I see petrol prices rising further despite this modest short-term and long-term demand devastation.
By Wolf Richter for WOLF STREET.
The price chaos that is going on at the pump is now leading to a certain destruction of demand. We have seen signs of that. We are at the beginning of the driving season, but the demand for petrol does not follow the classic pattern with a seasonal increase.
The Ministry of Energy’s EIA reported that petrol consumption, at 8.85 million barrels per day (four-week moving average), decreased by 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 run: it is only up 1[ads1].3% from the beginning of March. But in May 2019 (gray) consumption was up 5.2% from March, and in May 2021 (black) consumption was up 11.9% from March.
Note that EIA measures the consumption of petrol in the form of barrels delivered to the market by refiners, blenders, etc., and not by retail sales at petrol stations.
In October, November and December last year, petrol consumption exceeded levels in 2019. It was when petrol price shock began to spread among consumers that consumption suffered a setback, but it has not had a big hit yet, and consumers seem to be getting used to the pain, and the demand devastation has not gotten worse in recent weeks:
What consumers are facing at the pump is a majestic increase in petrol prices, which included a small fall in April to confuse everyone and spread some false hopes that price increases were over. In May, price increases rose to new records. On Monday, the EIA’s weekly target reached $ 4.59 per gallon as usual:
Long-term destruction of demand is happening, but it is a slow process.
The peak years for petrol consumption were 2016, 2017, 2018 and 2019, all at around 9.3 million barrels per day, and only slightly higher than 2007, with a precipitation of -6.3% in between. During the summer driving season, the peaks reached 9.7 million barrels per day.
The years 2016-2019 may turn out to have been the highest fuel consumption in the United States. The current rise in prices is shifting vehicle buying patterns back to more economical vehicles, including smaller vehicles and hybrid powertrains, and we are already seeing signs of that. These changes in purchasing patterns have long-term consequences for fuel consumption.
Older car manufacturers are finally in the process of rolling out electric cars, and although large-scale production is still handicapped by the various shortcomings, especially the semiconductor shortage that affects car manufacturers on all their models, there is great demand for electric cars and long waiting lists. The 1.44 million electric cars on the road in the United States make up only 0.5% of the 280 million vehicles in operation, but electric car sales are booming, and sales of ICE vehicles are falling, and each percentage increase in the share of electric cars represents a visible drop in gasoline consumption.
And the wave of office workers working from home during the pandemic has become a kind of permanent trend to work at least part of the time away from home, with commuting no longer a daily thing, but can be a thing two or three times a week, which dramatically reduces fuel consumption for those households, especially households that have long commutes, and enough of the households that do this will take some visible demand off the table.
Short-term destruction of demand.
High gasoline prices, when they hit the wallet enough, trigger some changes in what people do: They start driving less, they start to find it easier to save gasoline when they drive, and they start prioritizing the most economical vehicle in the household. They can cancel car trips and minimize driving while on vacation.
But these are short-term effects, things that people can do this year or this month, but once they get used to the higher gas prices, and maybe get an increase that will make the high gas prices less toxic, some of these changes will relax.
Demand destruction when people return to mass transportation yet?
How much must petrol prices increase before people return to commuter trains? Commuter train systems across the United States have taken a massive loss in cyclists during the pandemic, when people started driving to work or stayed home to work.
So is the current price increase enough to get people back on the trains? Let’s look at the San Francisco Bay Area BART train. Here, drivers encounter gas prices in the area of 6 dollars, bridge tolls that have been jacked up, and traffic congestion that is almost as bad as before the pandemic. It would be a great incentive to come back to BART.
So let’s see. Yes, in March, when petrol prices rose to new records, the number of BART riders increased by 32% to 3.34 million trips, from 2.52 million in February. And in April, when petrol prices fell slightly, the number of drivers increased slightly to 3.38 million. And now in May, when gas prices at many gas stations are above $ 6 per gallon – well, we’ll have to wait until the May data comes out. I expect a new jump in the number of riders, like March. So gas demand is being destroyed by people returning to mass transit, but only in small steps, and the driving rate remains 67% below the 10 million range before the pandemic:
I see that petrol prices are going higher despite this modest demand destruction.
There are some modest demand deviations from short-term changes in driving behavior, from long-term changes in the type of vehicle that people buy, and from people returning to mass transportation in small steps. But there is not a collapse in demand, just a modest decline that will continue for years.
And the industry can also figure this out, and they will continue to cut investment and capacity to cope with this declining demand. And nothing changes. If there was a sudden collapse in demand, it would be different. But it does not happen at these prices.
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