More Gas in the Tank

There’s been plenty of talk over the last month rising gas prices would soon prove the straw that broke the economy’s back. No doubt the fact this is an election year’s fueled some of that—after all, the Republicans have plenty of incentive to blame the opposition (until the roles are reversed and they no doubt propose their president has nothing to do with gas prices). But let’s be clear: The suggestion politicians have such power they can magically wave their hands and move supply and demand, thereby manipulating market prices, is entirely a fallacy—and gives politicians far too much credit.

Yes, gas prices have been higher lately, and some fear Middle East troubles may cause global supply shortages sending prices yet higher. But drilling down on the numbers (no pun intended), all is not so dreary on the supply front. US crude oil inventories recently saw their largest weekly gain since summer 2008, up 9 million barrels—well above expectations, which were for only a 2.5 million barrel increase. US oil inventories are now 6.7 million barrels higher than they were in 2011 and 18.2 million barrels above the five-year seasonal average. Crude inventories rose as a surge in domestic production—which is now at its highest level since 1998—and rising crude imports more than offset higher refinery throughput. Total refined product inventories also rose as higher refinery production more than offset a rebound in gasoline demand.

While international oil markets may remain tight (OECD ex-US oil inventories are at sub-2008 levels and OPEC spare capacity seems a bit tight), the US seems pretty well-supplied for now—the result of two primary factors, in our view. First, the boom in domestic oil production, which is up nearly one million barrels per day (20%) in the last five years. Second, decreased demand—which is down two million barrels per day (10%) versus the five-year seasonal average. It’s hard to blame that on a slow economy—the current expansion isn’t breaking records, but US (and global) GDP is at an all-time high. One contributing factor is likely increased energy efficiency, meaning the US can produce more with much less energy.

What about the belief higher gas prices will cause consumers to curtail spending elsewhere? Well, consider some recent sales data from the last week—specifically US auto sales and retail sales. The March seasonally adjusted annual rate of total US light vehicle sales was up 10% year over year to 14.4 million. According to car manufacturers, much of the demand is currently for small, fuel-efficient models—in fact, car sales outpaced truck sales in March. Meanwhile, March retail sales continued stable growth and beat expectations, up 3.9% month over month.

So though consumers may be saying (or thinking) one thing and doing another, that’s not too surprising. We often see things like sentiment surveys and actual retail sales seemingly at odds—making sentiment and confidence surveys near useless in forming forward-looking expectations for the market’s or economy’s possible direction.

What does all of this tell you? Well, you can strip out several objective facts: gas prices have ticked incrementally higher lately; US crude inventories are well above their five-year seasonal average; US auto sales have continued surging the past couple months and retail sales have continued their recent stable growth. Putting that together, you can conclude few folks celebrate higher gas prices, but there isn’t a reliable, direct relationship between gas prices and consumer behavior—or the broader economy.