Fuels Forward Blog: The Demand Wall
If we’ve hit peak fuel demand, where do we go from here?
OAKBROOK TERRACE, Ill. -- In its proposal to not raise biofuel blending volumes for the first time since the Renewable Fuel Standard (RFS) was enacted, the EPA acknowledged the existence of a blend wall—there is simply not enough demand for gasoline to absorb all of the original mandated volumes of ethanol as E10 and E85. (We won’t even touch E15.) But while the Sturm und Drang has swirled around ethanol, I think the bigger question is fuel demand.
Per person, average annual fuel consumption has dropped below 2008 levels and stayed there. Those who argue for a long-term fall might point to increasing fuel economy. In the EPA’s just-released annual report tracking average vehicle fuel economy, the agency announced that model-year 2012 vehicles attained a record fuel economy of 23.6 mpg--the second-largest annual increase in the past three decades. The new CAFÉ standards requiring carmakers to meet 54.5 mpg by 2025 will ramp this up even more.
There’s also evidence that the newest motorists—millennials—are just not that into driving. Recent research suggests that younger folks are simply driving less, whether for economic reasons or because they are settling more often than not in urban areas, which means a greater reliance on public transportation and less of a need for cars.
This has implications beyond ethanol, new cars and fuel sales. The Highway Trust Fund is due to go broke in 2014, and that shortfall is blamed on … yep, greater fuel efficiency and less driving.
It begs the question: Have we reached peak demand?
I asked Dan Gilligan, president of the Petroleum Marketers Association of America, this question recently, and he acknowledged that for the short term, fuel demand is flatsville. “You won’t see a lot of growth in gasoline,” he said. “If you’re in the c-store business and have great locations, you might see your volumes increase, but the overall impact in the area, some of the weaker competitors may not make it in that kind of environment.”
However, Gilligan also suspects that over the long-term, American drivers may reject the higher-mileage models carmakers will be putting out to meet the tougher CAFÉ standards, perceiving that they won’t offer the same oomph as the old clunkers. In this “Cuba scenario,” he sees carmakers eventually asking the government to reconsider the tougher mileage mandate because of weak new-car sales.
I also threw the question at John Eichberger at NACS. He predicts a very slow, long-term ramp up in demand. “Per capita, it’s going down,” he said. “We’re not on a 1% to 3% growth rate a year anymore. Now it’s 1% over five to 10 years.” But as cars get more fuel efficient and it costs less to drive, will drivers drive more?
For me, the biggest question marks are automotive technology and the price of gas—who knows where either will be in 2025. What else are we missing? Send me your thoughts to [email protected].