Cheaper Gas Prices, but Less Demand

Amid a credit crunch that is decimating consumer psyches and spending power, gasoline demand has dropped nearly 10% from a year ago, even as crude oil prices have fallen.

The daily barrage of stomach-churning financial news—for example, the recent two-day, 875-point drop in the Dow Jones industrial average—has prompted consumers and businesses to cut back. And that includes at gas stations. "People manifest their sentiments in how they drive," says Tom Kloza, chief analyst for the Oil Price Information Service in Wall, N.J. "Right now they're scared of a deep recession, of losing their jobs and substantial investments."

According to a weekly SpendingPulse gasoline report from MasterCard Advisors, a division of MasterCard Worldwide, U.S. gasoline demand hit its lowest point since September 2005 for the week ended Oct. 3, a decline of 3.2 million barrels.

Lower Prices Overshadowed

Compared to the same week last year, demand was down 9.5%, the largest year-over-year decrease since September 2006 (the figures aren't seasonally adjusted). The SpendingPulse reports are based on national retail sales, including charges on the MasterCard (MA) network, as well as estimates for cash and check payments.

Michael McNamara, vice-president of MasterCard Advisors in Purchase, N.Y., says that while the demand reduction in the spring and summer was a reaction to high prices, the latest fall in demand is happening despite lower prices. "The economy is on the front burner now," McNamara says. "We have a comparable price environment [to the spring and summer] but when you throw a financial storm on that, it has a compounding effect."

The lower gasoline sales account for temporary conditions such as damage caused by Hurricane Ike and temporary gas shortages in some parts of the South. Gasoline prices have fallen in recent months, but not enough to make a difference for consumers. Prices reached an all-time high of $4.11 per gallon on July 17, and slid 18%, to $3.48, by Oct. 7.

Oil Company Shares Hit

While the price lapse is a relief for consumers, it's not enough to offset macroeconomic problems dampening demand. That waning demand has directly hit the share prices of integrated oil companies, which have shed around a third of their value since reaching 52-week highs earlier this year. ConocoPhillips (COP) is off 35%, to 61; Chevron (CVX) has fallen 29.9% from its 52-week high, to 73; Exxon Mobil (XOM) is off 21%, at 76; and Marathon Oil (MRO) has shed 52%, to 30.

Doug MacIntyre, senior oil market analyst for the Energy Information Administration (EIA) of the U.S. Energy Dept., points out that despite the recent price drop, the retail price of a gallon of regular gasoline remains 33.5% higher than a year ago. "People are squeezed and cutting consumption of almost everything," MacIntyre says.

Consumer spending, which accounts for nearly two-thirds of U.S. economic activity, fell in July and August. Analysts expect the government to report this month that consumer spending shrank 3% or more for the just completed third quarter. That would mark the first quarterly decline since 1990, ahead of the 1991 recession, and the steepest since 1981.

Annual Decline Expected

MacIntyre says the numbers the EIA released Oct. 7 in its monthly forecast, predicting an average of $3.52 per gallon in October and $3.50 per gallon in November, are probably "a little too high," considering the demand destruction. Kloza predicts this month will bring the first year-over-year decreases in retail gasoline prices since 2006. He sees $3 or less in many areas within the next few weeks. He says he thinks demand will continue to be 3% to 5% below last year.

"Most of the decade we've been dealing with an uncertainty of supply," he says. "Now, it's uncertainty of demand."

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