Oil Price Piece: What’s Really Happening With Gasoline Demand?

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President Biden recently boasted on Twitter that gasoline prices in the United States have been falling for 50 days straight, noting this was the fastest decline in a decade. The president added a sort of infographic to his tweet informing us that 50 percent of gas stations sold gasoline for $3.99 or less a gallon. What he forgot to mention was that demand for gasoline has been behaving very unnaturally for this time of year.

Standard Chartered this week released a commodity alert that said that this year, driving season in the U.S. never really materialized. The report noted substantial demand declines for both June and July, adding, however, that the recent price decline should result in a pick-up in demand this month.

There has been a lot of talk about the cure for higher oil prices being higher prices still. It appears this might have happened in the U.S. as prices for gasoline earlier this year hit the highest level in several decades. And the national average is still above $4 per gallon, according to AAA.

No wonder then, with inflation raging on, people are opting not to drive, which is affecting demand. According to StanChart data, in July, gasoline demand in the U.S. dropped by 7.6 percent on the year to 8.592 million barrels daily, which, the report noted, was the lowest demand level since 1997 except for the lockdown-heavy 2020.

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Bloomberg’s observation about gasoline demand trends made a splash on Twitter, prompting a lot of analysts to weigh in on the discussion of whether it is possible that this year’s driving season could have been worse for gasoline demand than the lockdown summer of 2020.

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Indeed, whether or not demand for gasoline was lower this July than in July 2020 is not as relevant as the answer to the question of why, despite such a stable and continued decline in prices, Americans are not driving more.

The most obvious answer would be, of course, inflation. Economists, government officials, and journalists are debating the definition of recession, whether or not the presence of a recession on the United States’ books is relevant to anything, and whether the current situation is not a masked form of economic growth.

In the meantime, the actual prices of actual goods and services are rising. As prices rise, consumption begins to dip.

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It is therefore questionable how much credit for the 50-day price decline in gasoline the Biden administration could reasonably claim. They did not exactly open more refineries or stimulate more oil drilling - and even if they had, it would have taken time to get that new production to the market.

It was largely market forces that led to the lower prices. And also to lower consumption that may or may not have been even lower than consumption during the lockdown summer of 2020. Now, with prices lower, demand will very likely start picking up, as suggested by GasBuddy’s real-life data. The more important question then would be how long it will be until prices start climbing up again amid extra-strong exports of both gasoline and diesel.

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