Jason Lancaster | May 30, 2014 | Comments 14

0 Flares 0 Flares ×

“What if gas prices have peaked?” It’s a question I asked myself a few weeks ago, and it’s become a bit of an obsession for me since then. Partially, I’m curious about national gasoline prices, how they fluctuate relative to oil prices, how consumer usage of gasoline effects pricing, etc. Partially, I’m curious because automakers are working awfully hard to produce vehicles that consumer less fuel.

As far-fetched as it may sound, gasoline prices may have peaked (or may be peaking soon).

Demand For Gasoline In The USA Has Almost Certainly Peaked

Americans are burning less gasoline (and diesel) now than they did in 2007. Even projections for 2014 and 2015 – which are based on continued economic growth – show gasoline consumption isn’t going to increase (see eia.gov). While the sudden decline in gasoline use in 2008 was almost certainly a result of economic contraction, it’s not the only factor at play here.

The fact is, vehicles are more fuel efficient now than ever before, mostly as a result of federal fuel economy regulations.

In addition to regulations, gasoline demand is falling because consumers have bought more fuel efficient vehicles over the last few years. Automakers have made fuel saving technologies like direct injection, transmissions with more gears, and hybrids more affordable. A declining interest in driving among America’s youth has decreased demand for gasoline as well.

Still, regulations have played a big role in making the average vehicle more fuel efficient…and those regulations are about to get a whole lot tougher.

If we look into our crystal ball, it seems likely that gasoline demand will continue to fall. Consider:

Americans are driving less, especially young Americans

EPA fuel economy regulations are getting substantially more strict over the next decade – average vehicle fuel economy must double by 2025 compared to 2010

Alternative fuels and powertrains (like CNG, fuel cells, and battery-electric cars) are only going to get more popular, and these types of vehicles don’t burn any gasoline at all.

When you add it all up, it’s very likely that the USA will never burn more gasoline than it did in 2007.

What About Global Gasoline Demand?

It’s all but certain that gasoline demand in the USA is going to decrease annually. The trouble is, the USA isn’t the only country burning gasoline. There are billions of people in the world that don’t own cars, and many of them are going to buy cars very soon.

However, according to Exxon-Mobil’s 2014 Energy Outlook report, global demand for gasoline isn’t going to grow much longer:

[This decrease in consumer demand for gasoline after 2020] won’t be because of fewer vehicles in the world. In fact, from 2010 to 2040, the number of light-duty vehicles…is expected to more than double. [However,] the increase in the number of light-duty vehicles in the world through 2040 will likely be nearly offset by the fact that the vehicles themselves will be far more fuel efficient.

Even if China and India buy lots and lots of cars, these cars are going to be efficient. As US demand for gasoline falls, global demand for gasoline will just barely pickup the slack. By 2020 (or so), global consumer demand for gasoline is going to decline.

Does A 25% Increase in Oil Demand Mean Higher Gas Prices?

Of course, consumers aren’t the only ones burning petroleum. From air travel to cargo ships to industrial processes, Exxon-Mobil anticipates global demand for petroleum will increase about 25% by 2040. Which means that even if gasoline demand falls, petroleum demand will increase. But does an increase in petroleum demand lead to higher gas prices?

If you look at the volatility of oil pricing over the last 60 years or so, you see multiple dramatic price swings:

For 25 years after World War II, oil pricing was stable, even though demand was increasing dramatically. Then we had an energy crisis and a 15 year period of high prices…and then oil prices went back down to about what they were before (inflation adjusted). This price increase and decrease was a result of a few things, including:

As oil prices increased, consumers bought more efficient vehicles.

As oil prices increased, oil companies worked hard to discover and produce new sources of oil. US government policies were also changed to encourage domestic oil production.

OPEC lost their stranglehold on the global energy market.

Oil prices went from “sky high” to about what they were in the 50’s and 60’s (inflation adjusted), and they stayed at this lower price for nearly 15 years.

Granted, this is just one example of an oil boom and bust…but it’s a very relevant example, as we’re currently sitting in a similar situation in 2014. After a period of high prices, oil production is increasing daily. If global consumers can find a way to reduce their use of oil in a relatively sudden and dramatic fashion (perhaps by driving electric cars), we could see a repeat of the oil collapse in the 1980’s.

Or maybe not. Perhaps oil prices will increase with demand, and history won’t repeat itself. Who knows?

What Does All This Mean For The Truck Market?

To recap:

US demand for gasoline has peaked because consumers are driving less, and because of increasingly strict fuel economy regulations. Global consumer demand for gasoline will peak in the next few years, as vehicles are getting more efficient. Global demand for oil is likely to increase substantially between now and 2040 (about 25%), but that increase in demand may or may not increase oil and gasoline prices.

If you own a truck, all of this information probably means that your gasoline bills probably aren’t going up (at least not much), and might potentially go way down.

What’s more, it means that truck manufacturers have a reason to be bullish about the truck market. It’s no coincidence that GM has brought back the compact truck, that Nissan is making a big investment in the next generation Titan and Frontier, that Ford is building an aluminum truck, and that Toyota and GM will both being making mid-cycle engine updates that may include a diesel. These manufacturers know that increased fuel economy is going to lead to lower fuel costs, and that’s going to boost interest in buying and driving a truck.

One of my favorite saying is that “predictions are hard – especially about the future.” Still, when you add it all up, there’s reason to wonder if we’ve seen the highest gasoline costs we’re ever going to see.