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US drivers are willing to pay up at the pump

Higher Fuel Prices

Record high prices at the fuel pump aren’t slowing Americans down.

By Justin Jacobs, Energy Source newsletter from The Financial TimesEnergy Source is a twice-weekly energy newsletter from the Financial Times. 

As I reported over the weekend, demand for petrol in the US continues to rise. Buyers, so far, aren’t shifting away from big gas-guzzling trucks and sport utility vehicles despite petrol prices hitting record highs earlier this month and remaining well above $4 a gallon. This may not sound like a lot to our European readers paying far higher prices to fill up, but it bites harder in the US where commutes tend to be longer and cars are far less fuel-efficient.

Why aren’t high fuel prices prompting people to cut back? There are a couple of factors at play.

For one, American consumers are still in relatively good financial shape after stockpiling cash during the pandemic. Even though fuel prices are high, they are not eating into Americans’ wallets in the same way they have in past price spikes.

Spending on petrol as a share of total personal consumption expenditures is averaging about 3.1 percent, Michael Tran, an analyst at RBC, estimated. In previous periods where high prices forced people to burn less fuel, that was more like 4 percent — or even higher, indicating that current prices aren’t stretching people’s finances as much as it would appear at first glance.

Despite the sticker shock of $4 petrol, the “psychological impact is worse than reality”, Tran said.

Another important factor driving demand higher despite elevated prices is that the country is still emerging from the pandemic. Analysts say people are likely to take the trips they have been postponing for two years even if higher fuel costs make the road trip or flight more expensive.

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“If you have to pay an extra 50 or 60 cents a gallon to go visit your parents, grandparents or friends that you haven’t seen in two years, you’re going to do it anyway,” Tran added.

Analysts say that means demand for fuel, already back at pre-pandemic levels in the US, will continue to surge higher going into the summer, which is typically peak driving season, even if prices remain high.

Nor are there signs that high petrol prices are breaking up America’s love affair with ever-larger trucks and SUVs. Electric vehicle sales are rising fast, but remain a small share of total cars sold at less than 5 percent. I spoke to a number of auto dealers around Houston who said demand for big trucks and SUVs remains as robust as ever — they make up roughly three-quarters of all sales.

When might we see consumers start to bend? National average prices would likely have to top $5 a gallon, analysts say.

The last time serious fuel demand was hit was in 2008 when pump prices were about what they are now. But when adjusted for inflation, that would point to average pump prices of roughly $5.20 a gallon, about $1 a gallon higher than they are today. Global crude prices would likely have to rise to nearly $200 a barrel to lift fuel prices that high. (Justin Jacobs)

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