US gasoline prices have eased considerably over the past year in inflation adjusted terms, allowing consumers to shift expenditures elsewhere. While we expect prices to rise from here on depleted PADD 1 inventories and an uptick in US demand, a rerun of the extremes from last year look unlikely. Consumer expenditures as a percent of the total consumption basket will not exceed 3% (down from levels near 4% last summer).
Following the outbreak of war in Ukraine in late-February 2022, US gasoline prices rapidly accelerated alongside rising oil prices. The reaction seemed justified at the time. Russia was at war and the uncertainty around oil supply availability was very much up in the air. In April 2022, Russian oil production was down 400 kbd y/y, albeit output quickly rebounded, averaging a gain of some +200 kbd over the course of the 2022 calendar year. While concerns around Russian oil production have faded, the impacts of the price spike felt in the initial months following the Ukrainian invasion were sizeable. In March 2022, US gasoline prices in inflation adjusted terms surged, averaging $4.37/gal, marking an increase of nearly 28% from just two months earlier. While prices tend to appreciate in the months leading up to the summer driving season, the gains realized over this January to March period had never been higher back to 1976.
March was only the beginning of the upward trend for US gasoline. By June 2022, gasoline prices (still inflation adjusted) had peaked at a whopping $4.82/gal, holding at the highest levels since September 2012, when prices finished just above $5/gal. It was our view at the time that real prices could only maintain at current levels for a handful of months at most given heavy demand destruction that tends to set in as gasoline approaches the $5/gal level. In July, US gasoline consumption declined nearly 550 kbd y/y despite a weak post-Covid baseline. Over the entirety of the 2022 summer (May – Sep), demand held roughly 200 kbd under year-earlier levels. Elevated prices clearly had an impact on consumption habits.
Oil prices were certainly a motivating factor for the rise in gasoline prices through the summer of 2022 and Americans cut consumption to compensate. However, oil prices were not the only contributing factor. Gasoline supply availability, mainly in PADD 1, was extremely tight heading into the summer driving season. In April, stocks in the region were more than 10 Mb under normal, seasonal, pre-pandemic levels. This was a result of logistical constraints stemming from Jones Act restrictions and a cut in PADD 1 refinery capacity during Covid. This lent additional support to gasoline prices and the spread to WTI (against retail unleaded) in real terms blew out to $91/bbl in June 2022, the widest since May 2007 ($99/bbl).
The effects on the US consumption basket also faced impacts, albeit we were less concerned that high prices would cause a significant deceleration in spending elsewhere given healthy household balance sheets. Personal savings surged in Q2 2020 amid heavy government assistance and a very slow recovery in services spending (goods spending rapidly pushed above pre-pandemic trend). At the depths of the Covid pandemic, outlays on gasoline plummeted amid quarantine requirements and lockdown restrictions. In April 2020, the US consumer was spending just 1.33% of their respective expenditure basket on gasoline. By June 2022, the situation had reversed with outlays topping out at 4% of consumption, equivalent to $52 bn in real terms and holding at the highest level going back to 2014. However, things had been far worse in the past. In April 1980, some 7.9% of the consumption basket went to gasoline, more than double the levels from 2022. Even in the leadup to the great financial crisis, when oil prices surged, consumers were spending upwards of 4 – 5% of the consumption basket on gasoline alone.
Unsurprisingly, US transportation costs quickly trended higher in the wake of rising gasoline prices. The CPI index that tracks motor fuel prices when smoothed over a 6-month moving average basis finished August up 47% y/y, surpassing even the gains seen through the gyrations immediately preceding and the years following the financial crisis. This fed through to a persistently elevated headline rate of inflation, which remained above 8% in annualized terms for the better part of seven months, a dynamic not felt since the late 1970s and early 1980s.
Nonetheless, the situation around energy prices has eased considerably in recent months. In March, headline inflation came in at 5%, well off the highs from last summer, due in part to declining gasoline prices. In real terms, unleaded gasoline averaged $3.39/gal in March, down a whopping 22.3% y/y. The percent of the consumption basket dedicated to gasoline purchases predictably declined through H2 2022 before bottoming at 2.3% in January. Outlays have recently risen, back towards 2.6% of total expenditures, albeit this is well within the normal historical range.
However, gasoline prices are likely to rise from current levels. Depressed inventories in PADD 1 appear to be a problem yet again this year and US demand is set to tick up through the summer driving season (+100 kbd y/y). We have highlighted the likelihood that prices could find room to run higher into the summer. Despite this expectation, a rerun of last year looks unlikely given increased domestic production, lower oil prices and a reduction in exports. This will also limit the extent to which consumers are forced to significantly shift consumption towards gasoline outlays. Expenditures above 3% of basket look highly unlikely at this juncture. This effectively works as a sort of stimulus for spending elsewhere in the economy in y/y terms and could provide a bit of late-cycle boost to US consumption ex energy.
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