Here are 3 reasons why US oil demand is holding steady at prices over $100

Nearly a month after Russia invaded Ukraine, sending shockwaves through the oil market, America’s thirst for crude is still strong.

With oil prices above $100 a barrel, further exacerbating the rising cost of living for millions of consumers, the prospect of demand destruction is increasingly looming this year, although the price level be the subject of lively debate. To be sure, soaring energy costs not only threaten a still-fragile post-pandemic economic recovery, but also pose a serious dilemma for the Biden administration. At the moment, the demand for gasoline in the United States is surge despite prices just above the records reached earlier this month.

Here are some explanations as to why rough demand has not cracked in the face of high prices.

Gasoline spending in perspective

Americans’ gasoline spending as a share of total spending is much lower today than it was in the past. In January, gas spending was just 2.3% of the total, according to the latest available data from the Commerce Department, and well below the long-term average. Still, the pace of increases is significant, Omair Sharif, chairman of Inflation Insights, said in a note, adding that the share is expected to climb to around 2.9% in March.

“In terms of shock movement in such a short period of time, it just hasn’t happened too often in the last 63 years,” Sharif said.

Pump prices and inflation

The average U.S. retail gasoline price may have hit an all-time high above $4 a gallon this month, but when adjusted for inflation, it’s below the peak from just over $5.20 set in July 2008. Currently, the national average is about $4.24 per gallon, according to AAA.

Many American drivers, stung by record high gas prices, mentioned this month they would pay even more if it ended Russia’s war in Ukraine. Meanwhile, electric cars make up too small a percentage of vehicle sales to make a meaningful short-term drop in oil demand, especially since there are waiting lists for the most desirable ones.

But the longer prices remain at these levels, the greater the sticker shock for consumers.

In the latest AAA survey, 59% of drivers said they would change their commuting or lifestyle habits if gas prices hit $4 a gallon. If pump prices were to reach $5, which they have in the West, three-quarters said they would have to adjust their lifestyle to offset the increase.

It’s all about the economy

Even as analysts debate whether $150 a barrel of oil is the level at which demand destruction begins to take hold, the overall health of the economy is critical.

“You still have the problem ‘Can price just destroy demand in isolation or does it have to go through a broader economic downturn?’ And history suggests that the answer to that question is probably yes. As in, this likely requires a broader economic downturn to then destroy enough demand for oil,” Martijn Rats, global oil strategist at Morgan Stanley, told Bloomberg Television. interview.

Still, some investors and traders say demand may be less elastic than many think.

Beyond Covid, demand for crude oil has basically been up and right at varying levels over the past 40 years, said James Mick, senior portfolio manager at TortoiseEcofin, noting that in 2008/2009, there was a decline of about 1.4 million barrels per day. of global demand over a two-year period.

“Our worst recession in decades has barely seen a drop in demand for rough globally. In other words, demand has been incredibly resilient and we expect it to remain so, even if we have a recession.

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Felix J. Dixon