In the February Short-Term Energy Outlook (STEO), EIA forecasts motor gasoline consumption in 2015 to increase by 80,000 barrels/day (bbl/d), or 0.9% (Figure 1). Forecast growth in highway travel, which is attributable to increases in population, employment, and disposable income, and retail gasoline prices substantially below those in 2014, more than offset improvements in the fuel economy of the vehicle fleet.
All other things equal, lower gasoline prices increase gasoline demand. Although the impact of gasoline price changes on demand grows over time as fuel prices affect consumers’ vehicle purchase decisions and where they choose to live, which affects commuting distances, the short-term impact of prices on gasoline demand is quite modest.
EIA’s STEO uses a short-term price elasticity of -0.033–for every 10% decrease in the price of gasoline there is a corresponding short-term 0.33% increase in gasoline consumption. With average gasoline prices forecast to be 31% lower in 2015 than in 2014, this elasticity suggests that lower prices alone will increase short-term gasoline demand by about 1%.
Expected gasoline prices are closely tied to crude oil prices. As oil prices have sharply declined, market expectations of uncertainty in the price outlook have increased, as reflected in the current values of futures and options contracts.
The February STEO forecast for North Sea Brent crude, the type of crude oil to which U.S. gasoline prices are most closely linked, is largely unchanged from last month, averaging $58/bbl in 2015. EIA’s forecast for retail gasoline prices, which is subject to the high uncertainty in the outlook for oil prices, averages $2.33/gallon (gal) in 2015, $1.03/gal less than the 2014 average (Figure 2).
After falling for 17 weeks in a row, U.S. regular retail gasoline prices began to increase by February 2, and through February 9 are up a total of $0.15/gal.Falling crude oil prices and high inventories of gasoline had contributed to the decline in U.S. weekly regular gasoline retail prices to an average of $2.04/gal on January 28, the lowest weekly price since April 6, 2009.
In 2016, EIA projects motor gasoline demand to decline by 50,000 bbl/d (0.5%) as the annual average retail gasoline price is projected to increase by 17% compared with 2015. The $2.73/gal forecast average gasoline price in 2016, 0.64/gal below the 2014 average, is consistent with a forecast in which the average price of Brent rises to $75/bbl in 2016.