The price of gasoline is again in the news, prompting a revisit to the question of the demand for road gasoline and diesel, the implications for the business cycle, and trends in fuel efficiency.
Figure 1
Source: EIA, Table 3.7c Petroleum Consumption: Transportation and Electric Power Sectors, through 12/2021
Historically, US road fuel consumption rises during economic expansions and only falls during recessions. At present, road fuel consumption is still recovering from pandemic effects. Notwithstanding, US road gasoline and diesel consumption has never recovered its August 2007 peak (measured on a 12 month moving average basis).
By our calculations, WTI priced above $135 / barrel would be sufficient to push the US back into recession. Or more precisely, push the coastal states into recession. As the US is not a net importer of oil (or any other other energy commodity), the impact of rising oil prices is theoretically neutral on the economy. Some sectors will have to pay more for gasoline, while others profit from finding, producing, refining and selling more crude oil and road fuels. Not withstanding, we would expect to see road gasoline and diesel consumption to fall, quite similar to the 2011-2013 period, when fuel use declined without sending the US into recession, a unique event in the historical record to that time.
Figure 2
Source: EIA, Table 3.7c Petroleum Consumption: Transportation and Electric Power Sectors, through 2/2020; US DOT for VMT
Fuel efficiency is not much improved over the last thirty years. The first and second oil shocks of the 1970s and early 1980s led to a dramatic change in consumers’ choices of vehicles. After 1990, however, most of the low hanging fruit hang been plucked, and subsequent fuel efficiency improvements have proved modest.
From 1992 to to the onset of the pandemic, road fuel efficiency had improved by only 7%, equating to an observed improvement in fuel economy from 17.5 mpg in early 1992 to 19.1 mpg in February 2020, a not particularly compelling gain of 1.6 mpg in a bit less than three decades.
Figure 3
Source: EIA, Table 3.7c Petroleum Consumption: Transportation and Electric Power Sectors, through 2/2020; US DOT for VMT
If we consider only the period of the pandemic, that is, from February 2020 to December 2021, the US shows a dramatic increase in fuel efficiency, a gain of 4% or 1 mpg in little more than one year. This is likely to prove a statistical artefact, a distortion induced by changed commuting and travel behaviors during the pandemic.
Perhaps the fuel efficiency gains will stick. Historically anomalous efficiency improvements suggests this is not the case, but we may need to wait for 2023 or even 2024 data to see whether recent gains are consolidated or prove transient.