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Gasoline's slow fade heralds supply pain.
But climate will benefit,
thanks to more efficient engines, electric cars
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BLOOMBERG American drivers are
traveling more miles on less fuel than ever thanks to
a generation of cars with more efficient engines as well as new electric
vehicles
BY CHUNZI XU
BLOOMBERG
Gasoline demand in the U.S. has peaked, with a
surprise slowdown last year signaling that consumption is unlikely to
ever again return to pre-COVID levels.
This long-awaited milestone shows that
climate-friendly initiatives put into place more than a decade ago are
finally taking the U.S. across the threshold. American drivers are
traveling more miles on less fuel than ever thanks to a
generation of cars with more efficient engines as well as new
electric vehicles.
The government forecasts further
declines for gasoline demand this year and next.
What comes next is a two
track future, short-term pain, followed by decades of economic
and environmental benefits.
In the next several years, the fuel industry is
poised to cut supply faster than the drop in demand, with more plants
due to shut or convert to smaller biofuels facilities. The result
could be production crunches for gasoline, price spikes or even
limited outages because of the mismatch. Paradoxically for drivers,
it’s gasoline’s slow death that will make it painful.
In the longer term, falling gasoline demand
will eventually mean tamer prices and lower emissions, which is
obviously good news for the environment since transportation is the
biggest contributor to greenhouse gas emissions in the U.S. Peak
gasoline will “have significant implications for consumers, inflation,
politics,” said Mark Finley, an energy fellow at Rice University’s
Baker Institute for Public Policy. “All in all, a big deal – over
time.”
One of the strange things about being at peak
gasoline is that there’s still quite a lot of demand. Consumption
started plateauing in the years before the pandemic. Even as it drops
now, it’s not falling off a cliff and is still at what historically
would be considered high levels.
At the same time, oil refiners, who turn
crude into usable fuels, are already cutting back to stay profitable.
The supply losses were exacerbated because of pandemic-induced
shutdowns.
Since gasoline plants are destined to become
uneconomical stranded assets as demand fades, there’s little incentive
to increase output from them now.
In simple terms, the refining industry risks
moving on from gasoline more quickly than consumers.
It’s the latest example of the global energy
transition’s bumpy path. While most prices have calmed in the past few
months, the jolts in natural gas, electricity and fuel markets are
likely to be with us for the next several years as investments flow
out of fossil fuels and into technologies for clean power.
And it also underscores why energy-driven
inflation has become harder to control – even periods of relative
stability will likely be punctuated with
volatile price jumps that will make
the Federal Reserve’s job that much more difficult.
Oil refiners have already reduced their
production capacity by more than 1 million barrels a day, equal to
about 5% of the U.S. total.
That squeeze helped to send retail gasoline
prices to all-time highs in 2022 and left drivers in parts of the
country facing lines to fuel up during the worst crunches of 2021. The
disruptions are set to continue because of just how long the lingering
dependency on gasoline will last.
“It will take decades for gas-powered vehicles to
drive off into the sunset,” said Rob Jackson, a professor of Earth
system science at Stanford University.
The Energy Information Administration sees a
modest decrease for 2023, predicting a drop of less than 1% to 8.74
million barrels a day.
Matthew Parry, head of long-term forecasting at
consultancy Energy Aspects, says the declines will become more
pronounced over time. He predicts consumption will slump by about 15%
between 2022 and 2027, for a total decline of around 1.4 million
barrels a day over the period.
“It’s the ongoing replacement of old cars with
more fuel efficient ones that contributes to the steady erosion in the
amount of gasoline used per mile,” said Linda Giesecke, an analyst at
consultancy ESAI.
U.S. fuel economy in 2021 reached a record 25.42
miles per gallon, and preliminary data for 2022 shows an even greater
jump to 26.36, according to the Environmental Protection Agency.
These are the results of tough fuel mileage
standards Barack Obama called a “harbinger for change” back in 2009.
President Joe Biden has put forward even more aggressive goals, and
his administration’s Inflation Reduction Act dedicates $374 billion to
climate-related spending, including for EVs.
It’s hard to predict exactly when the supply and
demand sides will even out, partly because that will depend on how
quickly consumers buy new fuelefficient cars and EVs.
In 2022, vehicles that run on full or partial
electricity were poised to account for more than 17% of U.S. auto
sales, up from 3.3% six years ago, according to researcher LMC
Automotive. But so far, EVs account for less than 1% of all vehicles
on the road.
Cutting fuel demand is a long game. To put
in perspective how much time it
takes for the fleet to turn over:
Even if all cars sold in the U.S. today are EVs, it will take an
estimated nine years for EVs to replace just half the cars on U.S.
roads, according to John Eichberger, executive director of the Fuels
Institute.
Gasoline accounts for about 4% of the consumer
price index.
But fuel costs loom much larger in the minds of
consumers, many of whom have to fill up their tanks weekly. To
understand the outsize role gasoline plays in the economy, just
consider the extraordinary steps that the Biden administration took in
the last few years to keep prices under control: The president ordered
a huge release of reserves from the strategic oil stockpiles and was
imploring American oil drillers to increase output, even though the
move stood in contrast to his climate-focused agenda.
Short-term price spikes in the next few
years will continue to be a headache for policymakers. But zooming out
a bit more, the longterm decrease in fuel demand will eventually help
to keep costs in check.
“The politics of gasoline will also change,” said
Rice University’s Finley.
Green Play Ammonia™, Yielder® NFuel Energy.
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