Crude Math: What Is Really Impacting Gasoline Demand

Putting together a mosaic of the data to understand what is going on with gasoline demand is not too difficult. That is why I typically smirk when I hear some pundit on television claiming that the shrinking demand is due to some temporary setback (like our economy). It makes me think of the quote attributed to William O'Neil:

"Since the market tends to go in the opposite direction of what the majority of people think, I would say 95 percent of all these people you hear on TV shows are giving you their personal opinion. And personal opinions are almost always worthless ... facts and markets are far more reliable."


So, here are the facts regarding gasoline demand:

  • MasterCard Advisors' SpendingPulse, for the week ending February 10, 2012, reported that gasoline demand fell 3.1 percent to 8.01 million barrels compared to the previous week. Using a four-week moving average, demand fell 5.3 percent year-over-year versus 2011. The 47th consecutive decline in the four-week average versus one year ago results should give even the casual observer a reason to suspect that something other than a temporary event is the catalyst behind the change in demand.
  • According to the Federal Highway Administration, annual vehicle miles driven in the U.S. peaked in November 2007. Using 12-month moving averages, annual miles driven in 2011 were 2.3 percent below peak levels of 2007. Furthermore, vehicle miles driven were consistently improving on a year-over-year basis prior to the peak in 2007. Since 2007, the FHA has reported declines in two of the four years.

So why is it happening now?

Both pump prices and unemployment have in the past played a hand in U.S. gasoline demand destruction. But employment trends are gradually improving and gasoline prices, while higher than we would like, are not quite to levels that typically spur behavioral shifts for the average consumer. The culprit is the aging U.S. population!

The U.S. Census Bureau confirms that in 2009 there were 75 million or 35 percent of U.S. drivers between the ages of 45 and 65 years. Cutting off the group at age 55, we see that 33 million are in the home stretch towards retirement. Since miles driven decrease dramatically post retirement, our aging population (that as a group will create the most retirees we will see in our lifetime) is having an impact on gasoline demand.

Using Californians as a proxy for driving patterns, we cross-referenced the number of drivers with the average miles driven by cohort groups to illustrate the rapid decline. Combining the two, we see that drivers over the age of 65 will put 43 percent fewer miles on a vehicle annually than individuals just 10 years younger. So, with one-fifth of all U.S. drivers reaching retirement age in 10 years, this secular trend surely has a greater weight on gasoline demand than other commonly cited factors.

We will illustrate the basic change underway using "crude" math to summarize our findings. A total of 33 million (drivers between ages 55 and 64 years) implies 3.3 million drivers will hit retirement age in the next 12 months. Conversely, over the past 15 years the U.S. driving rolls have averaged a gain of 2.3 million drivers per year. So, a net 1 million drivers, who on average travel 6,000 miles fewer during a year, points to an average trend of 6 billion fewer miles driven than the preceding year. We expect this amount of loss per year to continue through 2021.

So, don't be fooled when someone on your favorite news outlet starts talking about refinery closures. Refiners are obviously well aware of these trends and are accordingly adjusting their capacity to account for this secular shrinking demand over the next 10 years.


Generated by readers, the comments included herein do not reflect the views and opinions of Rigzone. All comments are subject to editorial review. Off-topic, inappropriate or insulting comments will be removed.

Sailee  |  March 05, 2012
Duchess,A folk tale for you. One day in late summer, a news aeeuoncnmnnt was made by a breathless feller on Channel 3. "Big oil reserves located in gulf." By a week later the gas prices at the pump had dropped 12 cents per gallon. Folks whod watched the price shoot up 33% over the last four months were convinced big oil had been screwing them, and theyd just screw em right back. They trotted down to the local gas-bank, and laid out their whole gas budget for the next year, buying on lay-away, so they could lock in the 12 cent discount before the gas company realized theyd slipped up. Now, in October, theyre smugly filling up their tanks at $3.05 per gallon from the stale old late summer gas from the big old tank up north, while their neighbors are tanking up down the street at Cals Cut-Rate for $2.45 a gallon for regler with a born-on date of yesterday. Incidentally, I think I know where that big old tank is up north. Its somewheres near Amarillo. I filled up with Chevron there in about February of 04 for $1.29 a gallon. I was so happy I bought a fist full of pitcher postcards and sent them to all my friends and neighbors tellin what Id found. I was awantin to rent a U-Haul and fill er up with jerry cans. Id hit the mother lode! Later I figgered out that the postcards and stamps had run my gas bill up to about a $2.75 a gallon unit cost, but it was worth it...some of my friends had never got a pitcher of the Cadillac Ranch delivered in the mail before. I love Texas.
Stanley  |  February 28, 2012
Wheelman..... What are you drinking? The point of the article is that gasoline demand is shrinking and will likely continue. If anything the author is inferring that gasoline prices should track demand. Heres an idea - Read the article before posting a comment!
Dwayne Thomas  |  February 28, 2012
your assessment of what is rely taking place seems to be spot on and the data and facts you have provided proves that. i will like to ask how does this impact smaller gas producing countries such as trinidad and tobago seeing the majority of our gas is exported and there is no subsidy on local prices as compare to diesel?
Jay  |  February 27, 2012
Wheelman, the rising cost of peanut butter was due to the drought, not mfg. Farmers planted cotton instead of peanuts and it bit them.
Edward Shehab  |  February 27, 2012
Interesting article which could lend a lot of credence. However, the oil market and the gas market have totally decoupled from markets that traded on technicals and demand. The oil market is clearly trading on rumor and innuendo. Does any one really think the $100 handle on oil is a result of demand.... Remember traders make money in volatile markets not on trends. Gas prices are on the rise in the face of softening demand. We can always count on a refinery fire or shut down at least a few times a year to create a support level for gas. Change the margin and delivering requirements in the commodity markets and perhaps we may see the market start to move back to a technical base.
Wheelman  |  February 25, 2012
So you are saying that if we use more gas {more miles driven} the lower the price? What the HELL are you drinking? More demand for gas will drive up prices, Look at peanut butter,Food prices have gone up and the cheap peanut butter was a stable as more people bought it as a way to keep their food cost down.The mfg. of peanut based products saw the tread and up went the price.
Stephen Watkins  |  February 24, 2012
Mr Grosso, Commodity speculation has had a major effect in the past several years on both the price of oil and, consequently, the price of gas. However, while the prices of these commodities have been greatly influenced, what the speculators are really selling is "Fear" and protection from "Fear". They are making a killing . . . . . . kind of "Fearful" of them, dont you think?
John T  |  February 24, 2012
Read the book "Age Wave" and know everything in life for the last 40 years that has transpired has been directly influenced by baby boomers. I think youre spot on. Its also emerging markets too. Oh yea, lets not forget greed.
john grosso  |  February 24, 2012
I havent seen any mention of the effect commodity speculation has had on the price of fuel. Is there any quantitative data available that measures this?
Ryan B  |  February 24, 2012
The US demand may be going down, but how about world demand? The US should build more refineries and pipelines to supply the US with oil and completely cut off foreign imports, and then export the rest to make profit. We could control our own gas prices and stop this volatility!
John Adams  |  February 23, 2012
I believe the "fear factor" based upon speculation of the Iranian Presidents threat to close the Strait of Hormutz is the reason for higher prices and not market demand at all. The futures market and speculators are the problem and not supply and demand any more. As you stated out in this article to present facts and did not, the folks on Wall Street would be hard pressed to provide facts for their position and pricing structures.
Phil Eyler  |  February 23, 2012
Thats insightful. Now lets see a demographics based projection graph over the next 20 years. While this is admittedly a single factor, it contributes to the matrix of factors effecting oil demand.
jbeigh  |  February 23, 2012
Arent refiners simply shifting their sales? Selling finished product to exporters, who are selling to India and China? US is again a net exporter... despite our relative meager holding of known/predicted global reserves... just sayin.... Also, are retirees/ elderly travelling/going less places? if not, they somehow are getting there, and in America, they are NOT doing in on foot or by bicycle....
Murat  |  February 23, 2012
Hybrid car sales constitute about 38% of total market. They are about 60% more efficient (require less gasoline) in traveling the same mileage as conventional cars. Thus in order to travel 3050 Bmiles, a hybrid car needs 1220 Bmiles worth of gasoline. Translating to 38% of total car market, results in 0.4636 less mileage worth of gasoline for the total market. Hence the difference: 3050 - 0.4636 = 2586.4 Bmiles corresponding to approximate points on the graph shown above "All US Roads Vehicle Distance Traveled". I believe it is somewhat combination of technological improvement as well as decline in mileage traveled due to population demographics.
Jill Floto  |  February 22, 2012
Crude doesnt define these actions, think of something worse. There are fewer drivers on the road, so we are going to charge more to make up the difference. Does that sound like fair business practices to you? It sounds like greed to me. The industry is so smug ,they know they have us over a barrel. It isnt the Middle East that are crooks, its our friendly refiners, thank you very much.
Curt Gibby  |  February 22, 2012
Interesting article. Never thought that retirees would outnumber new drivers. But you havent suggested the dynamic effect of the big players in the commodities markets trading up the price of oil. Is the bigger fool theory in vogue again? Everybody wants to believe its all about the unrest in the Middle East, and especially the destabilization of Irans relations with everyone else. Is it true what Ive heard that we are actually exporting refined product? Sounds like a nice business, although it gives the American consumer competition. But, is that export of refined products sustaining? Is the world economy able to absorb it? How long?
John Croom  |  February 22, 2012
Nice article, and certainly adds up. I also feel the economy is not picking up enough to account for increased demand. Ive been travelling throughout the U.S. the past 12 months. and I can attest that people are hurting everywhere from NY to Fla to Cali, from Wash State to Oklahoma. Really only North Dakota is booming with increased traffic and spending. Underemployment is a huge issue whereever Ive been, money is very tight, and fear is prevalent throughout. Hardly anyone Ive spoken with expects improvement anytime soon, and most expect it to get worse. While it is true that older folks who retire travel less on a daily basis, they very much want to travel more extensively to vacation, visit, sightsee, explore, and enjoy life. Fear and uncertainty are keeping many from travelling to their desires. The higher fuel prices certainly arent helping. Not seeing many RVs on the road at all compared to just a few years ago. The economy is still the biggest detriment to miles driven in my honest opinion.
Tibby  |  February 22, 2012
Prices will never decline mostly because no one wants to car pool. All students of high schools and colleges want to drive their own autos to and from school.
Richard Peterson  |  February 22, 2012
Good article but I think there are at least two other points that are having an impact. I disagree with your comments about the employment trends are improving. I see far too many on government assistance and that group is growing to say that employment is improving. That said I do see more retiring, many more than want to some because of the economy. Where I see a disconnect is that the US was importing close to 3 million barrels per day of finished fuels in 2004 - 07 so that would tell me that the US lacked sufficient refining capacity to meet demand. BPs annual energy report would support this number. With a significant down turn in usage one would expect imports to drop dramatically before it would impact domestic refining capacity. But that doesn't seem to be the case so while the US demand has dropped for a variety of reasons why has US refining lost so much market if imports have gone to zero - or have they?
Robert Hurst  |  February 22, 2012
That's a good point, but certainly just one facet of a larger story. For instance, many young people have lost interest in driving or have been priced out: