Last week, the average price of U.S. retail gasoline (all grades, all formulations) fell by 0.11% to $3.617. This was the first decline since the last week of January and only the second decline since the week ending November 29, 2010. In turn, the year-on-year surplus in prices has widened from 8.49% at the end of November to 26.03% as of March 21.
The general consensus is that prices above $3.500 begin to cause not insignificant demand destruction. Yet the latest vehicle miles travelled data suggests that demand elasticity begins to wane much earlier.
Consider vehicle miles travelled (VMT), published by the Bureau of Transportation Statistics. Total travel on all roads in January 2011 (the latest data available) came to 223.5 billion vehicle miles; this is 0.19% below the ten year average. This may not seem so bad, but consider the breakdown.
First of all, 2010 saw vehicle miles travelled outpace the ten year average for every month except January and February. December 2010, when average retail prices came to $3.106 saw VMT 1.18% above the ten year average. When prices rose to $3.155 in January, the deficit established itself.
But even more concerning is the type of driving: Travel by public can be broken down in to two major categories: Urban driving, which accounts for business-related, unavoidable driving; and Rural driving, which counts for road trips and discretionary driving. A drop in the latter can be excused by people cancelling their travel plans due to the weather. But a drop in the former belies a more systematic shift in the fundamentals.
Thus it is discouraging to see urban driving in January 2011 come in flat YoY, which is part of a downward trend. In October, when retail prices came to just $2.870, urban driving was 2.3% higher YoY. By November prices increased to $2.912, but the YoY surplus held steady at 2.3%. In December, prices crossed above the $3.00 barrier and the YoY surplus fell to 1.4%. As prices keep rising, that surplus keeps falling and will likely become a deficit in February.
The bottom line is clear: prices above not just 3.500, but 3.000 create tangible levels of demand destruction, thus we question the validity of current price levels. Tomorrow’s consumer confidence index is expected to drop to 65.00 (from 70.4 in February); analysts at The Schork Reportpresent that they would not be surprised to see it even lower.
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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.