I see gasoline prices rising more despite this modest short-term and long-term demand destruction.
by Wolf Richter to Wolf Street.
The price chaos going on at the pump is now doing some demand destruction. We’ve seen signs of that. We are at the beginning of the driving season, but the demand for gasoline is not following the classic pattern of seasonal increase.
The Department of Energy’s Energy Information Administration reports that gasoline consumption, at 8.85 million barrels per day (the four-week moving average) is down 2.7% from the same period in 2021, and by 6.1% from the same period in 2019. Consumption in 2022 ( Red line) does not follow the summer driving increase: it is up only 1.3% from early March. But in May 2019 (in grey), consumption is up 5.2% from March, and in May 2021 (in black), consumption is 11.9% higher than in March.
Note that the EIA measures gasoline consumption in terms of barrels supplied to the market by refineries, mixers, etc., not by retail sales at gas stations.
In October, November and December last year, gasoline consumption exceeded the levels in 2019. When the gasoline price shock began to spread among consumers, consumption fell, but it has not taken a big hit so far, and consumers seem to be getting used to the pain, and the demand for destruction has not worsened during the few weeks past:
What consumers face at the pump is the massive hike in gasoline prices, which included a slight dip in April to confuse everyone and spread some false hopes that the price hike is over. In May, price hikes returned to new highs. On Monday, the weekly EIA measure came to $4.59 a regular gallon:
Long-term demand destruction occurs, but it is a slow process.
Peak years for gasoline consumption were 2016, 2017, 2018, and 2019, all at about 9.3 million barrels per day, and slightly higher than 2007, with a -6.3% decrease in between. During the summer driving season, it peaked at 9.7 million barrels per day.
It may turn out that the years 2016-2019 were the peak gasoline consumption in the United States. The current price hike is turning vehicle buying patterns back into more economical vehicles, including smaller cars and hybrid powertrains, We are already seeing signs of that. These shifts in purchasing patterns have long-term consequences for gasoline consumption.
Old car makers are finally starting to roll out electric vehicles, and while large-scale production is still hampered by various shortages, particularly the semiconductor shortage that afflicts automakers on all of their models, there is a huge demand for EVs and long waiting lists. . 1.44 million electric vehicles are on the road in the US It accounts for only 0.5% of the 280 million vehicles in operationbut sales of electric cars are booming, sales of ICE cars are declining, and every percentage increase in the share of electric vehicles represents a clear decrease in gasoline consumption.
And the wave among office workers from working from home during the pandemic has turned into a kind of permanent tendency to work at least part-time from home, where commuting is no longer a daily thing, but may be something second or three times a week, which significantly reduces consumption Gasoline is for those families, especially those with long commutes, and enough of those families will take some visible demand off the table.
Destruction of demand in the short term.
Rising gasoline prices are causing some changes in what people do when they hit a pocketbook: they start driving less, they start making it easier to conserve gas when driving, and they start prioritizing the more economical car in their homes. They may cancel road trips and reduce driving while on vacation.
But these are short-term effects, things that people might do this year, or this month, but once they get used to higher gas prices, and maybe they get a raise that makes higher gas prices less toxic, some of those changes will relax.
Claiming destruction as people return to mass transit yet?
How high will gasoline prices go before people get back on the commuter trains? Passenger train systems across the United States have experienced a huge passenger loss during the pandemic, as people begin driving to work or staying home to work.
So, is the current price hike enough to get people back on trains? Let’s take a look at BART trains in the San Francisco Bay Area. Here, drivers face gasoline prices in the $6 range, tolls raised for bridges, and traffic congestion that was almost as bad as it was before the pandemic. This will be a great incentive to return to BART.
So let’s see. Yes, in March, when gasoline prices jumped to new highs, the number of BART passengers jumped 32% to 3.34 million trips, from 2.52 million in February. And in April, when gasoline prices fell a little, the number of passengers increased slightly to 3.38 million. And now in May, when gasoline prices at many gas stations are above $6 a gallon – well, we have to wait for the May data. I expect another jump in passengers, similar to March. Therefore, the demand for gasoline is being destroyed by people returning to mass transit, but only in small steps, and the 67% ridership remains below the 10 million range before the pandemic:
I see gasoline prices rising despite this modest destruction of demand.
There is some modest demand destruction from short-term changes in driving behaviour, from long-term changes in the types of vehicles people buy, and from people returning to mass transit in small steps. But it’s not a collapse in demand, just a modest decline that will last for years.
And the industry can tell, too, and they will continue to cut investment and be able to deal with this sluggish demand. And nothing changes. Had it been a sudden collapse in demand, it would have been different. But this does not happen at these prices.
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