West Texas Intermediate Crude is back above $100 from a plunge to $76 at the beginning of October. Brent is $112. So why are gasoline prices lagging the rally in crude?

Reader Tim Wallace writes

Hello Mish

I am now paying $3.15 for gasoline here in North Carolina while the price of oil flirts now around $100 for the past several weeks. Historically I would have expected to see the price now moving up towards $3.50 per gallon.

So why is the price so “low” – a relative term – with the oil price escalating since summer?

The only reason I can assume is per the attached spreadsheets – the demand of gasoline is once more heading down, once again at a rate that brings it well below the crash of 2008/2009.

I have attached the database from the EIA with two charts I added at the front. The first chart shows the annual year on year changes in usage in thousands of barrels from 2005 to today. You can see the constant growth the first three years of the chart as all data points show growth above the zero line. We then have the plummet of ’08 on ’07 – the same time period oil was going speculatively through the roof.

You can see that ’09 was also below the zero line, showing that all growth from 2004 on was gone. We finally had growth last year, although marginal compared to the three positive years prior to the downturn. Now this year we are once again plummeting, in fact well below 2005 supply levels. This is possibly what is putting pressure on price as companies try to keep the volumes up to support their top lines. If this is so, domestic profits will take a hit this year.

The second graph shows the total annual usage with 2011 pro-rated to the year end based on 47 weeks of data.

Tim

click on charts for sharper image

Gasoline Usage

Gasoline Usage Growth

What About Cash-for-Clunkers and Better Fuel Mileages in General?

I asked Tim Wallace how cash-for-clunkers and better fuel mileages may have played into the decline. Here is his response.

There are over 250,000,000 vehicles registered in the USA. In the average year there used to be about 6% are “retired” – scrapped – out of the fleet. In the Cash for Clunkers year the scrap rate was 14,000,000 cars, coming close to 5.6% “retired”.

People are holding on to cars longer as is shown by the reducing number of car sales each year, and in fact for the first time in history the fleet may be shrinking as well.

Also note cash-for-clunkers happened in 2009. The entire resulting fleet was on the road in 2010.

What happens to the graph in 2010? UP.

As with all things in our economy, if the economy is growing consumption will go up.

I could not even accept a slight growth like in 2010 as a sign of the resulting fuel mileage savings of new cars in a growing economy being suppressed by higher mileage vehicles as such a high percentage of sold vehicles are the lower mileage large ones.

No, look at the historical years prior to see what one should expect, the “gains” in mileage this past year over cars/trucks manufactured and put into the fleet in those years are not that great. And there are far FEWER of these “higher mileage” vehicles being added to the fleet as well.

My hard and fast assumption is a drop in demand due to reduced driving for whatever reason.

Thanks Tim!

Gasoline Futures

West Texas Intermediate Crude

Brent Crude

Neither gasoline futures nor gasoline prices at the pump can be explained by the action in crude prices. Falling demand, which should also affect profit margins, appears to be at play.

Mike “Mish” Shedlock
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