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Released on August 14, 2002
(Next Release on August 21, 2002)
Double Dip?
Is the U.S. economy poised for a double dip recession? That is the question being debated
by many leading economists as a new round of gloomy economic reports show the U.S. economy
slowing considerably from the robust 5 percent pace set during the first quarter of the year.
While growth (measured as Gross Domestic Product) weakened in the second quarter to only 1.1
percent, several reports issued recently hint at the possibility of even further economic
degradation during the third and fourth quarters of 2002. Moreover, five of the last six
recessions have included double dips, characterized by a period of growth (fourth quarter
2001 through second quarter 2002) followed by renewed economic contraction. But other
economists are more optimistic about the future of the U.S. economy because they believe
the economy is in much better shape as indicated by reports showing the sixth straight
monthly rise in industrial production (goods manufactured in factories, mines and utilities)
in June, the 1.1 percent jump in retail sales during the same month, and the record seasonally
adjusted annual rate of 1 million new homes sold in June. But what lies ahead for U.S.
petroleum markets? According to the EIA's most recent
Short-Term Energy Outlook, total
petroleum demand is forecast to average 19.9 million barrels per day during the second half
of 2002, a level 1.9 percent above the same period in 2001. During this same period, gasoline
demand is forecast to average about 8.9 million barrels per day, or 1.4 percent above the prior year period.
Crude Oil Inventories Continue Recent Downward Trend
This week's drop in crude oil inventories, while large, to our knowledge does not reflect any
significant change in market factors. This week's crude oil drop reflects a continuation of
a stronger-than-normal falloff that began in May. Crude oil inventories went from about 4 million
barrels above the middle of the normal range at the end of May to about 5 million barrels below
the mid-range point at the end of July. This week's 300 million barrel stock level leaves crude
oil about 10 million barrels over the low end of the normal band. With crude oil prices swinging
between $26 and $28 per barrel and futures markets in backwardation (i.e., contract prices in
future months are lower than today's prices), refiners have little incentive to hold crude oil
inventories. Furthermore, gasoline and distillate inventories remain on the high side for this
time of year, indicating refiners can turn to product inventory to cover short-term unexpected
demand needs without drawing on additional crude oil.
U.S. Gasoline Demand Continues to Show Resilience
U.S. gasoline demand continues to show resilience against the backdrop of recent events that,
when combined, have the potential to significantly slow the rate of growth in demand experienced
so far this year. And with only one of the three national holidays of summer remaining, the
U.S. ostensibly has adequate supplies of gasoline to meet expected demand through the Labor
Day holiday, barring any major petroleum infrastructure problems between now and then.
While cumulative petroleum demand through the four-week period ending August 9, 2002 totaled
19.5 million barrels per day, a level that lagged the year-ago level by 1.2 percent, gasoline
demand during this same period totaled nearly 9.2 million barrels per day, a level that
measured 2.4 percent above the same prior year period. Gasoline demand has remained strong
throughout the summer, even with the myriad news stories that filled the media during July,
including renewed turmoil in the Middle East, growing corporate accounting scandals, and a
swooning stock market. Perhaps the most damaging economic news report during the month was
the 9.2 percent drop in the July consumer confidence index, the largest since October 2001
following the September 11 terror attacks. In view of this, at 9.1 million barrels per day,
peak gasoline demand may have occurred during the four-week period ending August 2, 2002.
But as long as falling consumer confidence does not translate into diminishing consumer spending,
then gasoline demand would be expected to remain relatively inelastic to further disappointing
economic news and/or events similar to those prevailing during July and early August 2002.
As noted above, even if gasoline demand growth surprises us to the high side over the remaining
few weeks of peak summer consumption, it now appears unlikely that late season retail prices
will move much higher. While crude oil and spot gasoline prices entered the second half of
July/August 2002 period in much the same position as last year, stocks plummeted at a near
record pace last year, propelling wholesale and retail prices quickly higher, aided some by
the Citgo, Lemont refinery difficulties. The stock draw so far over this period this year has
been notably stunted by continued high imports and relatively high domestic production. Hence,
with much higher inventories and likely continued high new supply levels, any last minute price
surprises now appear more likely to be on the downside heading into the fall transition period.
What can we conclude from this for the upcoming winter, especially with continued pressures on
crude oil likely? Only time will tell.
Retail Gasoline and Diesel Fuel Prices
The U.S. average retail price for regular gasoline fell 0.2 cent per gallon last week, ending
at 139.3 cents per gallon as of August 12. This price is 0.1 cent per gallon higher than last
year, marking the fourth week in a row this summer that 2002 prices were higher than 2001 prices.
Prices were down throughout the country, except for the Midwest, which saw an increase of 0.1 cent
to end at 137.0 cents per gallon. The largest price decrease occurred on the Gulf Coast, where
prices fell 0.8 cent to end at 130.4 cents per gallon. Gasoline prices have been moving upwards
in the past few weeks, and while there is still potential for some pressure on prices ahead of
Labor Day, any significant movement would likely prove to be very brief, barring major regional
infrastructure difficulties. Retail diesel fuel prices decreased by 0.1 cent per gallon to a
national average of 130.3 cents per gallon as of August 12.
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