Recessions v. Petroleum Demand

Recessions v. Petroleum Demand

U.S. economic sentiment reached a turning point late this summer as rapid deterioration in labor data fueled speculation that the Federal Reserve’s policy rate has remained too restrictive for too long, placing unsustainable pressure on U.S. consumers and businesses.

The past week of economic data and material revisions to historical estimates substantiate many of these claims, raising bets that the Fed will cut by more than 25 bps at September’s meeting.

While these deteriorating indicators and recession bets receive abundant commentary, the real-world follow-on effects for energy market stakeholders do not.

Today’s Energy Shot gathers the data and dissects this obscurity to answer the question:

How have previous U.S. recessions impacted petroleum product consumption?

U.S. Gasoline Demand and Recessions

As shown below, monthly U.S. per capita gasoline consumption increased from fewer than 0.5 barrels per month to a peak of 1.3 per capita per month in 1979. Four of five recessions during these 29 years led to transient declines in gasoline demand.

The onset of the 1979 oil crisis and the ensuing decline in Middle Eastern production precipitated a ~148% increase in crude prices, compounding the effects of double-digit inflation and inflation-targeting rate policy.

As shown below, the 1979-1983 period had the most substantial impact on U.S. per capita gasoline demand of any recession until COVID-2020, with monthly consumption in May 1980 falling by over 8.79% year-on-year.

Subsequent recessions in 1990-1991, 2001-2002, and 2007-2009 resulted in peak Y/Y declines in gasoline consumption of -3.1%, -0.6%, and -4.4%, respectively.

Distillate Demand and Recessions

Similarly, U.S. per capita distillate consumption and recessions are inversely correlated. Like gasoline demand, U.S. distillate consumption (per capita) peaked in 1979, when the 1979 oil crisis accelerated a shift away from DFO-fueled residential heating. As a result, distillate demand became more closely tied to industrial sector activity during subsequent recessions.

• In line with this theme, readers should note the effects of 2022-2024’s prolonged industrial sector turmoil on distillate consumption. Per capita distillate demand (12M MA) reached its lowest since 1966 in June 2024 at 0.338 barrels per month.

Expanding on the role of industrial and freight-related consumption, a closer look at Y/Y changes reveals significant changes to distillate demand during recessions after 1970.

The 1979-1983 period led to a peak -14.97% Y/Y decline in per capita distillate consumption in November 1980, coinciding with a ~1.1 million decline in manufacturing employment for CY1980.

Subsequent recessions in 1990-1991, 2001-2002, and 2007-2009 resulted in peak Y/Y declines in distillate consumption of -8.99%, -5.48%, and -10.02%, respectively.

Takeaways for 2H24+

As depicted above, the trailing 12M MA for per capita distillate and gasoline consumption fell -4.42% and -0.12% Y/Y in June.

Furthermore, 12M MA per capita distillate demand reached its lowest since 1966 for this period (0.338 bbl per capita).

What do these trends indicate?

While recession risks are elevated, these declines are part of a long-term trend in U.S. petroleum consumption since the 2007-2009 financial crisis.

Vehicle efficiency, ethanol blending, and EV/hybrid adoption amplified the effects of the 2007-2009 financial washout, as the -16.3% decline in total per capita product consumption between 2005-2023 shown above coincides with a 33.8% increase in the average fuel economy of the U.S. light-duty passenger fleet (below).

Meanwhile, readers should note the relationship between industrial activity and distillate consumption remains particularly relevant for 2H24-1H25 demand. Anecdotal and raw data suggest the near-term demand outlook skews bearish, irrespective of a confirmed recession.

Data and Methodology

This analysis uses per capita petroleum product consumption (barrels) to provide a more accurate and comparable measure of product demand across decades.

As frequently highlighted on Energy Shots, cheap and abundant energy plays a substantial role in the U.S.’ economic prowess, and per capita petroleum consumption remains a powerful tool for comparing economic growth prospects.

While annual per capita crude demand is suitable for some comparisons, economic contractions (as determined by indicators like NBER’s) do not neatly align with calendar years.

According to NBER data, the U.S. has experienced 11 recessions lasting a total of approximately 113 months over the 894 months between January 1950 and June 2024, making the average duration of each recession approximately 10.3 months (median: 10 months).

To better align recession onset and changes to product demand, the above analysis dissects rolling 12-month average per capita product consumption against monthly NBER-determined recessions.

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