REUTERS

COLUMN - Low U.S. gasoline prices are supercharging fuel sales: Kemp

 

Landing | Wed Sep 9, 2015 9:17am EDT

 

(John Kemp is a Reuters market analyst. The views expressed are his own)
By John Kemp


(Reuters) - As the summer driving season ends, U.S. gasoline prices have fallen to the lowest
level for the time of year since 2004, wiping out the effect of more than a decade of rising fuel
bills.


The average retail price of gasoline across the United States was just $2.53 per gallon on
Monday, including federal, state and local taxes, according to the U.S. Energy Information
Administration.


Retail prices have fallen by $1 per gallon, approximately 30 percent, compared with the same
time last year and have not been this low at the end of the driving season since 2004.
Gasoline prices are seasonal, reflecting higher demand in summer than winter and the limited
capacity of the refining system.


Over the last decade, gasoline prices have generally fallen on average by 50 cents per gallon
between the close of the driving season and the end of the year.


If that pattern is repeated, average gasoline prices could finish the year around $2 per gallon,
which would again be the lowest in nominal terms since 2004.


On the West Coast, fuel remains relatively expensive, owing to problems with the region’s
refineries, which have left gasoline stocks unusually low.


But in the rest of the country, fuel is comparatively cheap and prices are sending a strong signal
to consumers that it is okay to use more of it.


Economic expansion and rising employment are also boosting driving but cheaper fuel is turbocharging
fuel consumption.


DEMAND RESPONDS
In response to lower gasoline prices, motorists are using their cars more and buying larger
vehicles which offer more power and more space but get fewer miles per gallon.


Statistics on gasoline consumption, traffic volumes and auto sales all tell a consistent story about
strongly rising demand.


Gasoline consumption averaged 9.5 million barrels per day (bpd) during August, according to
the EIA, the highest seasonal level since 2007.


As the summer drew to a close, consumption was up by around 400,000 bpd, about 5 percent,
compared with 2014.


The volume of traffic on U.S. roads is also rising fast, and the increase is apparent in states as
diverse as New Hampshire and Florida.


Florida’s traffic rose by almost 3 percent in the first six months of 2015 compared with the same
period in 2014, the fastest increase since 2005, according to the state department of
transportation.


New Hampshire’s traffic was up by around 2.5 percent between January and July compared with
the same months in 2014, the fastest increase in more than a decade.


Motorists are also buying larger, more fuel-hungry vehicles. Car sales were up by 2.7 percent in
August compared with the prior year but light truck sales surged 5.5 percent, according to Wards
Auto.


For the first eight months of the year, car sales actually edged down slightly while truck sales
soared by almost 10 percent, according to Wards.


INTERNATIONAL SALES
In general, traffic volumes and fuel sales are more closely related to macroeconomic variables
like income and employment rather than fuel prices (“Dynamic demand analyses for gasoline
and residential electricity” 1974).


But the drop in fuel prices over the last 12 months has been so large it is having a measurable
impact on both the type of vehicles motorists are choosing and the amount they drive.


As the driving season ends, traffic volumes and fuel consumption volumes will slow seasonally
through the end of the year.


But the structural increase in demand from larger vehicles and more usage will continue to boost
fuel consumption compared with prior year levels.


Moreover, it is not confined to the United States. Traffic volumes and fuel consumption are also
growing rapidly in Britain, according to the UK Department for Transport.


Most OECD countries tax fuel much more heavily than the United States so changes in the cost
of crude oil have a smaller percentage impact on the final cost of fuel.


Heavy fuel taxes make consumption even less responsive to changes in oil prices than in the
United States. But the drop in fuel prices over the last 12 months has been so large it is having a
measurable impact even in high-tax countries.


Traffic on Britain’s roads increased almost 3 percent in the second quarter compared with the
same period in 2014, the fastest increase since 2002 (excluding periods affected by unusually
bad weather).


Low fuel prices are stimulating the fastest growth in rich-country oil demand in a decade which
will gradually help force the oil market back into balance.


FUTURES AND OPTIONS TRADING INVOLVE SIGNIFICANT RISK OF LOSS AND
MAY NOT BE SUITABLE FOR EVERYONE. OPTIONS, CASH AND FUTURES
MARKETS ARE SEPARATE AND DISTINCT AND DO NOT NECESSARILY
RESPOND IN THE SAME WAY TO SIMILAR MARKETS STIMULUS. A MOVEMENT
IN THE CASH MARKET WOULD NOT NECESSARILY MOVE IN TANDEM WITH THE
RELATED FUTURES & OPTIONS CONTRACT BEING OFFERED. SEASONAL
DEMAND AND CURRENT NEWS IN COMMODITIES ARE ALREADY REFLECTED
IN THE PRICE OF THE UNDERLYING FUTURES.