2016 SOI: The Clock Is Ticking On Gasoline
Low prices and high consumption will delay—but not prevent—category decline
After two years of record fuel margins and galloping gasoline demand, it would be understandable for c-store retailers to feel a little relieved. The long-term future of declining consumption, the inevitable shrinking of the industry’s largest sales generator—was it all a premature miscalculation?
Unfortunately for those in the gas business, the answer is no: The projections of decline still stand. That’s because long-term structural factors—i.e., Corporate Average Fuel Economy (CAFE) standards—are not likely to go anywhere. But several elements could influence the steepness of that fall, according to presenters at the summit.
When it comes to analyzing the energy market, three realities hold true, said Kevin Book, co-founder and managing director of ClearView Energy Partners LLC, a Washington, D.C.-based energy consultancy:
- Significant government control. The government influences energy supply and demand a lot and often.
- Limited data quality. Supply-and-demand figures from the government are imperfect, but they’re the only numbers the market has for gauging the state of these dynamics.
- Long infrastructure life. Policies that affect energy, which has a long infrastructure life, take a long time to play out.
“Forget these things, and you’re going to be wrong,” said Book.
On top of that, energy forecasters often have to make sense of trends and developments that are either not fully played out or are completely divergent. Take, for example, the fact that Tesla had sold more preorders for its mass-market Model 3 electric vehicle (EV) in a week than multiple EV manufacturers sold during the past four years. This is a vehicle that will not be ready for pickup until 2017.
So are EVs poised to take over?
“I question whether it’s a game changer for the entire industry,” said John Eichberger, executive director of the Fuels Institute, Alexandria, Va., during a presentation on the future of fuel. He pointed to the Model 3’s relatively small share of the overall vehicle pool based on preorders: 350,000 out of 18 million vehicles.
“I think the phenomenon is isolated to the Tesla Model 3. I don’t think it’s an indicator … for the EV market,” he said.
“It takes an awful lot to get to a place where an EV makes sense to the average or above-average driver,” said Book. “People aren’t in EVs right now probably because the price point isn’t there. Even if it was there, they would have to fuel it differently, live differently.”
That said, Eichberger believes EVs will begin to quickly gain critical mass as they address their biggest issues—price, range and recharge time—and consumers become more familiar and comfortable with the technology.
“We’ve got another 10 years before we see momentum on EVs,” he said, “but when that momentum hits, watch out.”
At the same time that EVs are making a splash, low gasoline prices are making new vehicle sales over the past year “pretty trucky,” said Book. Fifty-nine percent of new vehicles sold now are trucks and SUVs, he said.
There is a 30% correlation between gas prices and light-duty truck purchases, and typically it is “in the wrong direction,” with truck purchases rising as gas prices rise, according to Book. Only recently have lower gas prices triggered more truck purchases. This surely spells doom for efforts to improve fleet fuel economy, such as the CAFE standards, which are set for a review in 2017.
But not necessarily. First off, those trucks: Motorists tend to use them pretty heavily, and they fall out of the fleet pretty quickly—to the point that only one-quarter to one-third of the trucks sold today will remain on the road 10 years later.
And consider that the most recent set of CAFE standards have been in force for five years and have already had a significant effect on fleet fuel economy. The 75 million cars and trucks sold in that time are 3.5 miles per gallon (mpg) more efficient than the 85 million vehicles sold 10 years earlier than that. “So we have a spontaneous substitution to produce fuel economy gains,” said Book. “And as vehicle sales accelerate, they accelerate the substitution and, in effect, the fuel economy.”
The fleet fuel economy is projected to rise from 20 mpg to almost 25 mpg by the end of this decade. Based on current figures, this translates into a 10-million-gallon drop in gasoline consumption, or 500,000 barrels per year from 2016 to 2020, just because of the efficiency gains already “baked” into the fleet. Even assuming consumers’ appetite for trucks grows more, ClearView still expects a drop by at least 250,000 barrels per year. “It’s not the best picture, but not a bad picture,” said Book.
“How would you survive if you lost one-fifth of your gasoline customers by 2025?”
For fuel retailers, however, their largest category by sales will decline. By 2025, registered vehicles on the road will travel just as far as vehicles today on 55% less energy, according to EIA projections, “which means we’re going to see the reduction in fuel demand,” said Eichberger. After offsetting population and vehicle miles traveled (VMT) growth with fuel-efficiency gains, this translates into a 20% drop in fuel demand by 2025.
“How would you survive if you lost one-fifth of your gasoline customers by 2025?” he asked. “What are you doing to replace them?”
If you are hoping that a change in the White House this November could bring a cutback of CAFE standards, think again.
“The changing vehicle mix between what they projected in 2012, when they finalized the last set of standards, and what people are actually buying, is about a 26-million-metric-ton hole in their carbon budget that they just told the world that they were going to deliver in Paris last year,” said Book. “Is this politically important?”
Closing the emissions gap and keeping the United States’ Paris carbon-cut promises is job No. 1 for a Clinton or Sanders administration, said Book. This could mean new, broader rules, including refinery performance standards for greenhouse gases.
A Republican administration, meanwhile, is not likely to have that dramatic of an effect here. “You can’t just unravel final rules,” said Book. “It takes years.” More likely: A Republican president would live within the rules but only discretionarily enforce them.
Other developments may have additional impacts on fuel consumption. Take, for example, car-sharing services such as ZipCar and ride-sharing services such as Uber and Lyft. According to one study, the combination of car sharing and ride sharing has taken about 500,000 in new vehicle sales off the market. Are there longer-term implications?
From Book’s perspective, it is very difficult to determine how car sharing will change anything outside of the taxi industry. “If you eliminate the fixed-cost barriers to owning a car, you should definitely start to see more demand” for these services, he said. It’s a great model for generating more demand out of the same vehicles, he said.
As Eichberger pointed out, there has not been a measurable change in national VMT or fuel consumption numbers based on the growth of these services. But the potential is there, especially in urban markets.
“Of course, if you have fewer vehicles because no one’s buying cars and they have urban lifestyles, then you’re probably undercutting [fuel] demand,” Book said. “So it’s hard to say.”
Meanwhile, autonomous driving is already creeping into the vehicle fleet via semiautonomous features such as parallel parking. Eichberger sees the “human element” as the biggest challenge to wider-spread adoption of autonomous driving, especially the fully autonomous variety. But there is great potential for this technology to make driving safer and much more efficient.
All of these developments suggest that, despite gasoline’s banner past two years, its time is numbered.
“Gasoline is loud, it emits and we’ve been doing it for 120 years,” said Eichberger. He pointed out that consumers like to focus on “the shiny object,” such as Tesla’s Model 3 or fully autonomous driving.
“Combined with the car sharing and autonomous, I really wonder: Are we witnessing the death of American car culture?”
Liquid Fuels’ Future
In 2015, more than 97% of sales of light-duty vehicles (LDVs) were of liquid-fuel-powered automobiles, whether that fuel was gasoline, diesel or E85, the 85% ethanol blend. And despite the buzz around electric vehicles (EVs), hydrogen fuel-cell technology or compressed natural gas (CNG), liquid fuels will still dominate the vehicle mix 10 years from now.
A forecast by Navigant on behalf of the Fuels Institute projects that gasoline-powered vehicles will still have more than 83% share of sales by 2025, although this figure reflects a 10-point decline from today’s share of sales.
But how much of that 83% will come from regular-grade E10, the ubiquitous 10% ethanol blend, is up for debate. That’s because a few key trends suggest the future of gasoline may include a bigger role for biofuels.
Take for example, E15, the 15% ethanol blend that the Environmental Protection Agency (EPA) approved for use in model-year 2001 and newer vehicles. Its rollout in the fueling infrastructure has been very slow; five years later, only about 230 stations in 23 states are selling it, according to figures from Growth Energy, an ethanol industry advocacy group.
One big regulatory issue holds it back. The EPA set a minimum Reid vapor pressure for gasoline sold in the summer to minimize evaporation of fuel in the heat. E10 exceeds this minimum but was granted a waiver by the EPA. E15, however, was not so lucky, and currently can only fuel flex-fuel vehicles (FFV), even though analysis suggests its vapor pressure is nearly identical to that of E10.
“The biggest challenge is the regulatory hurdle,” said John Eichberger, executive director of the Fuels Institute, pointing out that retailers who are selling E15 are doing so because it is profitable, not because the government is mandating it. “If this vapor [issue] is resolved, and E15 can be sold to consumers as a fuel year-round, I would not be surprised if in five years … tens of thousands of stores are selling E15.” Midlevel blends—E25 and E30—may also have promise, benefiting from automakers’ drive to meet tougher CAFE standards with turbocharged engines, which run on higher-octane fuel.
The fueling infrastructure for E25 is much less costly to fuel retailers than that of E30. The challenge will be encouraging automakers and the government to consider this as they plan out a higher-octane fuel future.
One ethanol blend with a much less rosy future is E85. In 2019, automakers will lose the ability to earn credit toward meeting their CAFE standards obligations by producing FFVs, which can run on a range of blends, including E85. This means that unless consumer demand revs up, they will lose incentive to manufacture FFVs—so much so Navigant expects FFVs’ share of new-vehicle sales to fall from about 12% in 2016 to only 1.25% in 2025.
“You’ve got a couple years left to capture that 10% of registered vehicles before you start seeing that market start to erode,” said Eichberger. There are efforts to extend the FFV credit, so there is a chance the market will be preserved. Otherwise, “we’re looking at a situation where E85 might actually dry up, disappear, after a 20-year effort.”