The Fuse

Cheap Gasoline Creates Illusion of Abundance for American Motorists and Policymakers

by Nick Cunningham | April 08, 2016

The U.S. saw average retail gasoline prices drop below $2 per gallon in early January, the lowest prices observed since 2009 during the depths of the global financial crisis.

Cheap gas is fueling a driving boom in the United States, with consumption well above the five-year average for this time of year. It is still early, but the U.S. is on course to set a new record in gasoline consumption in 2016, breaking the previous high set in 2007.

The EIA releases weekly estimates on gasoline consumption, which are less precise than the retrospective monthly surveys, but assuming the latest data is accurate, the U.S. is currently consuming gasoline at a rate typically seen at peak driving season in the summer months. As a result, the upcoming summer could be a blockbuster for American gasoline demand.

gasoline consumption

Fuel efficiency gains secured?

In 2009, U.S. President Barack Obama issued new standards for cars and light trucks, requiring automakers to increase their fleet’s fuel efficiency to 35.5 miles per gallon (mpg) by 2016. In 2012, the Obama administration followed that up with standards for model years 2017-2025, tightening the fuel efficiency ratings to 54.5 mpg by the end of the regulatory period.

The standards are having an effect. As automakers improved the fuel efficiency of new vehicles, the overall fuel economy for the total fleet of vehicles on American roads jumped from 20.1 mpg in October 2007 to 25.8 mpg in August 2014.

That led to widespread speculation just a few years ago that gasoline consumption was heading for long-term decline, at least in the United States. “The U.S. has already reached what we can call ‘peak demand.’ Because of increased efficiency, because of biofuels, we’re not going to see growth in our oil consumption,” oil historian Daniel Yergin told NPR in 2012.

Demographic shifts were also thought to be putting gasoline consumption into structural decline. With Baby Boomers retiring and driving less, and the (possibly premature) belief that younger generations preferred denser and more transit-friendly lifestyles, and the rising popularity of ride-sharing programs, the age of the car appeared to be a thing of the past.

Oil consumption rises again

At least part of the fuel efficiency gains were driven by expensive crude oil, however, which made filling up a Hummer quite an expensive proposition.

Many American motorists have abandoned concerns about fuel efficiency, and are splurging on SUVs and light trucks at a rate not seen in years.

Now that crude oil prices are at their lowest levels in more than a decade, many American motorists have abandoned concerns about fuel efficiency, and are splurging on SUVs and light trucks at a rate not seen in years. In 2015, U.S. automakers enjoyed a record year in sales, with 17.47 million vehicles sold, surpassing the previous record of 17.41 million vehicles in 2000.

light trucks

Notably, the sales tilted much more in favor of heavier vehicles. GM saw its car sales fall by 14.2 percent, but its sales of trucks, crossovers and SUVS jumped by 16.3 percent. Moreover, cars only accounted for 30.2 percent of GM’s overall sales, down from 37 percent in 2014. Ford saw sales of its F-Series pickup trucks rise by 15 percent, and the F-150 continues to be the best-selling vehicle of any kind—for 34 years running. The industry is on track for another record year of SUV and light truck sales in 2016.

Even though the efficiency of cars and trucks being manufactured continues to improve, the fact that the overall U.S. vehicle fleet is shifting towards a larger share of gas guzzlers is reversing the decline in gasoline consumption observed following the financial crisis.

Higher-margin SUVs and light-trucks are great for automakers, but create a setback for the U.S.’ attempts at reducing its dependence on oil—domestic or imported. The overall U.S. fuel economy for March 2016 stood at 25.3 mpg, down 0.5 mpg since its peak in 2014. Energy forecasters have assumed that fuel efficiency would generally continue at a constant pace, weaning the U.S. off of oil slowly but steadily. Even though the efficiency of cars and trucks being manufactured continues to improve, the fact that the overall U.S. vehicle fleet is shifting towards a larger share of gas guzzlers is reversing the decline in gasoline consumption observed following the financial crisis. Furthermore, Americans are driving more now than ever before, setting a new record for vehicle miles travelled in 2015.

EVs to the rescue?

There have been more than 50 oil and gas exploration companies that have declared bankruptcy since the beginning of 2015, an indication that sub-$40 oil will continue to damage the industry. The IEA estimates global oil demand could rise by 1.2 million barrels per day (mbd) in 2016, and with supplies expected to remain flat, the markets should start to come into balance in the latter half of the year. As a result, oil prices should come off of their lows, although price projections are all over the map. Still, one could even make the case that oil prices could spike in the medium-long term given that the industry has deferred around $380 billion in investment from nearly 70 major upstream oil projects.

On the other hand, the rise of electric vehicles could slash oil demand over the coming decades as dramatic declines in the cost of batteries have allowed EVs to become tantalizingly close to cost and performance parity with conventional-fuel vehicles. According to Bloomberg New Energy Finance, EVs could beat conventional vehicles on price as soon as the 2020s not just in the U.S., but in most countries around the world.

Shaving off 13 mbd of oil demand, needless to say, would wreak havoc on an industry that has always been able to rely on continued global demand growth since its inception.

Lithium-ion battery costs have declined by 65 percent since 2010 to $350 per kWh in 2015. The declines are expected to continue, falling to $120 per kWh by 2030. BNEF forecasts EV sales to rise to 41 million by 2040, which would represent more than one-third of the market for light duty vehicles. If that estimate is realized, EVs would knock 13 million barrels of crude oil per day off of the market. “The electric vehicle revolution could turn out to be more dramatic than governments and oil companies have yet realized.” Shaving off 13 mbd of oil demand, needless to say, would wreak havoc on an industry that has always been able to rely on continued global demand growth since its inception.

A little bit of policy would help

The EV projections from BNEF are very ambitious, and there is no guarantee that the world reaches such a milestone. As we are witnessing today, motorists do not necessarily prioritize fuel efficiency, let alone an electric vehicle, when gasoline is cheap.

Policy tools such as increased fuel taxes, increased EV infrastructure, local deployment projects, extending EV sales tax credits, and public information efforts could help bolster deployment. But, there is no sign of any movement on Capitol Hill. Once a perennial concern for policymakers, oil dependence and energy security have dropped down on the list of priorities in Washington DC—and in car dealerships nationwide—as cheap oil creates the temporary illusion of abundance.