Three reasons why America is using less oil

Adam Levine-Weinberg | The Motley Fool

The United States is the largest consumer of oil in the world by a wide margin. In 2012, we used around 18.5 million barrels of oil per day (that's nearly 800 million gallons !). That represents around 20% of global oil consumption, and is still nearly twice as much oil as China uses. Until the mid-2000s, U.S. oil consumption was rising steadily.

However, a sharp uptick in oil prices caused demand growth to stagnate after 2004. The Great Recession then led to a steep drop in demand as people found ways to make do with less oil. In 2010, oil consumption looked like it might rebound, but since then, it has started to decline again. This is likely the beginning of a long-term trend. Here are three big reasons why U.S. oil consumption will continue shrinking.

Natural gas hits the road

The biggest factor undermining oil consumption in the U.S. is the growing abundance of natural gas. Natural gas production has been growing at a steady clip since 2005, but the growth in proven reserves is even more stunning. U.S. proven reserves of natural gas have doubled since 1999! This suggests that the recent supply glut is no flash in the pan.

The result is a growing gap between the price of oil and the price of natural gas. The promise of cheap natural gas is starting to make natural gas-powered vehicles economically viable. Compressed natural gas recently cost around $1.50 less per gallon equivalent than diesel. Fuel-guzzling heavy trucks look set to be the first to make the switch.

This year, Cummins Westport -- a joint venture of Cummins (ticker: CMI ) and Westport Innovations (NASDAQ: WPRT ) that focuses on building natural-gas powered engines for trucks -- introduced the first 12-liter natural gas engine. This engine is capable of powering heavy trucks weighing up to 40 tons, opening up a new market segment for natural gas engines. Cummins Westport already makes natural gas engines for smaller trucks.

Numerous major companies are embracing natural gas for their truck fleets. Home improvement retailer Lowes (NYSE: LOW ) plans to switch its entire truck fleet to natural gas by 2017 . Meanwhile, garbage titan Waste Management (NYSE: WM ) began moving toward natural gas last year, and 80% of the trucks it buys between now and 2017 will run on natural gas .

The opportunity to reduce oil consumption by converting heavy trucks to natural gas is huge. Heavy trucks only make up 1% of the U.S. vehicle fleet, but they get lots of usage and have low gas mileage, so they represent 20% of fuel consumption. Adoption of natural gas engines is still held back by an inadequate fueling infrastructure, but this problem is already receding, and will become an even smaller barrier over time.

Ditching oil heat

Cheap natural gas is also cannibalizing oil in another domain: home heating. Oil heat has been waning in popularity for many years, but the recent surge in oil prices and the simultaneous drop in natural gas prices have been the final nail in the coffin. Oil heat is making its "last stand" in the Northeast, but natural gas suppliers are extending their reach due to a combination of political pressure and economic interest.

In recent years, the cost of heating a home with natural gas has often been less than half the cost of using oil heat. While it costs thousands of dollars to convert from oil to gas, for homeowners who expect to be around for 5-10 years it's almost a no-brainer to switch. Moreover, many gas companies provide long-term financing for customers who switch from oil to gas, allowing them to pay off the conversion cost with the energy bill savings over time.

As a result, it should be no surprise that oil heat is rapidly disappearing. According to the U.S. Energy Information Administration, the number of U.S. households using oil heat has dropped from 8.4 million to 6.9 million just since 2008, and this total is expected to drop by another 3% this year. This trend is likely to continue for the foreseeable future.

More fuel-efficient vehicles

The third trend that is weighing on U.S. oil consumption is obvious to anyone who has looked at a new car recently. Due to tightening fuel economy standards -- as well as a shift in consumer preferences due to persistently high gas prices -- the U.S. vehicle fleet's fuel efficiency is steadily improving.

According to the EPA, the average fuel efficiency of new vehicles sold in the U.S. improved by 16%. Fuel economy has improved again this year, by roughly 5%. Moreover, with vehicle sales having rebounded strongly since the Great Recession, older gas-guzzling vehicles are being taken off the road at a faster rate. This improved fuel efficiency will more than offset the typical increase in gasoline usage that we would normally see due to population growth and economic growth.

Foolish bottom line

The U.S. still consumes plenty of oil: more than 18 million barrels per day. However, a number of developments are creating a long-term downtrend in U.S. oil consumption. Cheap natural gas is convincing everyone from trucking companies to homeowners to switch from oil to natural gas as their primary energy source. Meanwhile, high gasoline prices and stricter fuel economy standards are boosting the fuel efficiency of the U.S. vehicle fleet.

There are no signs on the horizon that these trends will reverse anytime soon. Combine this with rapidly rising U.S. oil production, and you have a recipe for better energy security and (hopefully) lower prices at the pump a few years down the road.

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