Released on July 24, 2002
(Next Release on July 31, 2002)

Falling Off the Wagon
As the Dow Jones Industrial Average, as well as other stock indices, continue to fall, some oil market analysts have speculated that this will negatively impact the economy. As a result they have fallen off the bandwagon of those that think that oil demand in the United States will recover. But there are a number of fallacies in this gloomy reasoning, not the first of which is that the data simply don’t support the position that U.S. oil demand is not strengthening!

U. S. oil demand in May was more than 0.9 percent above the May 2001 level, the largest year-over-year increase since July 2001 and the first positive growth rate since November 2001. And based on the weekly data, June 2002 U. S. oil demand is about 0.4 percent greater than year-ago levels. (Recent experience suggests final monthly June figures will show even stronger growth, possibly enough to lift second quarter results into positive territory.) All of this occurred in the midst of the latest stock market swoon. The Dow Jones Industrial Average has lost about 2500 points since it closed at 10,353 on May 17, yet U. S. oil demand showed positive annual growth in May and June. Gasoline demand, the largest component of U. S. oil demand and representing about 12 percent of global oil demand, was especially strong in May, growing at a 4.2 percent growth rate while averaging nearly 9.1 million barrels per day, a level that would usually be associated with the peak driving season this year! While it is true that U. S. oil demand was relatively weak earlier this year, most of this weakness was due to one-time factors that no longer exist (warm weather this past winter, in particular). Most of the available economic data also point to a recovery. For all of the worry about the stock market affecting the economy, the economy continues to grow, and whatever the strength of the equities linkage, other fundamental forces are more than offsetting. The first estimate for the annualized growth rate for the Gross Domestic Product for the second quarter is expected to be released a week from now, and a growth rate of 2 - 3 percent would not be surprising. This growth follows a surprisingly high 6.1 percent growth rate in the first quarter and precedes widely expected 3 - 4 percent growth rates for the third and fourth quarters of 2002. Low interest rates, continued healthy real personal disposable income growth, and still relatively low unemployment support a modest recovery in both the economy and U.S. oil demand.

But there is also another misperception about the stock market decline that has some analysts jumping off the oil demand recovery bandwagon. Many analysts have equated the stock market with the economy. Of course, as we wrote above, the economy is so far looking like it’s recovering nicely from the “recession” late last year. But many analysts are worried that the stock market decline will reduce personal wealth, which will affect consumer spending, which has been the major vehicle driving the economy to recovery so far. But if this does occur, and even ignoring the more than offsetting wealth gains experienced by many Americans through dramatic appreciation in housing values, it would not likely happen until much later (perhaps next year) and by then, oil market fundamentals could be much different. In the short-term, the drop in the stock market is not likely to impact consumer spending negatively, as many that have suffered dramatic declines in personal wealth are on paper alone. Those that have pulled their money out of the stock market have essentially “cashed” their paper wealth, and with housing and major appliance sales healthy, it appears that these people are finding ways to spend this “new” cash. Despite the daily headlines bemoaning the stock market, we refuse to “fall off the bandwagon”, and continue to predict that oil demand will be relatively strong over the remainder of the year.

Gasoline Imports Return to Historically High Levels
After never averaging more than 1 million barrels per day in any week before this year, total gasoline imports (including gasoline blending components) have now exceeded this level five times, including last week. The nearly 1.1 million barrels per day averaged last week, followed two weeks in which gasoline imports averaged a more typical 640,000 barrels per day. If imports had averaged 640,000 barrels per day last week, stocks would have been drawn down an additional 3 million barrels to supply the 9.1 million barrels per day of gasoline demand. This points to the importance that gasoline imports have had in keeping gasoline inventories from being much lower than they currently are.

Retail Gasoline and Diesel Prices Continue to Creep Up
The U.S. average retail price for regular gasoline gained 1.6 cents per gallon last week, ending at 141.0 cents per gallon as of July 22. This price is 1.5 cents per gallon higher than last year, marking the first time in 2002 that prices were higher than year-ago prices. It is also the largest increase since April 8. Retail gasoline prices were mostly up throughout the country, with the largest increase occurring in the Rocky Mountain region, where prices rose 5.5 cents per gallon to end at 145.5 cents per gallon. Large price increases were also seen on the East Coast, where Central Atlantic prices rose 3.1 cents to end at 142.0 cents per gallon. Prices fell by 0.8 cent per gallon on the West Coast, ending at 154.1 cents per gallon. While prices had remained relatively flat over the past few months, they have begun to gradually creep up over the past few weeks. There is still the risk of a moderate, last gasp burst before Labor Day, if we see continued pressure on crude oil, a sustained drop in gasoline imports, steady or rising gasoline demand, or a decrease in refinery output. Retail diesel fuel prices increased by 1.1 cents per gallon to a national average of 131.1 cents per gallon as of July 22.