On April 27, 2011, the United States Department of Energy (“DOE”) reported a 1.6 percent decline in domestic gasoline consumption, compared to a year ago; however, the average price for gasoline on Monday, May 2, 2011 in the U.S. was $3.96, a 36 percent increase from last year.  Historically, a decline in U.S. consumption affects the global demand for oil, resulting in a decrease in domestic gas prices, but the average gas price has remained high, even with a decrease in demand.  The DOE reported that consumption had declined for the fifth straight week on April 27, 2011, yet the price of oil per barrel increased 55 cents to $112.76 on the New York Mercantile Exchange.

In 2008 – at the beginning of the recession – oil prices hit $4 a gallon and demand drastically decreased, resulting in oil prices falling by over $100 a barrel in five months.  With the rapidly industrializing economies in China, India, Brazil and Saudi Arabia, global oil consumption is increasing at a rapid pace.  Therefore, the U.S. economy is likely to see oil prices may remain around $4 through peak travel season this summer. 

According to a May 4, 2011, report by Reuters the $4 gasoline price that was the “tipping point” in 2008, may be much higher in 2011.  Consumers may be willing to pay much higher prices before they are willing to substantially cut gas consumption enough to affect oil prices.  University of Southern California professor and expert in consumer behavior Lars Perner said, “[b]ack then [in 2008], the price at which demand fell off sharply was around $4.  Today, the price may be $5.”
 
However, the demand for oil in the United States is not likely to decrease substantially, at least in the short term.  Actually, U.S. demand for oil is estimated to increase to nearly 20 million barrels per day (“bpd”) by 2015, according to analysts at the Centre for Global Energy Studies.  This is a partial impetus for the House approving a bill on May 5, 2011 to expedite oil and gas drilling leases in the Gulf of Mexico and Virginia.  Although the bill is not likely to pass the Senate, the House GOP argued the bill will help increase necessary domestic fuel production.  In 2010 the U.S. oil demand rose by 400,000 bpd, compared to 2009.  Interestingly, the price of oil dropped more the 8 percent on May 5, 2011, to $99.70 a barrel, the third largest daily drop on record.  Speculative traders also sold off oil and other commodities May 5, 2011 in response to concerns about economic growth and monetary tightening.  Thus, while retail gasoline prices remain high, the overall picture for the future of gasoline consumption and price elasticity remains unclear. 

A copy of the Reuter’s report is available here. 

A copy of the Wall Street Journal article Drivers Cut Back on $4 Gas is available here.

A depiction of U.S fuel prices over the past year is available here.

The study conducted by Centre for Global Energy Studies is available here.

A copy of Weekly U.S. Retail Gasoline Prices, are available here.