Lack of affordability limits gasoline demand growth

Oil markets

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Gasoline Jul16

How much of your day’s wage does it cost you to buy a US gallon of gasoline?  This chart from Bloomberg shows the answer for 61 countries, based on prices for 95 octane grade at the end of Q2:

  Bankrupt Venezuela is most affordable at 1% of a day’s income (based on GDP/capita)
  Kuwait (1%), and the USA, Luxembourg and Saudi Arabia at 2%, are the other most affordable Top 5 countries
  In the rest of the G7 countries, Canada is 9th at 3%; Japan is 14th at 4%; whilst Germany (17th), the UK (22nd) and France (23rd) are at 5%; and Italy at 7.5% is 29th
  In the BRICs,  Russia is 33rd at 9%; Brazil is 49th at 16%; China 50th at 17%; and India 61st at 80% (not a typo)

These are fascinating results as they explain why today’s lower oil prices have not led to a major increase in gasoline consumption.  Instead, they confirm that demand patterns in today’s New Normal world are driven by Affordability, not absolute price.

Gasoline Jul16aAffordability, of course, depends on more than just the absolute price.  Helpfully, Bloomberg also sort the data in terms of average annual gasoline cost (based on the amount of gasoline used per year in 2013, as a percentage of salary), as shown in the second chart:

  Venezuela is still most affordable at 0.3%, even though the average driver uses 120 gals/year
  China. Hong Kong, Turkey and Belgium make up the Top 5 at 0.5% of average annual salary – using 10 gals, 28 gals, 9 gals and 38 gals respectively
  In the G7, France is 6th at 0.5% using 36 gals;  Italy (18th), Germany (19th) and the UK (22nd) are all at 1% using 48 gals, 79 gals and 74 gals respectively;  Japan is 34th at 1.3% using 114 gals; USA is 47th at 1.9% using 420 gals; and Canada is 58th at 2.7% using 327 gals
 In the other BRIC countries, Brazil is 56th at 2.5% using 54 gals; Russia is 52nd at 2% using 88 gals and India is 20th at 1% using 5 gals

2 key conclusions can be drawn from this data.

The first is that analyses suggesting that Country A has enormous potential to double gasoline consumption by comparison with Country B are missing the point. If the cost of a gallon of gasoline in India is 80% of the average daily wage, it is no surprise that the average Indian only uses 5 gallons/year.  Unless wages rise dramatically – which would require major policy changes over decades – the country is going to remain near the bottom of the table.

Secondly, one also needs to look at the relative affordability of gasoline in terms of annual spend.  As President Obama noted in April:

The reality for the average American family is that its household income is $4,000 less than it was when Bill Clinton left office.

Essentially, therefore, the average American is already having to prioritise their discretionary spending.  And so whilst they might, or might not, like to drive more miles – the decision to do this won’t just be based on the cost of gasoline, even if the incremental cost of a single gallon is only 2% of daily income.

The gasoline data thus confirms that companies cannot rely on economic growth to drive revenue and profit growth, now that the Boomer-led SuperCycle has ended.  The Winners in this New Normal world will be those who can best meet people’s basic needs – for food, water, shelter, health and mobility – in the most sustainable way.

In turn, this suggests that companies need to adopt new service-led business models. These models will no longer simply be based on the value of the product, but will also include the global value provided by the product.

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