The Fuse

Fuel Efficiency Gains Keep Gasoline Demand in Check as VMT Soars

by Matt Piotrowski | November 06, 2015

A mix of economic growth, population increases, and low pump prices has boosted driving, and if gasoline prices remain at current levels or move lower, vehicle miles traveled should rise even more in 2016.

Americans are driving more than ever, but gasoline demand remains below peak levels, indicating that fuel efficiency gains have kept consumption in check—at least to some degree. That’s the good news. The bad news is that the improvements in fuel economy have slowed down over the past year and are under threat from both consumers buying larger vehicles and automakers pushing for a loosening of government standards.

A mix of economic growth, population increases, and low pump prices has boosted driving, and if gasoline prices remain at current levels or move lower, vehicle miles traveled (VMT) should rise even more in 2016.

Recent data from the U.S. Federal Highway Administration shows that the 12-month rolling average for VMT hit a record 3,110,272 million miles at the end of August, continuously rising since the first quarter of 2014, and it particularly took off after gasoline pump prices collapsed last year.

VMT

The VMT reached this past summer was 2.5 percent higher than the level eight years ago when gasoline demand peaked and averaged 9.57 million barrels per day for the months June-August. Even though VMT shattered records this summer, gasoline consumption was .14 mbd, or 1.4 percent, lower than levels reached during the peak in 2007.

summergasolinedemand

The lower consumption, despite the rise in VMT, is the result of stronger corporate average fuel efficiency (CAFE) standards. Since 2008, actual fuel economy has risen from 20.8 miles per gallon to 25.2 mpg this year. Although the increase is substantial, fuel economy has stalled over the past year (see graphic below), the result of consumers returning to purchases of larger, less efficient vehicles amid lower retail prices. Against this backdrop, fuel-economy performance is lagging badly behind mandated levels.

fuelecon

The Energy Independence and Security Act of 2007 mandated new fuel economy for passenger cars, medium-sized automobiles and heavy-duty trucks, and they were tightened after President Obama took office. New vehicles are required to average 54.5 mpg by 2025, but the efficiency standards are under threat. Any slowdown in implementing CAFE regulations could reverse gains in limiting demand growth.

Mandate under scrutiny

The low-price environment could undermine the case to keep the current fuel efficiency targets in place when the Environmental Protection Agency and the National Highway Traffic Safety Administration review the current mandate.

In 2017, there will be the mid-term review of the mandate for vehicle models for years 2022-25. The current standards are getting pushback from automakers that want to delay implementation, now that consumers are switching back to bigger, less-efficient vehicles. Cost savings from vehicles with better fuel economy decline when pump prices are lower, since consumers pay more for their vehicles but don’t recapture as much in fuel savings. The low-price environment could undermine the case to keep the current targets in place when the Environmental Protection Agency and the National Highway Traffic Safety Administration review the current mandate. The Draft Technical Assessment Report examining CAFE standards for 2022-25 will be issued for public comment in mid-2016, and the proposal will be issued a year later, with the final decision by April 1, 2018.

If fuel economy standards aren’t tightened as originally envisaged, gasoline consumption could shatter previous peaks, undermining cost savings for consumers, increasing reliance on imports, and exposing consumers to more oil price volatility.

The problem is: If fuel economy standards aren’t tightened as originally envisaged, gasoline consumption could shatter previous peaks, undermining cost savings for consumers, increasing reliance on crude oil imports, and exposing U.S. consumers to more oil price volatility. “Fuel economy standards are a central element of U.S. energy security….,” write Varun Sivaran and Michael Levi of The Council on Foreign Relations in a recent report. “They are the primary way that U.S. economic policy reduces the country’s exposure to oil price spikes generated by conflict and instability overseas.” Furthermore, even if prices are low now, they shouldn’t be expected to remain around $2 per gallon forever. Consumers who buy inefficient vehicles now—which they can afford while gasoline prices are cheap—may find themselves in for a rude awakening when oil prices rebound, with potentially severe impacts for many household budgets and the U.S. economy at large.