For quite a while we, and others who track the crude oil and refined product markets, have wrestled with the sudden collapse in gasoline demand as highlighted by the area of the chart in Exhibit 9 inside the oval.
The typical response has been that high gasoline pump prices are the culprit. Others have suggested it’s due to the economic recovery remaining fragile and average hourly wages having barely increased as unemployment continues at historically high levels, all putting a squeeze on family incomes and spending. We have been exploring other factors that could be eroding gasoline demand such as demographic shifts among the U.S. population and the impact of the Internet on shopping and working patterns.
Now, however, it seems that maybe the Energy Information Administration (EIA), the publisher of the weekly gasoline demand report, is acknowledging that it has failed to capture the sudden and dramatic increase in gasoline export volumes.
In the Weekly Petroleum release for the week ending March 16, 2012, the EIA reported that the four-week average demand for gasoline was 8.4 million barrels per day, a decline of 7.8% from the prior year comparable period.
A nearly 8% drop in gasoline consumption following years of demand growth suggests there is a problem in the petroleum market. For quite a while trying to understand what lies behind this collapse has been a head-scratcher.
Yes, there is in an uproar over the rising price of gasoline at the pump, and politicians have been attacking “speculators” for causing prices to rise while demanding reformation of crude oil markets to stop them from profiting at the expense of the American driving public (we wrote about this last Musings).
As one energy writer emailed us following the publication of that article, in his view the opening up of the commodity pits to financial players has led to this rampant speculation. He scoffed at the estimate made by the St. Louis Federal Reserve economists that speculators only accounted for 15% of the price move during 2004-2008. He thought it was more like 150%, or even 1,000%!
Another friend suggested that if some of the accounting rules regarding mark-to-market accounting for hedging activity employing futures and options were changed, then commodity markets might gain from increased liquidity due to more and larger players deciding to participate, which would reduce the impact financial players are having on price.
A problem with this obsession about speculators is that the assumption is made that they make money all the time, no matter what’s happening in the market. We are sure many oil speculators lost money during the summer of 2008 when crude oil futures prices failed to crack the $150 per barrel barrier.
For a few days in early July 2008, crude oil futures traded in the $140-145 per barrel price range at the tail end of an extended price move. As the traders tried, and failed, to drive the contract price beyond the $150 mark, motivated by comments by a high-profile investment analyst that oil was headed to $200 per barrel, a collapse was inevitable.
The emerging financial crisis led to the credit crisis and then to the great economic recession and ultimately to the end of the crude oil bull market. Many speculators bet that the price barrier would be broken, but they lost out when it failed to happen. We are sure some of them switched to the other side of the trade as oil prices plummeted, but by then they were working to make up for their prior losses. To better understand speculators, we suggest reading the classic 1923 book, Reminiscences of a Stock Operator by Edwin Lefevre. The novel is a thinly disguised biography of legendary day-trader and stock manipulator Jesse Livermore who made and lost multiple fortunes on Wall Street in the early years of the last century.
If the EIA has missed a fundamental change in the domestic petroleum market, they may be continuing to overestimate the magnitude of the drop in gasoline demand. The concern is that the EIA is underestimating the amount of gasoline being exported. The Weekly Petroleum report requires the EIA to make estimates of certain data reported, which they then true-up at a point in the future when more reliable data is available. According to a recent article in The Wall Street Journal, last August the EIA estimated that gasoline exports were averaging 255,000 barrels per day, which later proved to actually be 536,000 barrels per day. The Journal estimates that the EIA may be underestimating gasoline demand due to its methodology by roughly 623,000 barrels per day, or the equivalent demand of countries such as Belgium, Turkey, South Africa or Argentina.
Once the EIA realized this mistake it adjusted its forecasting methodology. The EIA had been using a five-year average for projecting current gasoline exports but now has switched to using monthly data from the Census Bureau that appears to be more accurate. That data shows much higher exports leading to more realistic estimates of domestic demand.
Currently, the EIA is comparing estimates for domestic demand against inflated numbers from last year, which has the impact of magnifying the decline. Instead of 7-8% weekly year-on-year declines in gasoline demand, one private analyst estimates the decline is more like 4%. According to MasterCard’s Spending Survey, Americans have been reducing their gasoline purchases every week of the past year compared to a year ago at a 3% rate of decline.
While the Obama administration would like to take credit for the drop in gasoline consumption due to improved fuel economy mandates, the decline may truly reflect the impact of high prices. There are certainly other factors impacting gasoline demand such as a decline in the number of registered vehicles, less mileage being driven by those vehicles, and fewer teenage drivers and more older drivers with markedly different vehicle use patterns. In addition, there is still the unknown impact of the Internet on shopping and business driving patterns. All of these factors need to be explored in greater depth in order to grasp what is actually happening in the energy marketplace.
The weekly gasoline demand data series is certainly open for future adjustment, but that doesn’t help those of us who are trying to make heads or tails of the data in order to know how the energy market is performing now. This questionable data, which may be further altered by other market forces such as the impact from changes in the ethanol mandate, for example, reaffirms the view attributed to many sources that “there are three kinds of lies -- lies, damned lies and statistics.”
G. Allen Brooks is Managing Director of Houston-based investment banking firm Parks Paton Hoepfl & Brown. This article originally appeared in the March 27, 2012, issue of PPHB’s newsletter “Musings from the Oil Patch.”