Pain At The Pump Could Curtail Travel Plans

Americans are used to prices fluctuating at the pump, but the recent surge in fuel prices is giving some consumers pause, and potentially affecting travel behaviors. In comparison with grocery bills, which have been increasing due to inflation but vary week to week, price changes at the pump are easily noticed by consumers.

Oil prices were generally stable to declining from 2014 to 2019 within a range of about $40.00-$70.00 per barrel (/bbl), then fell in 2020 as demand collapsed due to the effects of the pandemic. Oil prices have surged this year, with West Texas Intermediate (WTI) crude prices increasing to $101.78/bbl in April 2022, up 65% from $61.72/bbl in April 2021, and up 615% from $16.55/bbl in April 2020 at the onset of the pandemic. These elevated fuel prices have cascaded across transportation sectors that use various fuel types, including toll roads (retail gasoline and diesel fuel), ports (ultra-low sulfur diesel fuel), airports (U.S. gulf coast kerosene-type jet fuel), and mass transit (typically diesel fuel but ridership trends are correlated with U.S. retail gas price fluctuations).

Chart 1

U.S. retail gasoline prices increased to an average of $4.21 per gallon during April 2022, up 46% since April 2019, and reached near an all-time high on a nominal basis for consumers within the U.S. Less obvious to consumers is the real or inflation-adjusted cost of gasoline, which was $4.24 per gallon in 2008--so the current cost per gallon is at an almost 22-year high. Regardless, higher prices at the pump along with increases in other fuels flow through to the cost of airline tickets and consumer goods, as some portion of higher operating costs is passed on by airlines and shipping companies through ports.

The question remains what effect this will have on U.S. transportation infrastructure demand--notably toll roads, airports, ports, and mass transit--along with state revenues, particularly motor fuel sales tax. S&P Global Economics forecasts elevated U.S. oil prices and a high volatility in the near term due to the Russia-Ukraine conflict and sanctions on Russian oil and gas exports. As a result, the potential effect of recent surging fuel prices on U.S. transportation infrastructure issuer credit quality is worth considering.

S&P Global Ratings has identified several potential effects on issuers' creditworthiness from increasing fuel prices--some positive but most negative. However, we note that how long fuel prices remain elevated will be key in determining the effect on issuer credit quality.

Table 1

A Historical Lookback At Fuel Prices And Demand Trends

The recent surge in nominal gasoline prices closely mirrors peak prices experienced by U.S. consumers in 2008 (average of $3.31 per gallon), and from 2011-2014 (average of $3.57 per gallon), before declining to less than $3.00 per gallon by December 2014. In order to estimate the effect of rising fuel prices on future transportation demand by sector, we analyzed previous activity trends during these periods of elevated fuel prices (increases of 20% or higher from the previous year) for a predictive approach to the potential credit impact by sector.

Table 2

Chart 2

Historically, demand across the toll road, port, and airport sectors is generally inelastic to rising fuel prices, whereas demand for mass transit generally increases as fuel prices rise and consumers shift to a cheaper mode of travel. In the following section, we summarize key findings by select asset classes within the U.S. transportation infrastructure sector.

How Current Fuel Prices Affect Transportation Infrastructure Asset Classes

Toll roads

The prices of gasoline and diesel fuel affect the toll sector in many ways. Intuitively, we would expect that rising fuel prices would reduce VMTs, and declining fuel prices would increase them. Nevertheless, U.S. passenger and commercial vehicle traffic historically has not been directly correlated with fluctuations in fuel prices (chart 3). For example, although fuel prices increased annually from 2002–2007, remained at peak levels from 2011-2014, and rose from 2016-2018, VMTs also increased during these periods. However, other factors, such as incomes, more fuel-efficient or electric vehicles, and population density, also affect travel behavior. Overall, we do not expect rising fuel prices will materially alter driving patterns if sustained for a short time, similar to historical figures; however, if they are sustained for a longer period, in our opinion, elevated fuel prices coupled with high inflation could negatively affect leisure travel, with less impact on commercial traffic.

Chart 3

Mass transit

Mass transit ridership is generally correlated with fluctuations in fuel prices because consumers can shift to mass transit from car travel when fuel prices increase, or to car travel when fuel prices decline. During periods of increasing fuel prices, ridership has generally increased, as seen from fiscal years 2002-2008, and declined when fuel prices fell from 2014-2019 (chart 4). When U.S retail gas prices increase by more than 10% and gas prices are above $3.00 per gallon, all modes of transit benefit. Historical data for 2002-2011 from a study by the Mineta Transportation Institute indicate an increase of 1.7% for bus, 2.1% for commuter rail, and 1.8% in aggregate for transit ridership when fuel prices increase 10% and gas prices are at or above $3.00 per gallon. Mass transit ridership growth is more substantial when fuel prices increase above the $4.00 per gallon threshold; for example, light rail ridership increased 9.3% when fuel prices were above $4.00 per gallon. Mass transit operators generally do not pass on rising fuel prices to riders, given that fares are typically fixed and fare increases often require a lengthy approval process. In addition to fuel prices, other variables are at play, such as relatively low borrowing rates boosting private vehicle ownership and changing demographics within urban and suburban areas that have also contributed to ridership changes. Nevertheless, we believe there is a general trend that rising fuel prices can be additive and a credit positive for mass transit issuers.

Chart 4

Airports

U.S. air revenue passenger miles (and enplanements) have generally increased, despite some declines due to the September 11 terrorist attacks (2001–2002), the Great Recession (2008-2009), and the COVID-19 pandemic (2020-2022), with no correlation to fluctuations in jet fuel prices. Jet fuel is normally the second-largest expense for airlines after labor costs, and costs or savings are typically passed on to consumers through higher or lower fares. Consumers generally have been willing to absorb higher airfare costs, and similar to historical trends, we do not expect surging fuel prices will materially alter passenger demand levels and generally be credit neutral if sustained for a short duration, particularly given pent-up travel demand due to lockdown restrictions during the pandemic. However, if elevated fuel prices persist for a longer duration, we expect leisure air travel (not business travel) demand could soften somewhat since consumers might be reluctant to continue to absorb higher airline ticket prices passed on by airlines for a sustained period, especially in tandem with high inflation. For more details, see "U.S. Airlines Look To Higher Fares To Offset Rising Fuel Prices," April 4, 2022.

Chart 5

Ports

We view activity levels at ports (for the purposes of our analysis here measured in twenty-foot equivalent [TEU] tonnage units) as not correlated with diesel fuel prices, but rather tied to underlying economic conditions and global trade flows. The sector benefited from the slow-but-steady economic growth and benign foreign trade policies in the years before the pandemic; more recently, it has experienced significant increases in container volume, bolstered by U.S. economic growth as we emerge from the pandemic and changing consumer behaviors, despite rising fuel prices. Higher fuel prices are a large component of overall maritime shipping costs, representing generally about 50%-60% of total ship operating costs (for example, the cost to ship one TEU from China is $8,500 to the U.S. west coast and $10,500 to the U.S. east coast); however, these fuel costs are typically passed on and absorbed by consumers through higher cost of goods sold. As a result, fuel price fluctuations have not affected tonnage levels across U.S. port operators (chart 6), and we expect they will be credit neutral.

Chart 6

The Duration Of Elevated Fuel Prices and Inflationary Pressure Will Determine The Impact On Credit Quality

S&P Global Ratings believes the extent to which fuel prices affect credit quality will largely be determined by the duration of elevated fuel prices, which could affect longer-term demand trends across sectors. An erosion in demand for a sustained period could result in weakening market positions or financial metrics including financial performance, debt and liabilities, or liquidity and financial flexibility. Historical escalations in fuel prices, particularly in 2008 and from 2011-2014, did not materially alter transportation infrastructure issuer credit quality, either positively or negatively, within the toll road, airport, mass transit, and port sectors because market factors worked to increase supply and mitigate real or inflation-adjusted prices. Similarly, previous periods of elevated fuel prices in tandem with inflation did not materially alter credit quality. This last occurred in 1979 when fuel prices increased 35% and inflation was 11.3%, which resulted in VMTs declining a meager 0.6%.

Although fuel prices are elevated, S&P Global Ratings expects they will decline modestly in 2023 and 2024. However, there is a high degree of uncertainty and potential volatility due to the Russia-Ukraine conflict. S&P Global Ratings raised its near-term oil and gas price assumptions on April 28, and immediately following the Russian invasion of Ukraine. Crude oil prices spiked as news broke that Russia had invaded Ukraine on the morning of Feb. 24, with Brent and WTI both surpassing $100.00/bbl to reach their highest levels since 2014. Per our April 2022 assumptions, S&P Global Ratings estimates WTI of $85.00/bbl in 2022, followed by a decline to $70.00/bbl in 2023, and $50.00/bbl in 2024, resulting in elevated fuel prices only for a short duration.

We expect oil prices will remain volatile as users of Russian oil continue to look elsewhere and as EU restrictions on May 15 begin to take effect. However, pandemic-related lockdowns in China continue to counter concerns about supply shortages from Russia. Overall, the Russia-Ukraine conflict remains the biggest risk to oil and gas prices and we expect significant near-term price volatility as the conflict evolves. For more details, see "S&P Global Ratings Raises Oil And Gas Price Assumptions On Persistent Geopolitical And Supply Concerns," April 28, 2022.

Table 3

Overall, if the duration of elevated fuel prices is shorter, we expect the impact on credit quality will be generally neutral; however, if higher fuel prices are sustained due to market conditions, geopolitical factors, or regulatory reasons such as a carbon tax, they could be positive for mass transit, modestly negative for toll roads and airports, and neutral for the port sector. In chart 7, we highlight the potential credit impact across different sectors. In the near term, we believe there is significant pent-up demand for travel affecting the airport and toll road sectors with consumers willing to absorb elevated fuel prices generally for leisure travel for a short duration, mitigating the effects of elevated fuel prices or increasing airfares. Nevertheless, longer term, we expect U.S. consumers could modestly temper their travel patterns if elevated fuel prices and inflationary pressures persist, particularly for the toll road and airport sectors.

Chart 7

Temporary State Gasoline Tax Suspensions--Not Likely to Affect Revenue Or General Obligation Bond Ratings

In addition to affecting U.S. transportation infrastructure issuers, rising fuel prices have also had an impact on policy decisions as some state governments move to provide relief to consumers at the pump. S&P Global Ratings views temporary suspensions of state gasoline taxes, implemented recently by a few U.S. states, and being discussed by others, as unlikely to lead to rating changes on highway user tax-supported debt. To date, only three states with gas tax-supported bonds outstanding--Connecticut, Maryland, and New York--have suspended collection of their gas taxes, each for a limited time. None of the states anticipates a drop in debt service coverage compared with originally budgeted projections since, in short, rising gas prices in the near term are spurring collections, but as behaviors change with rising gas prices, it is uncertain where gas tax collections will fall. However, we continue to monitor the situation and to the extent future state gas tax suspensions result in material declines in debt service coverage, we could take rating actions. For more details, see "Temporary State Gas Tax Suspensions Likely Will Not Affect Revenue Or General Obligation Bond Ratings," April 12, 2022.