The price of gasoline in the US has dropped by 9 cents, or 2.45%, over the past two weeks to $3.58 per gallon as of July 25. The current fall in the gasoline price is the largest in the last twelve months. Oil refineries processed 16.8 million barrels a day in the third week of July, the most since 1989.
The increased output has lowered the settlement price of West Tex Intermediate futures below the European Brent since August 2010. Gasoline futures dropped by 1.5% to $2.86 per gallon in the two weeks ended July 25. Demand for gasoline was 0.6% year-over-year (YoY) to 8.98 million barrels per day.
The overall demand for liquid fuels is forecasted to be down by 2.5% to 390,000 billion barrels of liquid per day (bbl/d) in 2014. On the other hand, the production of crude oil is expected to be up by 13.7% to 8.46 million barrels per day in 2014, thus contributing to the fall in its price.
The slashed gasoline price could have a major impact on companies like FedEx Corporation (FDX). This is primarily because fuel expenditure constituted 11.4% of total operating expenses in FY13. Fuel expenses decreased last year because of lower jet fuel prices and lower usage of aircraft fuel. As a result, a fall in gasoline prices would help expand margins by lowering operating expenses.
Similarly, United Parcel Service, Inc. (UPS) is also affected by changes in fuel price. As a package delivery company, its fuel cost is 8.3% of its total operating expenses. A $77 million decline in fuel expenses last year was largely because of a fall in jet fuel prices. Lower vehicle fuel efficiency contributed to an additional $14 million of fuel expenses. Moreover, the price of regular gasoline declined by 3.3% to $3.5 per gallon, which had a favorable impact on both FedEx and UPS.
Gasoline and automobiles are considered to have a high cross elasticity of demand since the two are complementary goods – a fall in the price of gasoline could positively impact the demand for automobiles. Regular gasoline prices fell by 3.3% last year to $3.51 per gallon, and had a positive impact on companies like Toyota Motor Corporation ADR (TM). Revenue during 4QFY14 was 63.9 billion, up 12.5% YoY. Moreover, industry sales this year increased by 11.3% to 1.6 million units, largely because of the improved economy. A fall in the price of gasoline could further help.
Gasoline prices are also expected to fall by 2.54% during 2015 to $3.45 per gallon, following the rise in the production level of crude oil by 13.7% to 8.8 million bpd in 2014. In the 1970s, amid the oil shortage crisis, a bar was placed on the export of US oil overseas. Companies like ExxonMobil Corp. (XOM) are calling for a re-examination of that decision, arguing that falling gasoline prices could hamper margins.
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