Gas prices or economy, experts disagree on what drives U.S. demand

By Jarrett Renshaw

NEW YORK (Reuters) – Americans hit the road in record numbers this winter, reigniting a long debate that may determine whether global oil markets hold steady or tumble anew. But many economists and academics are split on whether prices matter when it comes to gasoline demand.

On the face of it, the answer seems obvious. The over 40 percent slide in nationwide gas prices last year to nearly $2 a gallon led to more frequent and longer drives, fuelling a 5 percent jump in gas use in December and January, the fastest such growth in 11 years, according to U.S. government data.

Yet many energy economists have long argued that it is economic activity and employment, not prices, that hold the greatest sway over how much gas Americans burn each day.

“More jobs means more commuters,” says Phillip Verleger, president of consultancy PKVerleger and energy economist.

However, some academics are now challenging that notion with more than just anecdotal evidence. A soon-to-be released study that relies on data culled from credit card purchases at the pump suggests consumers are significantly more responsive to prices than previously believed.

And the debate will sharpen in the coming weeks, as pump prices have rebounded by nearly 30 percent from their January lows, threatening to dampen the nascent roadway renaissance. At the same time, the U.S. economy is expected to build on its long recovery.

Monthly non-farm payrolls data on Friday is expected to show unemployment falling to 5.4 percent, the lowest since 2008, according to a Reuters poll.

If the price-effect believers are correct, U.S. gasoline demand, which accounts for about a tenth of the world’s oil use at 9 million barrels per day (bpd), may soon slow.

DEMAND BOUNCES BACK

Most energy economists dismiss gas prices as a harbinger of gasoline demand. In the long term, of course, high prices encourage people to buy more fuel efficient cars or move closer to work, both trends that have tempered demand in recent years.

But in the short term it is a basic necessity, with few options to escape paying for it.

Wallace Tyner, an energy economist at Purdue University, said rises in income and other economic factors typically have 10 times greater impact on U.S. gasoline demand than prices.

In academic parlance, the “demand elasticity” of gasoline is generally estimated at around -0.02 to -0.04 in the short term, meaning it takes up to a 50 percent swing in the price of gasoline to raise or lower demand by 1 percent. In its forecasts, the U.S. Energy Information Administration uses an elasticity figure of -0.02.

But recent history is challenging that orthodoxy.

“Gasoline prices have dropped around 30 percent, while incomes have gone up no more than 3 percent,” said Tyner. “Thus, the drop in gasoline price over this period likely has been about as important as the increase in income.”

A new preliminary study by Matthew Lewis, a professor of Economics at Clemson University, and three other researchers suggests a 12 percent swing in pump prices would raise or lower gasoline demand by 1 percent, roughly five times higher than the EIA formula.

They argue that previous research relied too heavily on flawed monthly federal figures of gasoline demand that do not accurately reflect daily or weekly changes in behavior. Previous studies also did not take into account regional peculiarities, such as access to public transportation.

The fall in pump prices “is likely to be the major factor” behind the uptick, Lewis said.

TENSION BUILDS

Over the latter half of last year, consumers had every reason to buy more fuel, with prices falling and the economy expanding in tandem. Yet it remains to be seen how they respond to an environment of less-cheap prices but more abundant jobs.

Some reckon it should make little difference if the economy keeps humming along. Overall, the U.S. economy has added more than 3.5 million jobs since January of 2014. About one in seven of them will commute to work via truck or car, driving an average of 26 minutes, according to U.S. Census data.

The construction sector is a particularly strong driver of demand as more carpenters, electricians and pipefitters hit the U.S. roads.

“People that build houses drive trucks,” Verleger said.

But the fall in oil prices is not universally beneficial.

In North Dakota, home to the booming Bakken oil patch, mileage has surged 37 percent since 2010 as the shale drilling boom fueled employment and heavy truck traffic – both of which are slowing sharply as companies slash spending. Nationwide, the number of miles driven has gained just 8 percent.

Conversely, New Jersey, which has struggled more than other states to recover economically, saw job growth of 3 percent since 2010, and miles traveled has been relatively flat.

“There’s the income effect,” said Joseph Seneca, an economics professor at Rutgers University. “In New Jersey, we’ve had tepid overall economic activity, so it’s not surprising to have tepid growth in traffic volumes.”

(Reporting By Jarrett Renshaw; Editing by Diane Craft)

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