The US summer driving season is a bust. But that's no bad thing.
With less than a month until Labor Day, which marks the end of the peak gasoline demand season, deliveries of the fuel have dropped below the level seen during the pandemic summer of 2020. On a four-week average basis, which smooths out a lot of the noise in the weekly figures, gasoline deliveries from primary storage facilities, which the Energy Information Administration measures as a proxy for demand, slipped below those seen in the same period two years ago.
The chart above shows that this wasn't a freak result of one week's data. Gasoline demand has been tracking close to the 2020 level since the start of July and has only been above 9 million barrels a day once this year.
Why the significant drop? Veteran oil analyst Paul Sankey, founder of Sankey Research LLC, says more efficient vehicles may be playing a role. That could well be part of the answer, but, like Sankey, I don't think it's the only factor at play.
Until the start of this summer, gasoline demand was tracking close to last year's level. In 2021, the great summer getaway kicked in as normal, boosting consumption by 500,000 barrels a day, or 5%, over June. This year it did the opposite, clinging on for a while before slumping at the start of July.
Vehicle efficiency will drive a relatively slow-moving change in consumption patterns, so it's unlikely to explain the sudden divergence in demand at the onset of the peak driving seasons between this year and last.
Maybe everybody's flying instead of driving? The numbers of people passing through Transportation Security Administration checkpoints is up compared with last year. But it's still down by more than 11% from pre-Covid levels. So that doesn't seem like the answer either.
High gas prices are an obvious trigger for a decline in driving. As Sankey noted, a large proportion of US gasoline demand is discretionary and "the speed of the change does look like there's marginal behavior change."
And now those prices are falling. The White House has been making all it can out of the recent pull-back in pump prices for road fuels. Speaking to Bloomberg TV after this past week's paltry increase in OPEC+ output targets for September, President Joe Biden's senior adviser on energy security, Amos Hochstein, pointed out several times that people in many states are paying less than $4 a gallon to fill their cars.
Gas prices at the pump are down by nearly 20% from their mid-June peak, but before we all cheer too loudly, they're still close to a dollar a gallon up on where they were a year ago. On a national average basis, they're still above $4 a gallon, a threshold last breached in 2008.
So the market is working. My colleague Javier Blas and I have argued that governments have been pursuing the wrong policies in trying to lower the price of fuels by cutting taxes in a time of supply shortage. All that does is stimulate demand and prolong the problem. The UK's 5 pence per liter cut in fuel duty in March had only a very short-term impact on pump prices before underlying market pressures sent them soaring again.
The data suggest that soaring pump prices in the US have cured themselves by choking back demand, just as was needed. Maybe governments elsewhere should take note. This is the demand destruction we have to maintain in order to meet available supply in the coming months.
The OPEC+ producer group signaled very clearly that it has few, if any, more barrels to offer and we can't keep taking crude out of the Strategic Petroleum Reserve forever. If demand doesn't stay down, oil prices are going to go back up.
Julian Lee is an oil strategist for Bloomberg First Word. Previously he worked as a senior analyst at the Centre for Global Energy Studies. @JLeeEnergy
Disclaimer: This article first appeared on Project Syndicate, and is published by special syndication arrangement.