Gasoline demand grew at its fastest rate in 35 years in 2015, BP said in its annual statistical review. With global GDP growth having fallen by .3 percentage points last year, it’s clear that low oil prices, which were sustained throughout all of 2015, were the main factor behind the rise in consumption. Demand growth has not let up this year, with data so far supporting the fact that consumers have not lessened their thirst for gasoline, and 2016 is expected to be a record-setting year for consumption in the United States.
With global GDP growth having fallen by .3 percentage points last year, it’s clear that low oil prices were the main factor behind the rise in gasoline consumption.
While consumers are pleased with extra disposable income as a result of lower pump prices and businesses are saving money on fuel, low prices and increased demand make oil increasingly durable for the longer term and will eventually give oil producing countries, particularly those with low-cost reserves, more geopolitical relevance and market power. Unfortunately, steady declines in fuel consumption in OECD countries that occurred over the past decade are reversing, and consumers have been lulled back into a sense of complacency.
OECD gasoline demand, after falling on average by 60,000 barrels per day over the past 10 years, rose by 300,000 b/d in 2015, while globally it increased by 800,000 b/d, or 3.3 percent, more than double its 10-year average, said the BP Statistical Review of World Energy. Oil prices were almost 48 percent lower year-on-year in 2015, while global economic growth, according to the International Monetary Fund (IMF), was 3.1 percent, down from 3.4 percent the previous year.
Steady declines in fuel consumption in OECD countries that occurred over the past decade are reversing, and consumers have been lulled back into a sense of complacency.
The advanced economies didn’t see anything spectacular last year, growing by 1.9 percent, up just .1 percentage point versus 2014. The U.S. was flat, while the euro zone saw an increase in growth on the back of more stability in debt-ridden Italy and Spain. Japan also got a slight bounce, but that was offset by declines in the UK and Canada. In short, economic growth mostly stagnated but gasoline consumption took off.
U.S. gasoline to shatter records
“Gasoline demand in the United States may have reached its peak, as rising prices lead consumers to make long-term decisions that will weaken demand in the years to come,” said analysts at CERA, part of IHS, in 2008, who suggested that high prices and shifts to greater fuel efficiency essentially capped demand. But that’s turning out to not be the case, thanks in large part to the low oil price environment.
The trends taking place in 2015 were not a one-off. There are signs that continued low prices in 2016 are still supporting gasoline demand growth, further undermining fuel efficiency efforts, slowing the transition to alternatives in the transportation sector, and strengthening the long-term outlook for oil producing countries such as those in OPEC. In the U.S., where gasoline consumption makes up almost 10 percent of the global oil market, demand has grown by more than .3 mbd so far this year, while economic growth remains flat, putting total oil demand up an astonishing 580,000 b/d, or 3 percent. Gasoline demand averaged 9.34 mbd for the first five months of this year, above the annual 2007 peak demand figures of just under 9.3 mbd.
Most, if not all, OECD oil demand growth will occur in the U.S., according to OPEC estimates, where demand is most sensitive to fluctuations in price. OPEC forecasts total U.S. oil demand to grow by 250,000 b/d in 2016, but that appears to be a very conservative estimate, given that growth so far this year is more than double that figure. The U.S. Energy Information Administration (EIA), likewise, appears to be cautious, seeing total demand rising by 220,000 b/d and gasoline up by only 170,000 b/d in 2016, despite the rampant growth already experienced. Still, the EIA says the U.S. will set a record in gasoline consumption this year.
How to tackle gasoline demand growth
Clearly, this upward trend in demand has made it urgent to foster changes in the transportation sector that would curb consumption as low fuel prices have delayed the transition.
Clearly, this upward trend in demand has made it urgent to foster changes in the transportation sector that would curb consumption as low fuel prices have delayed the transition. First and foremost, fuel efficiency standards need to be updated to remain consistent with current technology when the mid-term review of the 2025 mandate is conducted next year. Fuel economy standards can keep fuel demand growth in check, incentivize innovation in transport, and lower dependence on oil in the longer term. Second, the government can help accelerate the adoption of advanced fuel vehicles. As Securing America’s Future Energy (SAFE) argues in its National Strategy for Energy Security, the federal tax incentive for electric vehicles should be restructured to remove the 200,000 vehicle-per-manufacturer cap and be phased down beginning in 2021. Moreover, the government can also reduce the value of the federal EV tax credit for vehicles that cost more than 40,000 while eliminating it for those that are more than $55,000. SAFE also advocates for removing barriers against the adoption of autonomous vehicles, which will likely be more fuel efficient than today’s fleet and also hasten the move to electrification. All these efforts can help reduce oil demand over the longer run, but for now consumption will likely be influenced heavily by price.
Low oil prices have mixed benefits. While consumers and businesses reap cost savings from them in the short run, there will likely be consequences down the road, particularly when oil prices spike again and consumers are left using inefficient vehicles purchased during a time of low prices. The complacency of American consumers is evident in the miles traveled and their preference again for large vehicles that are less fuel efficient. The country has a tough task in reversing these trends.