(John Kemp is a Reuters market analyst. The views expressed are his own)
By John Kemp
LONDON (Reuters) - Traffic volumes on U.S. highways are at record levels but the rate of growth is slowing as the earlier impetus from lower gasoline prices fades and motoring costs rise.
U.S. motorists drove a seasonally adjusted 267 billion vehicle-miles in September, up from 265 billion in the same month a year earlier, according to the U.S. Bureau of Transportation Statistics.
But as oil and gasoline prices increased, the growth rate declined to less than 1 percent, from a peak of 4-5 percent in 2016 - when oil hit a cyclical low under $30 per barrel (tmsnrt.rs/2zVspkY) (tmsnrt.rs/2zVdI15).
Traffic volumes exhibit a lot of month-to-month volatility, depending on calendar effects, weather conditions and extreme events such as hurricanes, snowstorms and floods.
The relationship between gasoline prices and driving remains controversial among economists, and estimates for the price-elasticity of gasoline demand vary significantly.
In general, a fall in prices is associated with a faster increase in driving. Rising prices are linked to a slowdown in traffic growth.
Traffic volumes are not very sensitive to price changes, so a large change in prices is needed to induce a relatively small increase or decrease in vehicle use.
However, U.S. gasoline prices have risen almost 20 percent over the last 12 months and are 40 percent higher than in February 2016.
The result is that traffic volumes are growing more slowly than during the oil slump in 2015/16 and the slowdown is likely to persist in the rest of 2017/18 if prices continue to climb.
The impact on fuel consumption is more complicated because it depends on the average fuel efficiency of the vehicle fleet and the fuel-economy of new cars purchased each year as well as fuel prices themselves.
Fuel economy has flatlined since 2014 after increasing significantly over the previous seven years, according to researchers at the University of Michigan’s Transportation Research Institute (UMTRI).
The sales-weighted fuel economy of light vehicles sold in October 2017 was just over 25 miles per gallon, essentially unchanged from October 2014, according to UMTRI’s Michael Sivak and Brandon Schoettle.
Consumers have taken advantage of cheaper gasoline to buy larger, more powerful vehicles, in effect swapping passenger cars for crossover-utility vehicles, blunting the previous trend towards greater fuel economy.
If gasoline prices continue to rise in 2018/19, the vehicle-sales mix will likely switch back towards smaller and more fuel-efficient models, and fuel-economy ratings will start to rise again.
Lower crude and gasoline prices helped start the oil market rebalancing by accelerating fuel consumption while encouraging slower growth in oil production.
But as the oil market transitions from oversupply in 2015/16 to undersupply in 2018/19, crude and gasoline prices will have to rise to restrain consumption and incentivise more production.
Slower growth in traffic and fuel sales will be part of that adjustment and there are signs the transition is already underway (tmsnrt.rs/2AkrQ4T).
“Booming oil demand is eroding inventories”, Reuters, Nov. 2
“Oil market set to move from rebalancing to tightening”, Reuters, Oct. 25
“Feast or famine? Oil market in 2018”, Reuters, Oct. 10
Editing by Dale Hudson