U.S. retail gasoline prices advanced 11cts gal in the first half of January, with today’s average of $3.39 gal reflecting a bounce of 19cts gal from the December 20, 2011off-season low of $3.20 gal.

   I’ll provide some color on where I believe gas prices are headed; what will drive them; and why this year may be more episodic than consistent. But first, bear with me and look at some very compelling numbers that may possibly reflect a behavioral change similar to the en masse acceptance of seat belts some decades ago.

   Gas prices this Martin Luther King weekend stood 29cts gal above where they were one year ago, and yet there is virtually no difference in American expense totals. We spent about $1.15-billion on motor fuel on January 16, 2011 and we’ll spend about the same amount today.

    Why doesn’t it cost more even with higher prices? Chalk it up to continued demand destruction from the population. A year ago, Americans consumed gasoline at the rate of about 370-million gallons per day. More recently, the consumption rate has fallen to about 344-million gallons per day. As recently as 2008, early January demand levels were in the neighborhood of 391-million gallons per day.

    What’s behind this deterioration in demand? Should we be encouraged or discouraged by the factors that may push U.S. fuel consumption to the lowest levels since Elian Gonzalez was at the top of the news, Time Warner was heralding the synergies of its AOL purchase, and American Beauty was the Golden Globe winner? The year was 2000 and the month was January.

    The price of gasoline twelve years ago was $1.29 gal, and with demand at less than 336-million gallons per day, consumers faced daily costs of about $433-million each day, or about one third of today’s costs.

    The U.S. has added about 30-million light trucks and cars since January 2000 and the population has swelled by about 31-million people.

   Where did the consumption go?  Is this slump merely a slump, or is it something more structural, perhaps representing a “sea change”?

    MasterCard numbers, gleaned from millions of retail transactions, suggests that demand last week was just 8.044-million barrels per day (337.8-million gallons per day), the lowest number recorded in the seven year history of the survey. Energy Information Administration (EIA) data put gasoline demand at 8.179-million barrels per day (343.5-millon gallons per day).

   Gasoline demand destruction has been accelerating since October. MasterCard’s four week average demand calculation has been at a negative to year ago levels for 42 consecutive reporting periods. And, the slump can’t simply be attributed to price changes.

   In mid-May 2011, for example, U.S. motorists were paying about 38% more for their fuel when compared to the same week in 2010. Yet, gas demand was down a very modest 1%. Early 2012 saw consumers pay just 9% more for their fuel and yet the year-on-year decline has been in the 4% to 5% neighborhood this winter.

    Here’s my best shot at solving this mystery. Listed below are theories garnered from refiners, distributors, and retailers about what has happened and what is still happening to U.S. gasoline demand. No single item is responsible for the demand destruction, but I’ve put the contributing factors in reverse order of importance.

  5. Motorists are aggregating trips, and more heavily relying on “Big Box” locations such as BJ’s, Costco, and Sam’s Clubs. There is widespread acceptance of these private or “off” brands.  Costco doesn’t take MasterCard, so volume growth there is not captured by the card company. More traditional “mom & pop” c-stores are seeing volume attrition of 4% to 8% in some cases.

  4. Oil price fatigue. Motorists and families spent a record $481-billion on fuel last year and that payment still hurts. They are consciously cutting back on discretional travel, particularly since there are few exciting places to travel to in January. (And yes, I have long maintained that “spite” can limit gasoline purchases. In New Jersey, it is one of the pillars of human behavior)

  3. Better Mileage. The Energy Information Administration (EIA) cites “slowing driving-age population growth” which equates to fewer motorists each year. This isn’t necessarily a bad thing - - scientific studies have shown that the teenage brain tends to promote risky and irresponsible behavior. In New Jersey, the driving age is 17. I am always stunned to hear of the many states that allow driving at age 15. Those young people that are driving aren’t behind the wheel of a 1969 Chevy Impala, like I was when I was learning to drive. They are driving hybrids or modern safe versions of lime green pintos.

 2. Understated unemployment numbers. Gasoline consumption has always trended with employment, but the recent disconnect between macroeconomic jobs’ numbers and gas demand is compelling. The “real unemployment” number is high, and the “underemployment number” (where out-of-work AIG executives are shucking fries) has steadily grown as well. If you live in a state that saw a construction boom, you may be aware of plenty of workers with no place to drive.

 1. Heavier cocooning. Let me abandon the behavioral psychology and business-speak for a moment. I maintain that we have seen at least twelve years of blaring drumbeats from media, business leaders, and even politicians. The message?  From Black Friday through New Years Day, go out and spend lots of money that you don’t have on crap that you do not need.

   The bills come due in January. This translates into a tightly wound cocoon that makes Mothra look stark naked.  

   By the way, spite reenters the equation as the teeming millions discover that they are using less and paying more for transportation than ever before. I expect an even more ornery public in the spring when fuel prices trend higher.  Gasoline demand is much less lumpy than it used to be, so we can expect a “demand lift” of only about 400,000 b/d (about 17-million gallons per day) under most circumstances.

   The EIA believes that when 2012 concludes, we’ll see nominal demand destruction, with gasoline demand likely to be off by just 0.2 percent this year. I’d be willing to bet that the actual demand drop will be five or tenfold of that prediction.

Price Predictions Short and Intermediate Term

   Goldman Sachs last week maintained that crude oil’s strength in the last six weeks has nothing to do with Iran and everything to do with strong economic growth (presumably outside the U.S. and Europe).  The bank is becoming a mix of Goldilocks and Goldmember.  Interestingly, a wire service report on Wednesday (that mentioned a possible delay in European Union sanctions against Iran) immediately led to a burst of selling that took crude down from $103 bbl to $99.75 bbl within a few minutes.

  Oil buyers may not be purchasing crude oil futures and options on the premise of Mideast saber-rattling. But there is no question that the Iranian news impedes sellers, and keeps them out of the market until the coast is clear.

  Last year, we dealt with advance notice of various “days of rage”, again, something that we are quite familiar with in New Jersey (every January day is at the very least a day of quiet disaffection and apathy).

   January 27 is the day on which the Iranian navy has scheduled war maneuvers in the Strait of Hormuz. It will be difficult to drum up any real selling interest until that day passes. Sellers just can’t risk an incident that provokes the madding crowd.

  The other geopolitical region that deserves scrutiny is Nigeria. Threats of general strikes have always been commonplace, but that country continues to probe the depths of chaos. And every time I hear the name of the growing terrorist group, Boko Haram, I turn a whiter shade of pale.

  Beyond the world, and here in the U.S. where it counts, the stage is still being decorated for a typical spring gasoline spike, prompted not by rising demand, but instead by constricting supply.  The “Dark Ages” have descended on the refining industry in Europe and Philadelphia (there is a W.C. Fields joke in their somewhere) and we are now beginning to see extensive maintenance shutdowns on both sides of the Atlantic, as well as in every region of the country.

     I’m still handicapping the likely April/May peak in retail unleaded gasoline in the $3.75-$4.25 gal neighborhood and maintain a Vegas over/under rating of $4.05 gal. The northeast and the West Coast should be the hot spots. That is perhaps appropriate, given the participation of the Patriots, Ravens, 49ers, and Giants in the conference championships this year.