Are high gasoline prices leading to demand destruction?

Hurray, in early August, for the first time since March, the US average gasoline price fell below $4/gallon to $3.99 per gallon! Admittedly, it’s not much of a drop, but for weary drivers and business owners riding the wave of rising gasoline prices, the fall is some welcome relief. But how significant is this drop, and most importantly, is it here to stay?

Gas prices have dropped, but not by much
If you’ve been paying attention to gas prices and the analysts who watch them, you know that this price drop was expected. Patrick De Haan, head of petroleum analysis at Gas Buddy, predicted back in July that the national average would fall to $3.99 by mid-August. But why are prices dropping?

It all comes down to oil prices. The price of crude fell below $90 a barrel in the first week of August, the first time since the war in Ukraine began. Also, gasoline consumption has dropped 10% this summer from last year, according to the US Energy Information Association. These drops and decreased demand fuel fears of another recession which may lead to further demand drops for oil and gas. Analysts from Citi say that if the International benchmark for oil, Brent Crude, falls below $65 a barrel by the end of the year, a recession may be on the way: “In a recession scenario with rising unemployment, household and corporate bankruptcies, commodities would chase a falling cost curve as costs deflate and margins turn negative to drive supply curtailments.”

Despite Citi’s fears of recession triggered by falling oil prices, some experts still believe that long-term, higher oil and gas prices are here to stay. Bart Melek, head of the commodity strategy at TD Securities, says, “Recessions don’t have a great track record of killing demand. Product inventories are at critically low levels, which also suggests restocking will keep crude oil demand strong.” So who is right? Only time will tell.

The gas price rollercoaster will continue
Analysts love to predict which way the market will go. But the past few years, it’s been a rollercoaster of ups and downs that no one could have predicted. Patrick De Haan shares “We’ve never seen anything like 2022 at the pump, highlighted by once-in-a-lifetime events including the COVID-19 pandemic, which caused myriad imbalances, exacerbated by Russia’s war on Ukraine. While the recent drop in gas prices has been most welcomed, the issues that led to skyrocketing prices are completely put to bed and still could lead prices to eventually climb back up, should something unexpected develop.”

As any business owner can tell you, it’s best to be prepared. As De Haan shared, the oil and gas market is still highly volatile. Oil companies are reluctant to invest in oil refineries and pursue new drilling projects amid the volatility. Refining capacity has dropped due to gasoline consumption demand to levels we haven’t seen since 1999. That means that even if demand spiked, there isn’t enough infrastructure to meet the market, which would inevitably push prices back up again.

Is demand destruction starting?
Much media focus is now on the term ‘demand destruction.’ It’s an economic term that indicates when demand for a product reaches so high that consumers no longer pursue the product and look for alternatives. Many predict demand destruction is starting to hit the oil and gas industry as consumers change their habits to save money. Here are a few statistics that show that demand destruction may be starting:

  • Gasoline consumption has stagnated since 2007.
  • In Q2 this year, Americans bought 196,788 battery-electric vehicles, an increase of 66% from last year.
  • Sales of new vehicles plunged by 20.8% in the same period.
  • EV sales reached a record-breaking market share of 5.6% in Q2.

Summer gasoline consumption usually spikes in the 4th week of July, but this year it plunged 9.7% from the same period in 2019.

What these numbers show is that consumers are changing their fuel habits. They are investing in fuel-efficient or battery-powered vehicles, driving less, and reducing their overall consumption. This trend could only continue as prices climb. More people will get frustrated with high gas prices, and demand will drop. Hendrick Wolff, professor of environmental economics at the London School of Economics and Political Science, says, “People shift away to other goods, to substitutes or do fewer trips. Less mileage. There’s always a phenomenon that we observe at times of very high gas prices. People tend to buy smaller cars and at times of very low gas prices, people go back to buying the big pickup trucks and SUV.”

This trend could become cyclic for oil and fuel companies, as decreased demand leads companies to resist investing in fuel and refinery projects and higher prices as supply dwindles. However, for consumers, the shifts they make during times of high gas prices may be here to stay. As Wolff says, “let’s say in five years from now, if we all buy smaller cars now, even if the price of oil goes down again, we will need less oil because our engines demand less. And that is part of the destruction process.” Whether that’s happening now or not, the situation remains volatile for both consumers and oil producers.

How will California fuel prices be affected?
As a fuel and lubricant supplier here in California, we always do our best to stay on top of the price rollercoaster. Here in California, we’re used to high fuel prices, and our prices are still leading the nation. Gasoline in California remains $0.37 or more, higher than other state averages, and prices haven’t been so quick to drop as they have in other areas of the country. States like South Carolina, Georgia and Mississippi all saw 6-9% gas price decreases in July, but prices weren’t as quick to drop here.

We’re here to help you ride the wave of fuel prices.
No one knows what the future of oil and gas prices may hold. We can analyze, predict, and watch, but as we have all learned over the past few years, this price rollercoaster has a lot of ups and downs. Luckily for you, we’re here to help. Our team is constantly watching the market and doing our best to help meet our customers’ fuel needs. So call us if you need help assessing your fuel or lubricant needs. As your lubricants supplier, we’re here to help!