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US household gasoline expenditures down

Hydrocarbon Engineering,

According to the US Energy Information Administration (EOA), the average US household is expected to spend approximately US$550 less on gasoline in 2015 compared with 2014, as annual motor fuel expenditures are on track to fall to their lowest level in 11 years. Lower fuel expenditures are attributable to a combination of falling retail gasoline prices and more fuel efficient cars and trucks that reduce the number of gallons used to travel a given distance.

Household gasoline costs are forecast to average US$1962 next year, assuming that the EIA’s price forecast, which is highly uncertain, is realised. Should the forecast be realised, motor fuel expenditures (gasoline and motor oil) in 2015 would be below US$2000 for the first time since 2009.

The price for US regular gasoline has fallen 11 weeks in a row to US$2.55/gal. as of 15 December, down US$1.16/gal. from its peak in late April and the lowest price since October 2009. Gasoline prices are falling because of lower crude oil prices, which account for approximately two thirds of the price of US drivers pay for a gallon of gasoline.

EIA’s latest STEO forecasts that Brent crude oil prices will average US$68/bbl in 2015, with prices up to US$5/bbl below that annual average earlier in the year. The forecast for WTI crude oil spot prices averages US$63/bbl in 2015. However, the current values of futures and options contracts show high uncertainty regarding the price outlook. For example, WTI futures contracts for March 2015 delivery traded during the five day period ending 4 December averaged US$67/bbl. Implied volatility averaged 32%, establishing the lower and upper limits of the 95% confidence interval for the market’s expectations of WTI prices at the expiration of the March 2015 contract at US$51/bbl and US$89/bbl, respectively. Last year at this time, WTI futures contracts for March 2014 delivery averaged US$96/bbl and implied volatility averaged 19%, with only a US$30/bbl spread between the corresponding lower and upper limits of the 95% confidence interval.

Increases in fuel economy are also contributing to lower motor fuel expenditures, as cars and trucks travel further on a gallon of gasoline. According to the Environmental Protection Agency (EPA), the production weighted fuel economy of cars has increased from 23.1 miles/gal. for model year 2005 cars to almost 25 mpg for MY2014, an increase of approximately 21%. Similarly, the fuel economy for trucks has increased 19%, from 16.9 mpg to 20.1 mpg in the same time frame.

In recent years, gasoline expenditures have accounted for approximately 5% of household expenditures. In the Bureau of Labor Statistics’ (BLS) Consumer Price Index, gasoline accounted for 5.1% of consumer spending, as of October 2014. Reductions in the gasoline price ultimately impact the relative weight of gasoline compared to other expenditures (shelter, clothing, food, entertainment, and so on) in price indices compiled by BLS and the Bureau of Economic Analysis at the US Department of Commerce.

The demand for gasoline is very price inelastic over short time periods, meaning changes in price have little impact on the number of gallons used. Falling gasoline prices allow households to spend income on other goods and services, pay down debt, and/or increase savings.

Adapted from a press release by Emma McAleavey.

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