Lately many have been debating the issue of whether demand destruction for gasoline is really occurring. This author believes there are multiple factors pointing toward the likelihood of demand destruction, and I intend to provide a brief illustration of key factors pointing to the Demand Destruction outcome: Consumer reaction to high gas prices; dollar per mile versus dollar per gallon concerns and demographic factors.
Consumer Reaction to High Gas Prices
Recent EIA oil inventory reports have indicated a gradual decline in the amount of gasoline delivered to market. The EIA Weekly Oil Inventory Report for the week ending April 29th indicated that gasoline consumption had fallen 1.9% compared to the same period last year. Given that the economy has returned to growth within the past year, one would expect gasoline consumption to have increased rather than decreased. Therefore a consumption drawback of 1.9% may be considered comparable to the 4% decline in gasoline consumption observed during the Price Spike in the Summer of 2008, when the economy was slowing.
Recent news reports of significant increases in YOY profits for oil and gasoline refiners and retailers in spite of a decline in production volumes have done the industry no favors in terms of public perceptions. Sales of small cars have increased. Every time the price of gasoline approaches the $4 mark consumers start switching over to smaller vehicles.
Dollars Per Mile versus Dollars Per Gallon
The issue that really affects consumers is not how much they pay per gallon of gas but how many miles they are able to drive for each dollar they spend on fuel. There's no denying that the recent increase in gas prices has had a greater effect on owners of SUVs and pickup trucks that get less than 20 mpg than it has had on owners of smaller cars that get better than 30 mpg. According to Department of Transportation figures, the average US fleet fuel efficiency of passenger vehicles for 2008 (the last year for which fleet figures are available) was 22.6 mpg. This is quite a bit lower than the 2010 figures for new vehicle fuel efficiency ratings of 33.7 mpg for passenger cars and 25.1 mpg for light trucks. The reason this comparison is important is that if consumers react to high gas prices by driving fewer miles on an individual basis - which leads to relative stasis in the total number of miles driven per year -then a 1% decline in national consumption only requires an increase in fleet mileage of roughly 0.015x, where x is the fleet mpg rating from the previous year. Given the significantly greater mpg ratings for new vehicles, such an increase in national fleet fuel consumption is easily attainable, it's a change that doesn't require everyone go out and buy hybrid cars, and it's a change that automakers seem ready to make. Also, higher gas prices lead to reduced demand for used SUVs and pickup trucks, which means those vehicles see greater depreciation. Vehicle depreciation figures and Blue Book values can impact consumers' purchase decisions and are likely to lead to reduced overall demand for large vehicles in the future, which creates a likelihood that fleet mileage figures will increase more rapidly.
As more of the Baby-Boomers decide to retire the total number of Americans who are driving to work everyday is likely to decline. If fuel prices remain high then the number of Baby Boomers who choose to pursue interests that involve using a great deal of fuel -like recreational boating or RV touring- is likely to decrease. Fewer commuters, fewer people gasing up at the boat dock and fewer people deciding to drive America in a giant 40' mobile home all point to less annual growth in the total number of miles driven (on land or water) and reduced fuel demand given increasing rates of efficiency.
Consumer responses to high gas prices, the dollars per gallon versus dollars per mile problem, and demographic factors all point towards demand destruction. Some of these factors are inevitable, and oil refiners and gasoline retailers can -as they've done recently- end up magnifying their own troubles. Others are unavoidable by-products of an aging population. While others are the result of business decisions made in response to consumer demand. Given this combination of factors, the existence of demand destruction seems inevitable.
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