Released June 23, 2022 | SUGAR LAND
en
Written by Daniel Graeber for Industrial Info Resources (Sugar Land, Texas)--While President Joe Biden pushes for a gasoline tax holiday to help ease inflationary pressures, the U.S. Federal Reserve Bank of Dallas said prices at the pump may already be enough to cause the demand destruction necessary to offset current market trends.
Commodity prices are behind the bulk of inflation in the U.S. economy, which is running at a 40-year high. The national retail price for a gallon of regular unleaded gasoline set daily records for most of June, regularly topping $5 on average.
Commodity prices declined swiftly, however, after the U.S. Federal Reserve increased its interest rates by 75 basis points, which may slow the economy enough to cause a recession. West Texas Intermediate (WTI), which hit an all-time high of $123.70 per barrel this year, lost major ground in the trading sessions that followed the Fed's announcement.
By early Wednesday, WTI was closer to $102 per barrel. Retail gasoline prices hit $5.01 per gallon June 14, but have since cooled to around $4.96, according to travel club AAA.
The U.S. Federal Reserve Bank of Dallas, however, said those prices still hurt. Broader market pressures are amplified by a decline in real wages, lingering supply-chain bottlenecks and the spillover from the war in Ukraine.
"These factors raise questions about whether U.S. fuel consumption can withstand higher prices for much longer," Garrett Golding, a senior researcher at the Dallas Fed, wrote. "Without an adequate supply response arriving in the near term from either crude oil production or refining capacity, demand destruction is likely the only variable that can eventually cause the fuel price surge to slow and reverse."
A year ago, retail gasoline prices were closer to $3.00 per gallon. It's double that now in some markets. And it hurts.
So Biden, who's been watching his polling numbers crater in the midst of ongoing inflationary pressures, is embracing a tax holiday for gasoline during the summer, which would erase at least 18 cents off the cost at the pump. If states follow suit, it could be a 50 cent-per-gallon break in some markets.
Biden and his energy secretary, Jennifer Granholm, have also pressured refineries, asking why they're not churning out more refined petroleum products to meet demand.
But they are. Refinery capacity is not at the same level it was before the pandemic and those that are still up and running are approaching their peak in terms of utilization rates. Even if major crude oil producers were given carte blanche, meanwhile, crude oil by itself is more or less useless. It's the refined petroleum products that matter and there's only so much the downstream sector can do at this point.
Meanwhile, consumers so far seem complacent at the very least about high gasoline prices. Consumer savings are hitting rock bottom, but demand indicators remain healthy.
The U.S. Department of Energy reported that the total amount of refined petroleum products supplied to the market for the week ending June 10, a proxy for demand, averaged 19.8 million barrels per day (BBL/d), up 2.3% from the same period last year. That includes all refined products, though, and it's skewed by an uptick in jet fuel demand. Total motor gasoline product supplied averaged 9 million BBL/d, down 1.1% from last year, suggesting that consumers may in fact be taking notice.
But looking at data for the similar week in 2019, to discount the impact of the COVID-19 pandemic, demand levels are somewhat close to current trends. For the similar week in June, total refined products supplied averaged 20.4 million BBL/d and gasoline averaged 9.5 million BBL/d.
Gasoline prices during that week in 2019 were actually below $3 per gallon on average, so a half-million BBL/d or so shows consumers aren't changing their behaviors dramatically in a $5-per-gallon climate.
Patrick DeHaan, the senior petroleum analyst at consumer-price watcher GasBuddy, said $5.50 or even $6 per gallon may be the breaking point for consumers. And the longer that demand holds up, the longer the inflationary pressures will last.
That sentiment is in line with that of the Dallas Fed, which said demand destruction may be the only thing that arrests consumer inflation. Incentivizing demand by way of a tax holiday, therefore, seems counterintuitive.
"It's a bad answer and could compound the problems we're dealing with (in the energy markets)," DeHaan said. "It's a game of Russian roulette."
It's a bad answer because it does nothing to address the real issues--dwindling refining capacity, a lingering supply-side deficit and the tendency of major oil companies to return more capital to shareholders than toward investments in new output or infrastructure.
But those things don't mean much, and might not even make sense, to the average consumer. The tax holiday is a move that could, however, make sense to people that aren't subject-matter experts in energy policy. Gasoline prices are the most obvious indication of inflation, so offsetting that will lessen some of the burden building up in average U.S households.
"President Biden understands that a gas tax holiday alone will not, on its own, relieve the run-up in costs that we've seen," the White House said. "But the president believes that at this unique moment when the war in Ukraine is imposing costs on American families, Congress should do what it can to provide working families breathing room."
Industrial Info Resources (IIR) is the world's leading provider of market intelligence across the upstream, midstream and downstream energy markets and all other major industrial markets. IIR's Global Market Intelligence Platform (GMI) supports our end-users across their core businesses, and helps them connect trends across multiple markets with access to real, qualified and validated project opportunities. Follow IIR on: LinkedIn.
Commodity prices are behind the bulk of inflation in the U.S. economy, which is running at a 40-year high. The national retail price for a gallon of regular unleaded gasoline set daily records for most of June, regularly topping $5 on average.
Commodity prices declined swiftly, however, after the U.S. Federal Reserve increased its interest rates by 75 basis points, which may slow the economy enough to cause a recession. West Texas Intermediate (WTI), which hit an all-time high of $123.70 per barrel this year, lost major ground in the trading sessions that followed the Fed's announcement.
By early Wednesday, WTI was closer to $102 per barrel. Retail gasoline prices hit $5.01 per gallon June 14, but have since cooled to around $4.96, according to travel club AAA.
The U.S. Federal Reserve Bank of Dallas, however, said those prices still hurt. Broader market pressures are amplified by a decline in real wages, lingering supply-chain bottlenecks and the spillover from the war in Ukraine.
"These factors raise questions about whether U.S. fuel consumption can withstand higher prices for much longer," Garrett Golding, a senior researcher at the Dallas Fed, wrote. "Without an adequate supply response arriving in the near term from either crude oil production or refining capacity, demand destruction is likely the only variable that can eventually cause the fuel price surge to slow and reverse."
A year ago, retail gasoline prices were closer to $3.00 per gallon. It's double that now in some markets. And it hurts.
So Biden, who's been watching his polling numbers crater in the midst of ongoing inflationary pressures, is embracing a tax holiday for gasoline during the summer, which would erase at least 18 cents off the cost at the pump. If states follow suit, it could be a 50 cent-per-gallon break in some markets.
Biden and his energy secretary, Jennifer Granholm, have also pressured refineries, asking why they're not churning out more refined petroleum products to meet demand.
But they are. Refinery capacity is not at the same level it was before the pandemic and those that are still up and running are approaching their peak in terms of utilization rates. Even if major crude oil producers were given carte blanche, meanwhile, crude oil by itself is more or less useless. It's the refined petroleum products that matter and there's only so much the downstream sector can do at this point.
Meanwhile, consumers so far seem complacent at the very least about high gasoline prices. Consumer savings are hitting rock bottom, but demand indicators remain healthy.
The U.S. Department of Energy reported that the total amount of refined petroleum products supplied to the market for the week ending June 10, a proxy for demand, averaged 19.8 million barrels per day (BBL/d), up 2.3% from the same period last year. That includes all refined products, though, and it's skewed by an uptick in jet fuel demand. Total motor gasoline product supplied averaged 9 million BBL/d, down 1.1% from last year, suggesting that consumers may in fact be taking notice.
But looking at data for the similar week in 2019, to discount the impact of the COVID-19 pandemic, demand levels are somewhat close to current trends. For the similar week in June, total refined products supplied averaged 20.4 million BBL/d and gasoline averaged 9.5 million BBL/d.
Gasoline prices during that week in 2019 were actually below $3 per gallon on average, so a half-million BBL/d or so shows consumers aren't changing their behaviors dramatically in a $5-per-gallon climate.
Patrick DeHaan, the senior petroleum analyst at consumer-price watcher GasBuddy, said $5.50 or even $6 per gallon may be the breaking point for consumers. And the longer that demand holds up, the longer the inflationary pressures will last.
That sentiment is in line with that of the Dallas Fed, which said demand destruction may be the only thing that arrests consumer inflation. Incentivizing demand by way of a tax holiday, therefore, seems counterintuitive.
"It's a bad answer and could compound the problems we're dealing with (in the energy markets)," DeHaan said. "It's a game of Russian roulette."
It's a bad answer because it does nothing to address the real issues--dwindling refining capacity, a lingering supply-side deficit and the tendency of major oil companies to return more capital to shareholders than toward investments in new output or infrastructure.
But those things don't mean much, and might not even make sense, to the average consumer. The tax holiday is a move that could, however, make sense to people that aren't subject-matter experts in energy policy. Gasoline prices are the most obvious indication of inflation, so offsetting that will lessen some of the burden building up in average U.S households.
"President Biden understands that a gas tax holiday alone will not, on its own, relieve the run-up in costs that we've seen," the White House said. "But the president believes that at this unique moment when the war in Ukraine is imposing costs on American families, Congress should do what it can to provide working families breathing room."
Industrial Info Resources (IIR) is the world's leading provider of market intelligence across the upstream, midstream and downstream energy markets and all other major industrial markets. IIR's Global Market Intelligence Platform (GMI) supports our end-users across their core businesses, and helps them connect trends across multiple markets with access to real, qualified and validated project opportunities. Follow IIR on: LinkedIn.
