The Fuse

The Mixed Consequences of Lower Gasoline Prices

by Matt Piotrowski | July 29, 2015

The massive drop in crude oil and gasoline prices has been a huge boon for the American consumer, but it has come at a cost—U.S. motorists have been driving more, furthering a rebound in demand and boosting the country’s reliance on imports of both crude and refined products while also mitigating recent gains in fuel efficiency.

The effects of lower oil prices on the U.S. economy is much more complicated than in the past. Before the U.S. crude oil production renaissance that took off earlier this decade, the impact of lower prices was straightforward with the economy receiving a stimulus from any downturn in price. But now with a large number of employees in the shale patch losing their jobs, certain parts of the country are seeing economic pain.

Consumers are reaping the benefits of the weaker oil market environment.

Nonetheless, it’s still the case that consumers are reaping the benefits of the weaker oil market environment. The graphic below from The Federal Reserve of St. Louis, using data from the Bureau of Economic Analysis, shows the massive savings that consumers have raked in during the past year. From the second quarter of 2014, when U.S. average retail gasoline was $3.75 gallon, through the first quarter of this year, personal expenditures on gasoline and other energy goods fell by more than $118 billion as prices plunged by $1.40 per gallon, or 37 percent. These cost savings were an obvious boost to the U.S. economy, which has undergone some bumps lately, averaging just 0.6 percent GDP growth in the first quarter, but rebounded to 2.3 percent for the second. Prices have bounced off the first-quarter lows, but the recent slide in crude prices to under $50 should translate into more declines in gasoline, a situation that will clearly benefit U.S. consumers.

fredgraph

Demand surges

This major shift in lower energy expenditures has occurred even with motorists driving more. U.S. gasoline demand has averaged 9.5 mbd in the past month or so, with the weekly numbers reaching a robust 9.7 mbd a couple of times, according to preliminary estimates from the Energy Information Administration (EIA). If the numbers are confirmed in the agency’s revised data, this month could mark the highest average since the all-time highs set in the summer of 2007. Last year, July averaged 9.22 mbd when prices were some 23 percent higher. Going back even further, this July—typically the peak month for demand—represents a roughly 0.7 mbd, or 8 percent, increase from the July 2012 average, when demand bottomed out.

gasoline consumptionpng

Source: EIA *Preliminary estimates

Higher demand, higher imports

While lower prices have brought about major cost savings for consumers, higher demand has increased the need for imports of both gasoline and crude. What’s more, the drastic change in pump prices could be pushing consumers back into their former less efficient habits that were moderated over the years by historically high prices and increased fuel efficiency.

While lower prices have brought about major cost savings for consumers, higher demand has increased the need for imports of both gasoline and crude. The drastic change in pump prices could also be pushing consumers back into their former less efficient habits.

The latest EIA data puts gasoline imports at about 0.74 mbd over the past month or so, up 21 percent year-on-year, even with domestic gasoline production soaring to just under 10 mbd, a sign of how much demand there is for gasoline—which makes up 63 percent of consumption in the U.S. petroleum sector—at home and abroad. Gasoline imports had been on a steady decline from 2006, but they have rebounded after bottoming out during the first quarter of last year.

At the same time, crude oil exports were up moderately year-on-year to about 7.5 mbd through the first part of July, likely a consequence of higher demand from both consumers and refiners, along with U.S. crude production stagnating. It is unclear if the rise will be part of a significant rebound or short-term blip, but it does call into question whether the longer-term downward trend of crude imports can continue with lower prices stimulating demand.

The big question is where demand goes from here. During the 1980s and 1990s, demand went on a relentless upward trajectory amid an extended period of low pump prices and drivers preferring large-sized sports utility vehicles that had poor fuel economy. From 1982 to the end of the 1990s, demand soared by some 1.892 mbd, or almost 30 percent.

During the 1980s and 1990s, demand went on a relentless upward trajectory amid an extended period of low pump prices and drivers preferring large-sized sports utility vehicles that had poor fuel economy.

Will the same trend occur now that prices have fallen? New fuel economy standards ought to keep demand from increasing at rates seen in the past. The average fuel economy for passenger cars bought in 2013 was 36 miles per gallon, likely to be higher this year, up from 33.9 mpg at the beginning of this decade. It is also a significant rise from 31.2 mpg in 2007, when U.S. gasoline demand peaked.

Also key in keeping demand in check is the hope that U.S. consumers do not have the short attention spans they did before. It is likely that consumers have fallen back into some of their old habits, but it was only a little over a year ago that oil prices were well above $100 per barrel and just seven years since they hit $147 and gasoline shot up past $4 per gallon. It looks as though the U.S. will near a record in car sales this year, but it remains to be seen how the driving habits of those car owners will shake out.