Gas Prices

ANDREW MORANhas been writing about business, economics, and finance for more than a decade. He is the author of “The War on Cash.” Andrew Moran

A Remedy for Higher Prices

Demand destruction contributes to the decline in oil prices

For the first time since early March, the national average price for a gallon of gasoline is roughly $4, according to data from GasBuddy and the American Automobile Association (AAA).

Since peaking at more than $5 per gallon in June, prices have tumbled by about 20 percent.

But while President Joe Biden has touted his administration’s policies as the cause for the steady decline, market analysts attribute demand destruction—high prices spurring reduced demand—as a major contributor to the downward trend.

“The drop in the national retail price can be attributed to consumers reducing their usage of gasoline as the summer driving season started during the first week of July, when the price peaked around $5.00 per gallon,” economist Ed Yardeni wrote in a recent note. “During the August 5 week, the four-week average of usage was down 5.3% from a year ago. The four-week average price fell back down to $4.37 during the August 8 week.”

Energy Information Administration (EIA) supply data show that gasoline stocks have risen five of the past eight weeks, totaling nearly 3 million barrels during the typically busy driving season. Gas demand has also dropped, from 9.25 million barrels per day (bpd) to 8.54 million bpd, which is down by 1.24 million bpd from the same time a year ago.

Inflationary pressures are ostensibly weighing on consumers, forcing motorists to change their driving habits to cope with elevated gas prices. A recent AAA survey found that 64 percent of U.S. adults have altered their lifestyles since March, including driving less, combining errands, and reducing shopping or dining out. Others have also postponed their vacations this year and saved less money.

“Traders are going to see if the demand drop corrects itself or is it a sign that U.S. drivers are bucking under the pressure of the most aggressive inflation we have seen since the 1980s,” market commentator Phil Flynn wrote in The Energy Report.

Inflationary pressures are ostensibly weighing on consumers, forcing motorists to change their driving habits to cope with elevated gas prices.

China, Recession Hurt Oil

The decline in crude oil prices has played a significant part in diminishing the pain at the pump, too.

West Texas Intermediate (WTI) and Brent have erased their post-invasion gains. WTI futures have slumped by nearly 14 percent over the past three months to $90 per barrel on the New York Mercantile Exchange. Brent, the international benchmark for oil prices, shed 10 percent over the same period to $95 per barrel on London’s ICE Futures exchange.

“Oil is the primary ingredient in gasoline, so less expensive oil is helpful in taming pump prices,” Andrew Gross, AAA spokesperson, said in a statement. “Couple that with fewer drivers fueling up, and you have a recipe for gas prices to keep easing.”

Market analysts have alluded to China and its COVID-Zero strategy that has resulted in routine lockdowns every time there’s a COVID-19 outbreak. The world’s largest energy consumer saw its imports of crude and refined petroleum products plummet by 9.5 percent and 35.3 percent, respectively, in July.

Experts forecast that imports will pick up steam in the second half of 2022 as Beijing accelerates its infrastructure-spending plans to stimulate the world’s second-largest economy.

But growing recession fears in the energy market have weighed on demand expectations, turning investors more bearish this summer, according to Warren Patterson, head of commodities at ING.

“The higher prices seen for much of this year would have also led to some demand destruction,” Patterson wrote in a research note. “The more recent weakness in prices may limit the demand destruction that some may feel is needed in order to keep the market balanced.”

Despite the United States and other countries injecting emergency reserves of crude into the international market to help curb prices, global supplies remain considerably tight.

“When the market wakes up to the reality that these barrels of oil aren’t going to be dumped onto the market in the winter, we should see solid buying come back in,” Flynn said.

Overall, the U.S. energy situation is fragile, as inventories are down by 10.7 percent compared with a year ago. If recession fears subside and consumer demand for gasoline and diesel picks up in the coming weeks, conditions may reverse the steady stream of losses in oil and gas in the fourth quarter of 2022, energy analysts say.