Travel Demand Holding Up, Despite High Gasoline Prices

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Written by Daniel Graeber for Industrial Info Resources (Sugar Land, Texas)--U.S. holiday-goers tapped deeper into their savings to cave to pent-up demand, traveling in droves over the long Memorial Day weekend despite record-high gasoline prices.

Travel club American Automobile Association (AAA) (Heathrow, Florida) listed a national average retail price of $4.67 for a gallon of regular unleaded gasoline for Wednesday, the highest national average ever reached.

Click on the image at right from the U.S. Energy Information Administration (EIA) for a graph detailing recent gasoline prices, by U.S. region.

It has been a near-daily occurrence for retail gasoline prices to set records since the Russian military invasion of Ukraine upended global commodity markets. But perhaps feeling flush still from the stimulus that came during the worst of the pandemic, demand is holding up.

"So far, the pent-up urge to travel caused by the pandemic outweighs high pump prices for many consumers," said Andrew Gross, a spokesperson for AAA.

Last year, retail gasoline prices were closer to $3 per gallon on average, in large part because supplies were ample. Not anymore. And what makes this year different too is the fading severity of the pandemic. Memorial Day marks the unofficial start of the summer holiday season, and many annual festivals and events are returning after a two-year hiatus. That's breaking cabin fever for many consumers, despite higher prices.

AAA estimates that nearly 35 million people hit the road during the long holiday weekend, beating the previous record set in 2019.

Energy, meanwhile, is the single-largest contributor to U.S. inflation, which is running at a red-hot 8.3% over the 12-month period ending in April. While some of the components that go into the energy aspect of the indices declined month-on-month in April, the price for energy goods as a whole is up 30% over the same 12-month period. For just gasoline, inflation is running at around 40%.

That inflation is leading to concerns about a recession, particularly as goods ranging from wheat to refined petroleum products get caught in the web of war. With the European Union working to ban imports of waterborne crude oil from Russia by year's end, the market will only get tighter and prices will only get higher for the foreseeable future.

But so far, U.S. consumers don't seem to care. The personal savings rate, which is reported by the Commerce Department as a percentage of disposable income, came in at 4.4% in April, the lowest recording since the Great Recession in 2008.

That suggests that consumers are tapping into their savings to compensate for soaring prices. When savings are depleted, however, discretionary spending eventually suffers--and it's discretionary spending that accounts for the bulk of economic growth in a capitalist system. When savings are depleted, it leads to demand destruction.

That, in turn, adds to the growing concerns over a possible recession. And it's an election year, one in which the ghost of former President Donald Trump continues to haunt the U.S. political machinery. U.S. President Joe Biden and the majority Democrats cannot afford to lose more voters over economic concerns.

Opinion polls already show many voters are both frustrated with Biden and frustrated with the overall mood in general.

For the battleground state of Michigan, state Gov. Gretchen Whitmer, a Democrat, is mulling a suspension of the state's fuel tax, among the highest in the nation. She's up for re-election this year.

At the federal level, Biden is considering everything from tapping a diesel reserve to easing back on some of the environmental regulations on fuel production to bring prices lower.

Because of the warm summer months, refineries need to add more steps to the gasoline production process to keep the fuel from evaporating. Even without the extraordinary economic strains emanating from the war in Ukraine, that means gasoline prices would be higher anyhow.

But it's the price of crude oil that contributes most to what consumers see at the pump. And crude oil prices are determined largely by international events, not domestic ones, so there's not much the U.S. government can do.

That may leave it to market forces to determine consumer behavior. Polling from AAA found that 67% of respondents said they would change their driving habits once gas hits $4.50 a gallon, and 75% responded in kind when asked about $5 per gallon gasoline, which many see as an inevitable national average.

But consumers are stubborn, which may be to the detriment of savings, discretionary spending and ultimately economic growth.

"If pump prices keep rising, will people alter their summer travel plans?" AAA's Gross asked. "That remains to be seen."

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.