American Drivers Signal a Top in Gasoline Demand
Labor Day weekend, marking the end of the US summer driving season, is typically the year’s last hurrah for gasoline producers. This year, the high-fives were reserved for drivers (and White House occupants): The average pre-long weekend pump price was down 13% from last year after gasoline refining margins collapsed in August. Pump prices have eased further this week.
This summer, Americans got back to driving about as much as they did before the pandemic, in terms of trailing 12-month vehicle miles traveled. Yet gasoline demand is down so far this year, and remains about 4% below the peak level of 2018.
More miles equating to fewer gallons is not a good equation for the oil industry and this heralds a profound development: that US gasoline demand, the world’s single largest pool of oil consumption, has almost certainly peaked for good.
Gasoline demand hit an earlier peak in 2007, just before a financial cataclysm and the Prius mania sparked by triple-digit oil prices undercut it for the best part of a decade. Even the then-chief executive of Exxon Mobil Corp. thought it had peaked for good. By 2016, however, demand had recovered all the lost ground and hit a new high in 2018. Beware peak prediction, so to speak. Still, regaining demand’s 2018 level now would mean closing a fairly persistent deficit of about 400,000 barrels a day in the face of several big headwinds.
The big drivers of gasoline demand are distance driven and fuel economy. Distance driven is, in turn, a function of how many drivers there are — population, essentially — and economic growth. Neither look conducive to a rebound in gasoline demand.
The US civilian population is expected to grow at just 0.6% a year over the next decade, the slowest rate since the Bureau of Labor Statistics began publishing such data. What’s more, the older cohort will grow fastest, and they tend to drive the least, with retiring boomers’ annual distance about 40% shorter than the national average. Meanwhile, the International Monetary Fund forecasts gross domestic product to grow by 2.05% per year on average through 2030 — respectable but slightly slower than the past five years and slower still compared with the decade prior to that, when gasoline demand was recovering.
Now consider fuel economy. The Prius’ moment in the late-aughts was relatively brief and US drivers resumed their shift toward heavier trucks and SUVs. Even so, average fuel economy kept rising, spurred in part by tightened federal standards and the nascent penetration of electric vehicles. Divide vehicle miles traveled by gasoline consumption and you get a crude proxy for this.
The recent slowdown in sales of EVs and the potential election of another Trump administration inclined to make tailpipes great again could conceivably curb efficiency gains. Given the economic and demographic headwinds, however, they would have to slow to a stop or even reverse in order to get back to 2018 demand levels sometime this decade. And while legacy automakers in the US have scaled back targets for battery electric vehicles, enthusiasm for plug-in hybrids has risen, which is still bullish for efficiency and bearish for gasoline.
On any reasonable view, US gasoline demand, accounting for one in every 12 barrels of oil consumed worldwide, has peaked.
This would tip the global gasoline market toward outright decline. Global gasoline demand was about 26 million barrels a day in 2022, or about a quarter of the global oil market, according to David Doherty, Bloomberg NEF’s head of research. Using figures from the International Energy Agency, he calculates that countries that appear to have reached their peak in 2019 or before accounted for about 60% of global gasoline consumption — equivalent to 16% of global oil demand — in 2022. The US is the crucial factor flipping the “likely peaked” markets from the minority to the majority.
Some of those may yet surpass prior peaks, of course. But most are aging industrialized societies, many of them European nations where the last peak in gasoline demand occurred prior to 2010. Even in China, the second-largest gasoline market and one that has kept growing, demand is forecast by the International Energy Agency to decline slightly next year and sales of EVs are already overtaking traditional vehicles. Plus, unlike the US, China’s population is shrinking already.
“Peak” tends to imply a sharp drop-off, but vehicles often last for a decade or more, so turnover to more efficient models or those using alternative drivetrains is slow. The likelier path for US gasoline demand this decade is a plateau or gentle decline.
Oil producers and refiners can draw only so much comfort from that. Even absent a sharp drop-off, having a significant and rising share of your market stop growing and enter decline represents a structural drag on growth and, thereby, on valuation multiples on energy stocks. And as Doherty lays out in a recent analysis, the headwinds building in gasoline consumption will inevitably spread to commercial vehicles, including heavy trucking, putting all road fuels, including diesel — comprising some 45% of the global oil market — in play over the coming years.
Slow or absent growth globally represents a shock even before getting to outright shrinkage. With summer gone, crude oil prices have fallen this week as minds focused on the prospect of OPEC+ beginning to unwind production cuts. Ideally, from their perspective, these returning barrels would be absorbed by rising demand. The drop in prices portends a less optimal outcome: excess oil pushing prices down. Now imagine the battle for market share that will ensue when the safety valve of rising consumption eventually closes off entirely.More From Bloomberg Opinion:
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