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Don’t Get Too Excited About Cheap Gas

Nathaniel Bullard
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Don’t Get Too Excited About Cheap Gas

(Bloomberg) --

On Monday, Russia and Saudi Arabia signaled the start of an oil price war with plans to pump millions more barrels of oil than the world currently consumes. As of the close of U.S. trading on Wednesday, benchmark Brent and West Texas Intermediate crudes were trading more than 45% off their highs of earlier this year. With industrial activity in China still lower than normal due to the Covid-19 pandemic, gasoline prices could head significantly lower—and stay lower for some time.

How much of a benefit will this be to consumers? There are a number of ways to look at it, and they all start with how much people in the U.S. drive—that is, a lot. U.S. vehicle miles traveled, which plateaued for years after the global financial crisis, are now back at all-time highs. In the 12 months leading up to November 2019, Americans drove more than 3.2 trillion miles.

On a per capita basis, however, vehicle miles traveled are not quite back to where they were before the financial crisis. Vehicle miles traveled per person on the U.S. peaked a bit above 10,000 in 2005; in November, that figure was 9,888.

More importantly for the impact cheap gas might have is how much it costs us to drive. Last month I looked at U.S. personal consumption expenditure on electricity, which is very close to its all-time low. Personal spending on gasoline isn’t quite so low, but it’s still very low by the standards of the past 50 years. In the late 1990s, when oil prices fell to $10 a barrel ($17 in 2020 dollars), gasoline and other motor fuel was 1.83% of American’s personal consumption expenditure. At the end of 2015, it was 1.98%, and last quarter, it was 2.32%.

How can we decide what this means for our current moment? First, we should note that the last time vehicle miles traveled were this high, the economy was also roaring. At that time, gasoline expenditures were 3.2% of personal consumption. The ensuing spike in gasoline expenditure to above 4% and the plummet to barely above 2% just six months later aren’t things we want to repeat: the spike was a function of very high prices, and the collapse was due to plummeting gas prices and reduced economic activity during the financial crisis.

Also, the U.S. simply needs less gasoline per unit of GDP these days. Here’s a chart of U.S. gasoline demand and U.S. GDP in constant 2012 dollars, relative to their levels in 1950. Through the mid-1970s, they were exceptionally correlated; since then, not so much. A significant increase in fuel efficiency is a major factor: U.S. car corporate average fuel economy rose from 15.8 miles per gallon in 1975 to 27 miles per gallon in 1985. 

But surely, you say, cheap gas will boost the economy? Perhaps—but perhaps not. Given that the U.S. is the world’s biggest oil producer, oil and gas extraction is an important contributor to GDP, and it’s even more important to specific regions such as West Texas and North Dakota. When prices fall, so does employment, and with it wages and spending.

In 2016, Christiane Baumeister and Lutz Kilian of The Brookings Institution analyzed the macroeconomic impacts of U.S. private consumption and oil-related investment reactions to a steep fall in oil prices, from more than $100 in 2014 to below $30 in early 2016. The result? “A wash,” in the words of Ed Crooks of Wood MacKenzie. Lower investment in the oil patch cancels out the private consumption spurred by lower oil prices.

Any benefit that accrues to consumers from cheaper gasoline prices is also happening as the world embarks on the greatest experiment ever in remote working, telecommuting, and working from home thanks to Covid-19. Cheap gasoline is a boon to consumers, but the benefit might be academic and the real economy impacts minuscule if hundreds of millions fewer drivers take to the road each day. 

Nathaniel Bullard is a BloombergNEF analyst who writes the Sparklines newsletter about the global transition to renewable energy.

To contact the author of this story: Nathaniel Bullard in Washington at nbullard@bloomberg.net

To contact the editor responsible for this story: Jillian Goodman at jgoodman74@bloomberg.net

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