CERA: US motor fuel market being transformed

Dec. 11, 2006
The US motor fuel market is being transformed by higher prices, tightening environmental requirements, changing demographics, growing world demand for oil, and expanding fuel options, said analysts at Cambridge Energy Research Associates (CERA), Cambridge, Mass., a leading energy advisor.

The US motor fuel market is being transformed by higher prices, tightening environmental requirements, changing demographics, growing world demand for oil, and expanding fuel options, said analysts at Cambridge Energy Research Associates (CERA), Cambridge, Mass., a leading energy advisor.

“Americans have been driving further-40% more than 25 years ago-and using more gasoline in bigger, more-powerful cars and other light-duty vehicles. But higher gasoline prices have had a significant impact,” said CERA analysts. “The rate of growth in gasoline demand slowed sharply from its 1.6%/year pace (1990-2004) to 0.3% in 2005, and continued to grow slowly in 2006, at 1%. And for the first time in 25 years, motorists’ average mileage went down.”

That drop in average mileage is not because of any significant reduction in the number of cars and trucks on the road, as is evident during rush hour driving in any major US city. In fact, the US is in the unusual position of having more vehicles than licensed drivers-1,148 registered personal vehicles (cars and light trucks) for every 1,000 licensed drivers, CERA acknowledged.

High fuel costs’ impact

US gasoline pump prices rose from an average $1.59/gal in 2003 to $2.30/gal in 2005 and averaged $2.61/gal through mid-November 2006. “Gasoline started at $2.30 in January 2006, hit a high of $3/gal in July, and is currently averaging $2.22 in November,” CERA said (Fig. 1).

Click here to enlarge image

CERA claims high fuel prices have cooled US drivers’ recent “passion for sport utility vehicles and minivans,” since new purchases of light trucks, SUVs, and minivans declined in 2005-06 for the first time since 1990. As part of that downsizing, General Motors’ new H3 Hummer, built on a midsize pickup truck platform, accounts for three-quarters of that brand’s current sales. Unlike its H2 predecessor, which at more than 8,600 lb gross vehicle weight was exempt from the US Environmental Protection Agency’s mileage-reporting program, the H3 has a highway rating of 19 mpg.

Yet there are still many H1 and H2 Hummers on the road. Those gas-guzzlers were once so popular that Hummer was the only GM division in 2003 that didn’t have to resort to costly sales incentives such as 0% financing. Meanwhile, many of the 2007-model autos are being advertised for their high performance rather than their low mileage.

“Although new car buyers are once again shopping for fuel efficiency, it will take some years for the fleet fuel efficiency to change significantly since new car and light truck sales account for only about 8% of the vehicle fleet each year,” CERA acknowledged.

In 1975, when corporate fuel efficiency standards were legislated, SUVs (including minivans and light trucks) accounted for just 16% of all vehicles. That market share peaked at 56% of all new vehicles sold in 2004. The SUV share of total sales slipped to under 55% in 2005 and 53% in 2006. “Buyers appear to be shifting from big SUVs to smaller, more fuel-efficient vehicles in that same class. While sales of hybrids are rapidly rising, so far in 2006 they constitute only 1.4% of new vehicles sold,” said CERA analysts.

The fuel efficiency of the entire automobile fleet-new and old cars-averaged 22.1 mpg in 2001. “Since then, however, the pace of efficiency gains has slowed, flattening out at 22.2 mpg by 2005. The average for all light trucks (SUVs, minivans, and light pickup trucks) on the road was 16.9 mpg as of 2005, below the federal target for new light trucks. Since light trucks are a growing share of the vehicle fleet, they pulled down the average for all vehicles to 19.8 mpg in 2005 (the last year for which complete data are available), a drop from the peak of 20.2 mpg attained in 2001,” CERA said.

Demand fluctuation

High energy prices during 1976-81 triggered rampant conservation in the 1980s, but the US economy has been slower to react to rising fuel costs this time around, partly because of greater disposable income. Gasoline and oil spending as a share of the average US household budget fluctuated at 3.4-3.6% in the 1960s, “rising to its highest level of 5% in 1981,” CERA reported. “It reached its lowest level with the oil price collapse in 1998 when just 2.1% of household spending went to gasoline and oil, and increased to an estimated 3.8% in 2006. This appears remarkably stable especially compared with medical care, which grew from 11.2% of household spending in 1981 to 17.3% in 2005, and with food, which declined to 13.4% from 20% over the same period.”

CERA analysts said, “The rate of growth in US gasoline demand averaged 1.6%/year over the decade and a half through 2004. But with rising gasoline prices, in 2005 US demand growth was only 0.3%, and for the first 11 months of 2006 show a reduced growth rate of just 1%. This contrasts sharply with significantly faster rates of growth from 1990 through 2005 in most emerging countries including China (6.6%), India (6.2%), and Brazil (4.5%).”

Click here to enlarge image

Some critics claim that US gasoline consumption is encouraged by low taxes on transportation fuels. Gasoline taxes amount to 5% of the retail price in the US, compared with 30% in Canada, 45% in Japan, 61% in France, and 64% in Britain (Fig. 2).

Demographic changes

CERA also sees demographic changes affecting the US transportation fuels market. Some 89% of the US population of driving age are licensed drivers. The average age is 40, but 29 million drivers, or 14.5%, are over the age of 65-”almost double the level of 25 years ago,” analysts said.

“Because people drive less as they age, and since an increasing share of the US population will enter middle age or retirement in the next 5-10 years, the growth rate of miles driven per licensed driver is likely to continue slowing, as in the recent past,” CERA said.

However, other sources point out that, thanks to modern medicine, US residents live longer and generally are healthier and more active in their later years. With more medical devices and procedures to maintain their vision and offset other handicaps that once sidelined senior citizens, the age of 60 is now considered the “new 50,” and more senior citizens may remain behind the wheels of their more-comfortable and easier-to-drive automobiles instead of retiring to rocking chairs as did previous generations.

Impact of modified fuels

In the interim, transportation fuels are changing. “Reformulated gasoline requirements, congressional and state mandates, and significant tax incentives (currently a 51¢/gal tax credit) have driven US ethanol consumption from 11,000 b/d in 1980 to about 350,000 b/d in 2006, or about 4% of total gasoline consumption by volume (Fig. 3). These supports suggest that ethanol output will continue to grow,” CERA said. However, the prevalent production of ethanol from corn in the US is not expected to exceed 10% by volume of total gasoline usage because of food-for-fuel tradeoffs and ethanol’s logistical challenges. “This would still be a significant number-close to 1 million b/d. But since ethanol provides about two thirds of the energy as the same volume of gasoline, more volume of ethanol is needed for every barrel of gasoline replaced,” said CERA analysts.

Click here to enlarge image

However, cellulose-derived ethanol made from the nonfood portions of plants expands the potential supply while reducing competition with food. A joint study by US Departments of Agriculture and Energy concluded the US has enough biomass resources to satisfy one third of US petroleum needs if cellulosic technologies and resources are employed.

“Cellulosic ethanol has the best growth potential for the biofuel market. But its current production cost of $2.25/gal ($3.38/gal of gasoline equivalent) is uneconomic,” said analysts at Simmons & Co. International, Houston, in a September report.

Refinery capacity up

No new conventional refineries have been built in the US since the 1970s because of the difficulty in gaining permits and public acceptance at new sites. However, refiners have invested $5-7 billion/year to significantly increase refinery capacity at existing plants in recent years. Modernizing, debottlenecking facilities, adding capacity, and completing environmental upgrades have increased capacity to 17.4 million b/d in 2006 from 15.3 million b/d in 1996 (Fig. 4). That is “about the same effect as building 17 average-sized new refineries,” CERA said.

Click here to enlarge image