Released on July 19, 2006
(Next Release on July 26, 2006)

News Flash: High Gasoline Prices Do Restrain Demand
Recently, there has been a lot of discussion concerning the impact of higher gasoline prices on demand. Data released earlier today, showing gasoline demand over the last four weeks up 1.9 percent compared to a year ago, raise the question of how can gasoline demand be growing at a rate within the 1.5 to 2 percent range experienced during periods of significantly lower gasoline prices, even when the national average price for regular gasoline is close to $3 per gallon?

Part of the reason demand for the recent strength of demand growth is that demand during the comparable year-ago period was relatively low. As the graphs below show, gasoline demand this June and through the first 2 weeks of July, is below what it would have been had demand grown at a typical rate since 2002, when gasoline prices started their long climb. After averaging $1.38 per gallon back in June 2002, gasoline prices have increased steadily since, averaging $1.49 per gallon in June 2003, $1.97 per gallon in June 2004, $2.16 per gallon in June 2005, and $2.88 per gallon last month. However, gasoline demand is influenced by economic growth as well as prices, and at least some of the impact of prices on demand has been offset by the demand-increasing effect of strong economic growth.

Had gasoline demand grown at a 1.5 percent annual growth rate since 2002, demand would have ended up being about 0.2 million barrels per day higher by June 2006. An annual growth rate of 2.0 percent over the last 4 years would have put June 2006 gasoline demand nearly 0.4 million barrels per day higher than the 9.5 million barrels per day seen last month based on weekly data. A similar pattern for gasoline prices and demand can be seen during the month of July in recent years. Despite what many analysts consider very strong gasoline demand through the first two weeks of July, had demand grown at a 1.5 percent annual rate over the last four years, demand would be more than 0.1 million barrels per day higher, and 0.3 million barrels per higher had it been growing at a 2.0 percent annual rate.

Thus, the rise in gasoline prices since 2002 has had an impact on gasoline demand, keeping it from being even higher than it is. Economists and oil market analysts should be relieved to realize that basic assumptions, such as the notion that high prices should restrain demand (from levels that would otherwise be reached), still remain true, even if at first glance it appears that high prices are having no impact. Undoubtedly, recent changes in gasoline markets, such as the rapid phase-out of MTBE from the gasoline supply, has created new challenges for data collection, and the weekly data is always subject to revision as the more complete monthly data is reported to EIA. However, available data suggest that gasoline prices have not yet reached a level high enough to result in an absolute decline in demand, particularly given a robust economy.

U.S. Average Retail Gasoline Price Gains 1.6 Cents
The U.S. average retail price for regular gasoline increased by 1.6 cents last week to reach 298.9 cents per gallon as of July 17, which is 67.2 cents higher than last year. Prices rose for the third week in a row, reaching the highest weekly price since September 5, 2005. East Coast prices rose 1.8 cents, the largest regional price increase, to 298.0 cents per gallon. West Coast prices remained the highest in the nation, adding 1.4 cents to 314.9 cents per gallon. California prices were up 1.6 cents to 324.0 cents per gallon.

Retail diesel fuel prices gained 0.8 cent to reach 292.6 cents per gallon as of July 17, which is 53.4 cents higher than last year. Prices were up throughout most of the country, with the East Coast seeing the largest increase of 1.9 cents to 290.6 cents per gallon. West Coast prices remained the highest in the nation, falling 0.9 cent to reach 305.1 cents per gallon. California prices fell by 1.6 cents to 309.7 cents per gallon.

Propane Inventories Moderately Higher
Propane inventories moved moderately higher last week with a 1.8-million-barrel stockbuild that positioned the nation’s primary inventories of propane at an estimated 53.1 million barrels as of July 14, 2006. For the first time in several weeks, propane inventories posted gains in all regions last week. East Coast inventories, which had been nearly flat for the past three weeks, posted a weekly gain of 0.2 million barrels, while Midwest inventory gains continued strong with a weekly increase of 0.9 million barrels. The Gulf Coast region moved up by 0.4 million barrels last week, while the combined Rocky Mountain/West Coast regions inched higher by 0.1 million barrels during this same time. Propylene non-fuel use inventories rose by 0.1 million barrels and accounted for 6.8 percent of total propane/propylene inventories, unchanged from the prior week’s share.

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