Gasoline And The Global The Wealth Shift

by: Jason Tillberg

When it comes to having tools that make us more productive in life and allow us to consume the greatest amount of goods and services, I can't think of anything greater than having a car -- with the exception of living in New York City, with its century-old subway system. America is built around the need to have a car. We need our cars to get to work, to go to the store, to visit our friends and family and to just get away and drive to our favorite park.

The key word here is "productive." When we recognize how many things we can accomplish in one day because we have a car, we can better appreciate its use as a tool that tremendously helps raise our standards of living. It is also the tool that has made America the greatest economy in the world.

But our cars run on gasoline, and the cost of driving our cars has gotten more and more expensive. That has put the brakes on our physical economy and standards of living.

In 2011, gasoline averaged $3.53 a gallon, a record high yearly average. The average American household was estimated to have spent $4,155 on gasoline, which would be 8.4% of an average household income in 2011, the highest percentage since 1981.

Gasoline is currently at a record high price for this time of year averaging $3.87 as of the week ending March 19th. I'd like to examine what is causing these high prices in this article by looking at supply and demand. You might be surprised by what I have found. My conclusions are, unfortunately, not good for consumers of gasoline.

Click to enlarge

As you can see from the chart of regular gasoline above, the price hovered between $1.00 - $1.50 from 1990 until about 2003, then began to rise in 2004 up to over $4.00 a gallon by the middle of 2008.

The gasoline price tanked in late 2008 and bottomed out in early 2009. Since that early 2009 low, the price of regular gas has been rising for the most part. The rise of regular gas in these last few years has been on lower demand in these United States. Peak gasoline consumption?

See the chart showing finished motor gasoline delivered to gas stations across the U.S. and note the recent collapse:

Click to enlarge

America's total petroleum demand is also down from around 22 million barrels per day to around 18 million barrels per day.

Click to enlarge

These two charts above speak volumes. We didn't need peak oil in the world to see our usage fall. But we are as a nation, experiencing an economy that appears to be running on less and less energy every year. This is probably why according to a recent survey, 63% of wealthy Americans think we're still in a recession.

While demand decline is partly be due to more efficient cars on the road, we also measure miles driven so we can see demand for driving itself is down in the chart below:

Click to enlarge

The chart above shows the aggregate miles driven. If we account for the population growth in the U.S., we can see the demand picture is even more extreme.

Click to enlarge

Both Charts from Doug Short.

If we also look at car sales in the U.S., we can see sales of cars are also at historically low levels. The recent rise in sales is partly due to credit being more easily available, especially to subprime borrowers.
No, banks have learned nothing from the real estate bubble and are back to lending large amounts of money to subprime borrowers.

In Europe, although I don't have information on miles driven, there was recent data for February car sales that showed the worst amount of sales in the Eurozone in the last 12 years. Portugal and Greece both saw February car sales down close to 50% year over year, sales were down 20.2% in France and 18.9% in Italy. Overall, the Eurozone saw a total decline of 9.7% year over year car sales.

It's also worth noting that gas prices have just hit $10 a gallon in Paris.

Clearly, demand in the West, the U.S. and Europe, is down. Why? Because it's going up in the East, as that is where the wealth of the world has been moving. The world's economies are rebalancing and shifting with less and less weight coming from the U.S. and Europe and more weight moving to Asia, South America and the Middle East.

The U.S. could not continue being 4% of the world's population and consuming 25% of the world's oil production forever. While "economy" can best be defined as the wealth and resources of a country or region, especially in terms of consumption and production of goods and services, "wealth" is defined as all good and resources having value in terms of exchange or use.

One aspect of the wealth of an economy is its automobile industry. Both in terms of production of cars and its consumption or use of cars. So long as there are good roads and affordable fuel to run the car, there is no doubt that a nation with a high percentage of its population having a car will have a vibrant and strong economy,. because it would likely be very productive.

In 1992, China built 1.0 million cars. In 1999, they only built 1.2 million cars. China basically was sleeping in the 1990s. In 2001, they entered the World Trade Organization and from then on, they have been exploding in growth. China build 9.35 million cars in 2008, and in 2009, they built 13.79 million automobiles, making them the worlds largest maker of automobiles. They produced 18.5 million in 2011. In 2005, the U.S. built 11.9 million automobiles, the most in the world. In 2009, we built only 5.7 million automobiles. In 2011 however, we built 8.6 million.

China is making more cars thus has more wealth because they can use those cars to either exchange to other countries or use themselves to make their own population more productive. They can hit a McDonald's drive-thru and have bite to eat in 10 minutes versus walking to the vegetable market and spending 2 hours chopping greens and onions and making soup. (The standard of living part is debatable in this example, however.)

A new car in the US is more than likely a car that replaces another car. A new car in China is more than likely a new gas tank. So while it is true we are drilling more oil out of the ground, we are exporting a lot more oil products, more than offsetting our own domestic increase in production.

Below is a historical chart of U.S. field production of crude oil. Although it peaked in the early 1970s, its begun to pick up again in recent years:

Click to enlarge

Here is a chart of our exports of petroleum products:

Click to enlarge

In 2009, China consumed 8.2 million barrels of oil per day. They are forecast to consume 15 million barrels of oil per day by 2015.

What is helping China pay for the demand for oil is a stronger currency. This is another major factor in this rebalance of the transfer of wealth that has been taking place for the past 10 years or so. China's currency, the RMB has been getting stronger against the U.S. dollar since 2005, when $1 got 8.13 Chinese RMB. Today, $1 gets you 6.32 RMB.

In other words, Chinese purchasing power in their wages earned is going up and U.S. purchasing power in wages are going down. Hence why aggregate demand for oil is going up in China and down in the U.S.

Click to enlarge

The currency is expected to get even stronger versus the U.S. dollar, which should not come as a surprise.

So while oil and gas goes up in dollars, it's not going us as much in Chinese RMB, making the pain felt less to the Chinese. There is still pain at the pump everywhere in the world.The consumption picture in the U.S. tells us that. Americans are sacrificing their way of life. Their ability to freely choose to go and visit family and friends, to freely choose to live in a house that might be 20 miles from their place of work, or freely choose to accept a job that might be 30 miles from home.

Given that the likelihood of lower gas prices is poor, it's difficult to be overly optimistic about the growth in the U.S. economy. Bernanke can't print his way out of this one, and Obama can't deficit spend his way out of it either. Frankly, for the Fed to have bought so many U.S. Treasury securities over the last few years that have allowed the Federal Government to so aggressively deficit spend, it hasn't helped the value of the dollar either.

Driving less is probably our only option. We often hear talk about more efficient cars, but what should also be talked about is more efficient use of miles driven. Think harder about lifestyle choices. Live close to where you work. Consider using mass transit more (although this can be expensive as well). Carpool. Shop closer to where you live, and hit more stores in one trip. Consider having a "no driving day" or weekend once a month. I would imagine many Americans are already making these choices, given our demand picture.

The dominant theme here is twofold, the supply demand picture for oil is very tight, and the wealth of the world is rebalancing from the West to the East. Expect these themes to continue in the years ahead, and learn to adapt to our new reality.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.