two or three times a week, which greatly reduces gas mileage for those households, especially those households that have long commutes, and enough of those households that do that will eliminate some of the request visible from the table.
Destruction of short-term demand.
Soaring gas prices, when they hit the wallet enough, trigger changes in what people do: they start driving less, take longer to save gas when they drive and start give priority to the most economical vehicle in their household. They can cancel car trips and minimize vacation driving.
But those are short-term effects, things that people might do this year or this month, but once they get used to high gas prices, and maybe they get a increase that will make these high gas prices less toxic, some of these changes will unwind.
Demand destruction as people return to public transport?
How much will gas prices have to go up before people get back on commuter trains? Commuter rail systems across the United States suffered a massive loss of ridership during the pandemic as people started driving to work or stayed home to work.
So is the current price spike enough to get people back on the trains? Let’s look at the San Francisco Bay BART trains. Drivers here face gas prices in the $6 range, bridge tolls that have been raised, and traffic congestion almost as severe as before the pandemic. It would be a great incentive to get back on the BART.
So let’s see. Yes, in March, when gas prices hit new highs, BART ridership jumped 32% to 3.34 million rides, from 2.52 million in February. And in April, when gasoline prices fell slightly, ridership increased slightly to 3.38 million. And now, in May, when gas prices at many gas stations exceed $6 a gallon – well, we have to wait for the May data to come out. I expect another increase in ridership, similar to March. Thus, the destruction of demand for gasoline by people returning to public transport is occurring, but only in small steps, and ridership remains 67% below the 10 million range before the pandemic:
I see gasoline prices rising despite this modest demand destruction.
There is a slight demand destruction due to short-term changes in driving behavior, long-term changes in the types of vehicles people buy and people returning to public transport in small steps . But it’s not a collapse in demand, just a modest decline that will continue for years.
And the industry can also understand that, and it will continue to reduce its investments and its capacity to deal with this slowdown in demand. And nothing changes. If it was a sudden collapse in demand, it would be different. But that doesn’t happen at these prices.
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