The Fuse

U.S. Consumers Grapple With High Gasoline Prices Heading Into Summer Driving Season

by Matt Piotrowski | May 22, 2018

As U.S. motorists hit the road this Memorial Day Weekend—the unofficial beginning to the summer driving season—retail gasoline prices are the highest since 2014 and some 22 percent above a year ago. The national average is now just under $3 per gallon, with some parts of the country experiencing prices near $4/gal for higher grades. Despite this backdrop, AAA expects over 41 million Americans to travel by vehicle this weekend, up approximately five percent compared to last year, reaching the highest level since 2005.

American consumers plan to change their driving habits throughout the summer due to increased fuel costs.

Even though many will drive this holiday weekend, American consumers plan to change their driving habits throughout the summer due to increased fuel costs. The rise in gasoline prices is affecting household disposable income and offsetting a portion last year’s individual tax cuts. A SAFE analysis estimates that if pump prices rise by another 55 cents to $3.50/gal, the tax cuts—which give back $122 billion—would be fully negated by the added fuel costs. According to a survey by GasBuddy, released Monday, almost 40 percent of respondents said that high gasoline prices will affect their summer travel, double last year’s level. Less than 60 percent of respondents plan to take a road trip this summer, down 24 percent compared to 2017.

The reasons for higher pump prices are well established by now—strong economic growth, declining inventories, heightened geopolitical risks and supply losses in oil-production countries, and OPEC’s market manipulation. Oil market analysts agree that if OPEC and its non-OPEC partners such as Russia had not cut production for the past year and a half, global oil prices would not be at current levels of $80 per barrel.

There could be more hits to come for U.S. consumers. Venezuela’s production declines appear irreversible, and the country’s upheaval could lead to even lower output. There is looming uncertainty over Iran sanctions and the general instability in the Middle East. Most critically, OPEC and others may not exit their current pact even though oil prices have gained 80 percent in the past 11 months, inventories have fallen to normal levels, and global demand will surpass 100 million barrels per day (Mbd) this year. Without OPEC increasing supply, oil markets could see a deficit of 1 Mbd this year, according to Goldman Sachs analysts, possibly further increasing prices at the pump.

Today’s increasing pump prices are a further illustration that shale’s extraordinary growth is not a panacea and will not insulate U.S. consumers against global oil market volatility. “U.S. shale cannot solve the current oil supply problems,” said analysts at Goldman Sachs.

“U.S. shale cannot solve the current oil supply problems.”

With the low oil price environment over the past four years, a sense of complacency set in surrounding the issue of energy security, but America’s dependence on petroleum remains a national and economic security threat. Now that gasoline prices continue to increase, implementing solutions to reduce oil dependence and countering OPEC’s actions take on greater urgency. One response is to modernize and strengthen fuel economy standards during the current Mid-Term Evaluation. As SAFE pointed out in a recent report, using existing driver assist and autonomous vehicle (AV) technologies could potentially bring about some 18–25 percent system-wide fuel economy savings.

SAFE also advocates for a formation of an energy security commission to investigate how the actions of OPEC members and other petro-states undermine U.S. consumers and producers. Moreover, we urge policy makers to increase domestic production, adopt advanced transportation fuels including electricity and natural gas, and deploy AVs promptly and safely.

It is not a foregone conclusion that prices will keep rising, but circumstances point to a volatile global oil market in the coming months and serve as a wake-up call to take active measures to diversity the vehicle fleet and increase its efficiency.