September 10, 2019
At a time when it seems all attention is being directed towards electrification of the transportation market, it is important to not forget about a very important and perhaps most important component of that market – gasoline prices. There is no other product for which consumers can shop the lowest price while driving down the road at 45 miles per hour (or faster). And, no other price point is so “in-your-face” every single day. It is no wonder that consumer behavior is often tied to the digits on the corner sign. But because prices have been relatively stable and affordable recently, it is easy to get distracted.
Don’t you, forget about me
Don’t, don’t, don’t, don’t
Don’t you, forget about me.
How influential this component might be in the future remains uncertain. Several trends suggest a global scenario in which oil supply (the primary ingredient in gasoline) could outpace demand and put downward pressure on petroleum prices. What implications that may have for consumer decisions regarding travel behavior and vehicle preference will be very interesting to observe. As we transition away from the summer drive season of 2019, let’s take a closer look at what that 20-foot price sign really represents.
Consumers Have Said Fuel Prices Matter
Consumer attitudes often go up and down with the price of gasoline. In fact, according to monthly consumer surveys conducted by NACS between 2013 and 2017, on average 31% of consumers said that the retail price of gasoline had a “great impact” on their feelings about the economy and another 49% said it has “some impact” on their feelings. Of course, as could be expected these responses varied with the price of fuel. When retail prices were high, as many as 47% of consumers said they had a “great impact” on their feelings about the economy, yet that percentage dropped as low as 21% when fuel prices were lower.
A similar situation was reflected in the level of consumer interest in alternative fueled vehicles. In consumer surveys conducted by the Transportation Energy Institute and NACS, respondents were asked if they would consider certain alternative fuel vehicles for their next vehicle purchase. In April 2014, when retail gasoline prices posted a national average of $3.65, 84% of consumers said they would consider a hybrid. When prices dropped to $2.26 in October 2015 the percentage of consumers who would consider a hybrid dropped to 44%.
An analysis the Transportation Energy Institute published in 2018, “Driving Vehicle Sales,” reviewed vehicle sales by class and powertrain relative to purchase price and fuel prices since 2003. The data demonstrated that consumers were not necessarily buying pickup trucks when pump prices were low and compact cars when prices were high, despite conventional assumptions. But, as represented in the survey data relative to hybrids above, interest in alternative powertrains seems to be influenced by pump prices.
With that in mind, one has to wonder about the relationship between gasoline prices and electric vehicle adoption. As electrified powertrains enter the market in greater numbers, will consumers consider converting away from gasoline-powered vehicles if they are not concerned about the price at the pump? Or will these new vehicles deliver such compelling consumer value that adoption will be independent of the miles per dollar consideration? Guess we will have to keep our eyes open to see what happens.
Will you recognize me?
Call my name or walk on by
Rain keeps falling, rain keeps falling
Down, down, down, down.
What Does the Fuel Price Represent?
Despite the significant influence wielded by the pump, there is a tremendous lack of knowledge regarding what is included in the retail price of gasoline. Most observers understand that crude oil plays a significant role in the price they pay at the pump, but do they really understand how much of a role it plays? And do they know what else that price covers? (NACS has a great resource answering this specific question.)
The U.S. Energy Information Administration (EIA) each month calculates the contribution to the retail price of gasoline made by four major components – crude oil, taxes (federal, state and sales), refining operations and distribution and marketing (this includes everything after the fuel leaves the refinery). From 2006 through July 2019, the average retail price of gasoline has been $2.86, according to EIA. Of this, crude oil has averaged 59.5% of the retail price. However, on a monthly basis, it has contributed as much as 80.0% and as little as 37.7%.
The second largest average contributor to the retail price of gasoline has been taxes at 15.8%, or about 44 cents per gallon. The majority of the tax burden on fuels is assessed on a cents per gallon basis, but there are some local jurisdictions that apply a percentage-based sales tax on gasoline sales. Taxes vary greatly from state to state, with the highest combined tax levied in California at 79.6 cents per gallon; the lowest taxed gallon in the nation is in found in Alaska at 33.06 cents per gallon. (The American Petroleum Institute provides extensive coverage of fuel taxes, including interactive maps.) The balance of the retail price of gasoline (about 24.7%) is split between refining operations and the distribution and marketing sector, both of which experience extreme volatility in their contribution to the final price.
Understanding what contributes to the price consumers pay at the pump is critical when trying to anticipate what might happen in the future. And with that in mind, the crude oil market is definitely something to evaluate closely.
Crude Oil Yesterday, Today and Tomorrow
Since crude oil is the dominant input to the retail price of fuel, it deserves a little specific attention. Since January 2006, the swings in crude oil prices have been significant from a low of $30.70 in January 2016 to a high of $132.72 in July 2018 (prices quoted are for the Brent market, monthly average as reported by U.S. EIA). However, since the beginning of 2015 prices have remained below $80 per barrel with one exception (October 2018) and have averaged $56.63. Efforts by the Organization of Petroleum Exporting Countries (OPEC) to restrain production and support prices have not driven prices higher, largely because of additional production capabilities within the United States.
What is likely to happen to the oil markets remains to be seen. On August 1, 2019, the Wall Street Journal reported “Citigroup and JPMorgan Chase analysts currently project supply will grow roughly one million barrels a day more than demand in 2020, resulting in a surplus each quarter of next year.” If this is true, the likelihood that oil will return to the high prices experienced in the first half of this decade is minimal. This also means that retail fuel prices in the U.S., which are so heavily influenced by oil prices, are similarly unlikely to return to prices of the past. Of course, how things proceed between the U.S. and China, the U.S. and Iran, the U.S. and Russia, and any number of other external factors could have a significant impact on what happens with the oil markets and, consequently, retail fuel markets.
Tell me your troubles and doubts
Giving me everything inside and out
The Volatile Bellwether
If gasoline prices are indeed a major influence on consumer behavior, then it is understandable how volatility at the pump can render some people schizophrenic. Since January 2006, the national average retail price of gasoline has varied even more than the price for crude oil. From $1.62 in December 2008 to $4.09 in July 2008, it has been a somewhat of a wild ride. (Note that these two extremes occurred within six months of each other – the fuel market in 2008 was insane as the world slid into the Great Recession.) As the following chart shows, the first half of the decade (just like that for crude oil) was extremely volatile. Since 2015, however, prices have remained below $3.00.
Seasonally, as the next chart show, prices move all over the place. The best resource to understand this is provided by NACS. NACS explains that there is a somewhat predictable pattern in retail prices, which is evident in the historic data. We typically have seen a climb in prices during the first five months of the year, leveling off until the fall, and then a slide in prices to close the year. This has been repeated time and again – if someone is surprised by what they experience at the pump, they have not been paying attention to the trends.
The relationship between crude oil prices and retail gasoline’s prices is extremely important, as explained above. In recent years, the Brent crude oil market has become the preferred reference to the actual value of oil in the market. The following chart plots Brent oil spot prices with national average retail gasoline prices since 2006. As can be seen, rarely does the price of oil go up or down without a corresponding movement in retail fuel prices. While the retail reaction is often delayed by days or weeks, the trends remain consistent.
The moral of this story is that gas prices matter and we should not forget the role they play in the market – they are in your face, they move a lot throughout the year, they are affected by a huge variety of internal and external forces, they influence consumer behavior and sentiment, and they are poorly understood by the vast majority of stakeholders. Yet, they are critical to all facets of the transportation sector and likely will influence the rate of adoption of alternative powertrain technologies. Consequently, it is advisable for those of us interested in the transportation market to be educated and remain mindful about the role fuel prices play in the market and the direction they may head in the future. Finally, like songs from the 80s, when left alone by external forces they tend to repeat themselves season after season:
Don’t you forget about me
Don’t, don’t, don’t, don’t
Don’t you, forget about me