Released on June 10, 2009
(Next Release on June 17, 2009)

A Study in Contrasts

Motor gasoline and distillate fuel markets have been affected by both the recent economic downturn and rollercoaster ride in product prices. EIA projects that these markets will recover along with the economy, but in different ways. Table 1 summarizes actual and projected annual percentage changes for fuel consumption and other related data series from 2007 through 2010.

Beginning in late 2007, road transportation fuels consumption was buffeted by the headwinds of economic recession and increases in product prices, as shown in Table 1. The result was a substantial decline in both motor gasoline and distillate consumption in 2008. (In both 2007 and 2008, heating degree days rose substantially, indicating that weakness in total distillate consumption was concentrated in the economically sensitive transportation diesel component.)

Despite the continuing economic recession, recent data indicate a diminishing year-over-year decline in gasoline consumption, while consumption of distillate fuel is continuing to exhibit substantial year-over-year declines. Reversing a pattern of weakness seen for almost two years, motor gasoline consumption appears to be gaining traction while the distillate fuel market continues to fall. Our Short-Term Energy Outlook (STEO) released yesterday, shows a projected 0.3-percent increase in motor gasoline consumption this year, buoyed by an increase in real disposable income and a substantial year-over-year decline in retail motor gasoline pump prices. Distillate consumption, on the other hand, is expected to shrink a further 5.5 percent this year as a result of substantial declines in both manufacturing activity and freight movements at U.S. ports.

We expect the two fuels to exhibit different responses to a gradual economic recovery in 2010. Motor gasoline consumption is projected to rise 0.6 percent. Reversing the trends of the previous two years, the projected distillate consumption increase, 2.1 percent, is substantially more than for motor gasoline as a result of the projected recovery in industrial production and, especially, activity at U.S. ports.

Both historical data and our projections indicate that the two fuels respond differently to macroeconomic and price changes. For motor gasoline markets, real disposable income is an important driver. Real disposable income generally moves gradually upward, except during periods of severe recession. Even during the current downturn, income is slated to increase this year, as shown in Table 1, partly as a result of the tax rebates. (The same thing occurred in the previous year, when lump-sum tax rebates were issued.) While income is an important driver, changes in motor gasoline consumption do not respond fully to changes in income. It is estimated that a one-percent change in real disposable income, on average, results in only about a 0.5-percent change in vehicle miles traveled and gasoline consumption in the short-run. In contrast, the index of industrial production has a more pronounced influence on distillate consumption as industrial production is more cyclical than real disposable income, contributing to the fluctuation in distillate consumption patterns. It is estimated that a one-percent change in the industrial production index, on average, results in a 0.8-percent change in distillate consumption.

The two fuels also differ in regard to their sensitivity to changes in price. Published estimates of the price elasticity for each fuel vary widely. The most recent estimate used in the STEO for the short-run motor gasoline price elasticity is -0.04. That estimate is at the lower end of the range of published elasticity estimates due largely to the use of monthly data in the model. Although the estimate seems small, it suggests that large price changes, especially if sustained over many months, can have a substantial effect on consumption. Conversely, the substantial declines in those prices during the past year have likely contributed some upward strength in recent year-over-year comparisons in motor gasoline consumption despite the ongoing contraction in the economy.

In the STEO model, diesel prices have almost no influence on short-term distillate consumption. Although that result reflects the monthly frequency of the estimating equations, most studies based on lower frequencies have shown smaller price-related responses for diesel fuel, but these are smaller than those for motor gasoline.

U.S. Diesel Prices Surge
The national average price for regular gasoline jumped a dime to reach $2.62 a gallon. Despite a cumulative increase of 58 cents during the past six weeks, the price remained $1.42 below the average a year ago. Prices increased in all regions of the country with the East Coast gaining eight cents to reach $2.54 per gallon. The price in the Midwest shot up nearly 12 cents to settle at $2.70 per gallon. At $2.47 per gallon, the average price on the Gulf Coast remained not only the lowest of any region, but was the only region where the average price was below $2.50 per gallon. In the Rocky Mountains, the price rose nine cents to $2.52 per gallon. The price on the West Coast gained the most of any region, jumping over 12 cents to $2.80 per gallon. In California, the average price surged 14 cents to $2.89 per gallon.

The national average price of diesel fuel rose for the fifth week in a row, surging nearly 15 cents to $2.50 per gallon. That price was the largest weekly increase since May 26, 2008 but still $2.19 below last year. Prices in all regions of the country rose sharply. On the East Coast, the price jumped 15 cents to $2.52 per gallon. The average price in both the Midwest and Gulf Coast regions also shot up 15 cents to settle at $2.47 per gallon. The average price in the Rocky Mountains went up the least of any region but still jumped 10 cents. At $2.44 per gallon, the price there was the lowest of any region. The West Coast price moved up more than 14 cents to $2.60, while the price in California surged 17 cents to $2.68 per gallon.

Propane Inventories Continue Strong Build
Total inventories of propane held by primary stockholders continued to be strong last week, pushing higher by 1.4 million barrels to an estimated 52.7 million barrels as of June 5, 2009. Regional inventories were mixed last week with gains in the Midwest of 1.6 million barrels followed by a 0.1 million-barrel increase in the combined Rocky Mountain/West Coast region. Conversely, East Coast inventories registered a 0.2 million-barrel loss last week while the Gulf Coast region remained relatively unchanged during this same time. However, all of the major propane regions remain at or above their respective average ranges for this time of year. Propylene non-fuel use inventories remained relatively unchanged last week although its share to total propane/propylene inventories dropped to 4.0 percent from 4.2 percent from the prior week.

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