The Relationship Between Gas Prices and Demand

Lower prices don’t increase driving, but less driving is certainly affecting current oil prices.

March 20, 2020

ALEXANDRIA, Va.—One of the big financial stories is how oil prices are cratering, and with 121,998 convenience stores selling fuel and being responsible for about 80% of the fuel sold in the United States, there certainly are implications for these latest developments.

There are analysts who have suggested gasoline prices could drop below $1 per gallon and even one who suggested that oil prices could go negative—meaning that those with oil would pay someone to take it. Compare that to the summer of 2008 when one analyst predicted that oil prices could top $500 per barrel.

What is one thing that both extreme predictions have in common? They made headlines. But let’s take a step back and look at what’s going on in the system and some of the reasons why oil prices are dropping—and they are not all caused by coronavirus (COVID-19).

Supply

In normal circumstances, the equation is simple: The world consumes about 100 million barrels per day (mbpd) of oil and the world produces 100 million barrels per day. It is largely balanced, and even small deviations from that balance could propel prices higher or lower. But that dynamic changed two weeks ago when Russia (which produced 11.5 mbpd in 2019) and Saudi Arabia (which produced 9.8 mbpd), the second- and third-largest oil producers, escalated a price war. Both sides began flooding the market with more crude oil, and the balance shifted, right about the time that China was experiencing a reduction in demand. This price war alone pushed down oil prices even before changes in demand occurred worldwide.

Demand

Looking at U.S. demand alone, the country consumes about 20 mbpd of oil, or one-fifth of global demand. (The U.S., with the shale revolution, also now produces nearly 20 mbpd of oil.)

The majority of oil consumption in the United States is for transportation. Other uses are for utilities, home heating oil, production of oil-based products, etc. Looking at U.S. consumption of oil for transportation alone (using statistics from the U.S. Energy Information Administration):

  • 45% is for gasoline
  • 20% is for diesel fuel
  • 9% is for jet fuel

Social distancing and other shutdowns have certainly decreased gasoline demand related to daily commutes, as well as air travel. While passenger airline travel has been significantly reduced, jet fuel is still used for air transport of products. But diesel fuel demand may pick up slightly with more direct-to-consumer deliveries.

In looking at transportation demand for fuel, there is no question it has decreased in the United States—and around the world—and this has widened the supply/demand imbalance that is affecting the markets.

Prices

So what are the markets saying? On March 18, oil prices plummeted to 18-year lows and were sitting at $20 per barrel before rebounding in trading on Thursday. Overall, the oil markets are experiencing the same market volatility as the other markets, with huge swings but mainly downward. Trading markets generally perform poorly in periods of uncertainty, and these markets are reacting to news as much as actual conditions. Even radically redrawn analysis from a few days ago is outdated. The U.S. Department of Energy’s March 11 Short-Term Energy Outlook, a monthly analysis of trends and predicted supply and demand, was markedly different from the February update. And it’s still out of date even with the latest news.

So what does all this mean for retail?

First off, let’s look at the headlines of gas prices possibly falling below $1 a gallon. No one knows what the next market cycle will bring, but there are a lot of factors that would have to go into making sub-$1 a reality.

First, oil prices are the largest driver of the cost of a gallon of gas, but only one part. There are 42 gallons in a barrel of oil, so $20 for a barrel of oil would mean that the oil would cost the equivalent of 48 cents per gallon. But, remember that it’s still oil and needs to be distributed to refineries, refined and taxed. (The federal tax on gasoline is 18.4 cents per gallon, and all states have additional taxes. Taking all states into account, the average tax per gallon across the country is 54.5 cents per gallon. And, of course, it also has to be transported and sold at a retail location, and there are costs associated with that.

The typical presumption is that people drive more because of lower gas prices, but that has never really been true and it is certainly not true now. NACS Consumer Fuels surveys have repeatedly found that people say they drive more miles because of increased responsibilities, not because of lower gas prices. Meanwhile, people also say they drive fewer miles because of a gas price point that makes driving more of a hardship. Only 26% of drivers in a January 2020 survey said that they drove more because of lower gas prices in 2018, compared with 57% who cited jobs and errands that required more time on the road.

All that has changed with many Americans sharply curtailing their driving because of social distancing and offices and schools being closed.

For the past 20 years, NACS has maintained the Fuels Resource Center that also provides information about consumer behavior, industry data and other statistics. While supply and demand have radically changed since the resources were produced, this site also provides links to many respected analysists and reports related to fueling and transportation.

NACS will continue to build out resources as the situation evolves and will provide updates on how energy-related issues affect the convenience and fuels retailing industry. Please contact Jeff Lenard, NACS vice president of strategic industry initiatives, to share ideas on future research and any insight into what you are seeing at your stores.

The Fuels Institute, which NACS founded in 2013, is offering a free webinar on Thursday, March 26, to share the latest insights on what the future of the transportation-energy sector holds for your business. Seats are limited, so register early.

This webinar has already taken place. Watch the webinar recording on the Fuels Institute website.

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