Publications: Notes at the Margin

Good News for the Economy, Not Such Good News for Gasoline, and Pretty Bad News for Refiners (May 3, 2021)


The Bureau of Economic Analysis reported robust US GDP figures on April 29. The gross domestic product grew at an annual rate of 6.4 percent during the first quarter of 2021. Personal consumption expenditures increased 10.7 percent, thanks mainly to the American Rescue Plan Act passed by Congress in March. The growth in real GDP and real consumption was excellent news for the US economy.


The news was not so great for the energy sector. Constant dollar consumer spending on motor fuels picked up a little but remains more than ten percent below previous levels. While expenditures on fuels went up in the first quarter, the increase was less than the rise in spending on everything else.


Working through the detailed BEA data, one finds that the Covid-19 crisis and economic changes between 2018 and 2020 have altered consumer purchasing patterns for gasoline. Consumers appear to be buying less, and they are more price sensitive.


Changes in residential preferences caused by the pandemic may be contributing to a permanent shift in gasoline consumption patterns as well. Several reports noted population shifts away from the large cities toward the suburbs and smaller cities following the release of the 2020 census data on April 26. These shifts may cut the amount of fuel used for commuting.


Two other factors affecting fuel use are the rise in lumber prices and tight labor markets, which might be slowing construction activity. Lumber prices have doubled in a year. Tight supplies and high prices should depress housing starts, which will reduce fuel use modestly.


The good news on the economy and not-so-good news on motor fuel demand are of little concern to refiners, though, compared to the skyrocketing price of their renewable volume obligation (RVO). The RVO is the biofuel volume target refiners must hit under the Renewable Fuel Standard. If they do not have their own renewables sources, they must purchase renewable identification numbers (RINs). On Friday, Argus Media put the cost of meeting the current RVO at eighteen cents per gallon. This amount has tripled over the last year.


The per-gallon RVO cost may rise further in the coming months if corn and soybean prices keep increasing. It could also be pushed higher if the Biden administration boosts blending requirements for 2022 and 2023. We expect this to happen because the RVO is a stealth gasoline tax that customers do not understand. Furthermore, the public’s distrust of the fossil fuel industry may make it impossible to shift the blame for higher prices to the White House. The success of California’s Low Carbon Fuel Standard program makes it clear that the industry has little clout.


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