Sharp drop in fuel prices boosts car sales, encourages US motorists to drive more

LONDON—US gasoline demand is increasing as motorists opt for bigger vehicles and drive more, encouraged by the sharp drop in fuel prices and an improving employment market.

Increased fuel consumption in the United States and other advanced economies is one way lower oil prices will rebalance the market. Coupled with falling output from the major US shale plays, increasing demand will gradually eliminate excess supply over the course of 2015 and 2016.

Gasoline consumption was at a near-record seasonal level in the final three months of 2014, according to the Energy Information Administration (EIA).

In October, US refiners and importers supplied almost 9.2 million barrels of gasoline per day to customers in the United States, which was about 250,000 barrels per day or 2.8 percent more than in the same month a year earlier.

Weekly consumption data show strong sales volumes maintained through the end of the year, according to the EIA.

Weekly estimates are less accurate than the monthly numbers so they must be employed with care. But both weekly and monthly estimates are consistent with other data showing strong growth in fuel demand in the final few months of 2014.

US motorists and truckers drove more than 3 trillion miles in the 12 months ending in November, according to the Federal Highway Administration, the highest level of driving since July 2008.

The number of miles traveled had been broadly flat between 2009 and 2013, even as the economy recovered and US population rose. But from early 2014, the number of miles traveled has risen sharply.

Increased driving has coincided with a strong improvement in the labor market and a sharp drop in gasoline prices. Average pump prices, including taxes, have fallen 43 percent since late June 2014, according to the EIA.

Car buyers are also opting for vehicles which get fewer miles to the gallon. Adjusted average fuel economy for new cars purchased in December was just 25.1 miles per gallon, down from a high of 25.8 mpg in August, according to the University of Michigan Transportation Research Institute.

Reports from motor manufacturers and distributors confirm larger vehicles that consume more fuel, including light trucks and sport utility vehicles, sold particularly well in the final months of 2014.

There is no evidence for a similar pick up in distillate consumption – which is mainly used by commercial trucking firms, railroads and to heat homes and other buildings, rather than private motorists.

Gasoline consumption was actually lower in 2013 than it had been in 2005, even though the US population had increased by 20 million and real disposable incomes were up by almost $2,500 per capita over the period.

The high cost of motoring enforced major changes in driving behavior and car buying between 2005 and 2013 in the United States. Consumers made fewer discretionary trips and chose smaller vehicles. But all that has started to change as gasoline prices fall to their lowest level since March 2007.

In time, cheaper oil prices should also stimulate greater demand from trucking companies and airlines as the incentive to economize on fuel consumption is blunted.