Low prices encouraging US gasoline consumption
Drivers, builders and refiners are gorging on cheap oil and making the most of the market
Cheaper oil is lifting US gasoline consumption and, in tandem with higher refinery use and encouraging signs of sustained growth in the economy, is dragging American crude demand with it.
The US Energy Information Administration’s (EIA) short-term energy outlook in June forecast a 3.4% year-on-year rise in US liquid fuel supply for the month to an average 19.47m barrels a day (b/d). Gains were recorded across all sectors, including gasoline, jet fuel and distillates.
The EIA also forecast a general growth in demand over the next year, allowing for seasonal fluctuations, with the supply figure for June 2016 projected to edge up to 19.67m b/d.
That remains well short of the near 21mn b/d reached in 2004. But the latest forecast would confirm a trend of modest demand growth over the past three years, which some now see as the foundations of an extended recovery. The International Energy Agency noted recently that demand growth had been “particularly robust in the US, where consumers are more directly exposed to the plunge in dollar-denominated oil prices”. In short, low fuel taxes mean American drivers are enjoying the price plunge.
The economy is helping too. Unemployment data suggest the US jobs market is slowly expanding, while various indices show business activity on the up. The Conference Board’s leading economic index, which rose 0.7% in May, extended gains seen in the previous two months.
“The type of year-on-year demand growth we are seeing in the US is pretty remarkable. It’s something we haven’t seen for probably four or five years,” says John Saucer, an oil and gas analyst at Houston-based Mobius Risk Group. “It’s partly a case of the marketplace responding to much lower prices. After multiple years of $100 crude, this is a shot in the arm.”
In mid-June, the US WTI benchmark crude price traded at around $60/b, off its sub-$50 lows of early 2015, but still sharply down on the $105 level of mid-2014.
Recent unexpectedly large draws on US crude stockpiles add weight to the view that US oil demand is likely to be robust in coming months. Despite falls in inventory during June, however, total crude stocks are still more than 12% higher than the same time last year and well above long-term historical averages.
Pinpointing the source of the demand recovery isn’t straightforward. A gasoline price of around $2.90/gallon in June – almost a buck cheaper than a year earlier – is likely to be a factor. In multi-vehicle households, small economical cars are likely to do more miles when gasoline costs $4/g, while the gas-guzzling SUV, gathering dust on the drive, might get a spin at today’s relatively low prices, says Jim Williams of US consultancy WTRG Economics.
A recent survey from the National Association of Convenience Stores, whose membership includes fuel retailers, found that 27% of Americans would take more time on vacation trips this summer, and 86% of them would drive. Affordability was the main reason offered up by 61% of drivers. Last year, 54% of them said that.
Others argue that an uptick in construction activity is a bigger force for lifting gasoline demand than car use. The construction sector sucks up more gasoline than other industries and its workers tend to live a greater distance from home.
Going further for less
The industry shouldn’t get too excited just yet. Overall gasoline and diesel consumption growth is still likely to be curbed over the longer term by advances in vehicle fuel efficiency, thanks to tighter emissions regulations and technological advances.
A study published in March by Michael Sivak of the University of Michigan’s Transportation Research Institute showed that, in absolute terms, fuel consumption by light-duty vehicles in the US fell by 11% between 2004 – the year of maximum consumption – and 2013. That fall came despite an 8% growth in the country’s population over the same period.
It may be that the largest gains in fuel efficiency have already been made, though the US state’s Environmental Protection Agency (EPA) continues to push for tighter emissions controls, which would put pressure on engine makers to improve fuel consumption still further.
The EPA’s latest proposals, announced in late June, would entail a 24% cut in fuel consumption by 2027, compared to levels forecast for 2018, as well as an 8% reduction in carbon emissions from new more aerodynamic truck trailers.
If implemented early next year, as planned, the measure would conserve 1.8bn barrels of oil and reduce fuel costs by $170bn during the 2018-27 period, the government estimates. That’s equivalent to almost 0.5m b/d of lost demand, although as the proposals will take several years to implement they won’t affect consumption in the immediate future.
Another EPA regulatory framework may even give scope for more demand than previously expected for oil-based transport fuels.
In June, the agency said it wanted to cut the quota of ethanol in the US transport fuel mix, proposing that refiners blend 13.4bn gallons of ethanol with gasoline in 2015 and 14bn in 2016, lower than the 15bn gallons targeted for both years in a 2007 law.
Fossil fuels advocates have maintained that increasing the proportion of ethanol in the fuel mix would push up gasoline costs, something the biofuels industry refutes. Mobius’ Saucer said lowering ethanol targets in this way “just provides an opportunity for petroleum to fill that gap”.
Another major source of demand for crude is the refining sector, which has been revitalised by improved demand for its products and the greater profits on offer by being able to buy crude oil cheap and sell refined products at a premium.
“There’s good product demand growth. You’ve got wide crack spreads for refined products, particularly gasoline, which accounts for a huge part of US demand and refinery yields,” says Saucer.
EIA data show utilisation of refining capacity for petroleum and other liquids rising year-on-year for all of the past 12 months.
In March 2015, 15.86m b/d of the available operable capacity of 17.87m b/d was utilised, or some 88.7%.