U.S. Gasoline Consumption Growth to Slow in 2017

U.S. gasoline consumption has been growing at the fastest rate for more than a decade as lower fuel prices and an expanding economy have combined to produce a big increase in demand.

OPEC is relying on continued growth in U.S. gasoline consumption, as well as other fuels, coupled with faster growth in demand from emerging markets, to help rebalance the oil market in 2017.

Gasoline demand depends on continued GDP growth in the United States, where the expansion is becoming increasingly mature, and the transition to a new administration has injected a source of uncertainty.

But gasoline demand will also likely be influenced by the course of gasoline prices, which are now rising rather than falling.

In the last two months, U.S. retail gasoline prices have risen year-on-year for the first time since the oil slump began in mid-2014 (http://tmsnrt.rs/2hhZURB).

The impact of earlier sharp price falls between 2014 and early 2016 on gasoline consumption in the United States may start to fade in 2017.

In that case, OPEC may have to rely more heavily next year on growing demand for other fuels, such as distillate and jet fuel, and emerging markets.

DEMAND BOOST
Gasoline consumption is projected to have risen by around 130,000 barrels per day (bpd) in 2016, according to the latest estimates from the U.S. Energy Information Administration ("Short-Term Energy Outlook", December 2016).

Consumption growth has slowed to around half the blistering 260,000 bpd rate reported in 2015, but building on a higher baseline, with back to back gains pointing to the underlying strength of fuel demand.

Consumption has jumped by almost 400,000 bpd, or a compound annual rate of nearly 2.2 percent, during 2015/16, according to EIA estimates (http://tmsnrt.rs/2gjOf6Y).

Compound growth of 2.2 percent in 2015/16 may not seem like much but it would be the fastest two-year growth rate since 2001/02 and before that 1998/99.

All three periods of exceptionally strong gasoline consumption growth were marked by a combination of economic expansion and low fuel prices.

Employment gains as well as increased leisure driving and the choice of vehicles with larger engines that get fewer miles per gallon have all boosted fuel use, offsetting the underlying improvement in fuel-efficiency for all vehicle models.

EIA is currently forecasting gasoline consumption growth will slow to just 60,000 bpd in 2017, though that figure could be substantially revised, with changes to both growth and the baseline.

Gasoline demand forecasting is subject to an enormous amount of uncertainty, illustrated by the big revisions to the forecast for 2016 since the start of the year (http://tmsnrt.rs/2gk1CnF).

But the most recent high-frequency data from EIA on gasoline consumption show it continuing to increase more than 2 percent year on year in September (http://tmsnrt.rs/2hi0AGi).

Separate data on traffic volumes from the Federal Highway Administration show the number of miles driven has continued to increase steadily at more than 2 percent year on year (http://tmsnrt.rs/2gjQNlB).

Vehicle-miles driven have been rising at the fastest rate since the turn of the millennium, in contrast to the sluggish growth or decline reported between 2005 and 2014 (http://tmsnrt.rs/2gjOqiE).

PRICE RESPONSE
Gasoline consumption may be more responsive to price changes than previously thought according to the latest econometric research ("Anticipation, tax avoidance, and the price elasticity of gasoline demand", Coglianese et al, 2015).

"U.S. gasoline consumption has been rebounding at a rapid pace," economists Christiane Baumeister and Lutz Kilian wrote in a paper earlier this year ("Lower oil prices and the U.S. economy: is this time different?" 2016).

"This rebound started well before the sharp decline in oil and gasoline prices in the second half of 2014, but the latter price decline undoubtedly contributed to the sustained growth in gasoline consumption."

Growing U.S. gasoline consumption has played a small but important role in helping the global oil market rebalance following the price slump.

Without the accelerated growth in U.S. driving and fuel consumption, the oil price slump would have been much deeper.

By John Kemp