NEW YORK -- As crude-oil prices climb to historic highs, steep gasoline prices and the weak economy are beginning to curb Americans' gas-guzzling ways, reported The Wall Street Journal.
In the past six weeks, the nation's gasoline consumption has fallen by an average 1.1% from year-earlier levels, said the newspaper. That's the most sustained drop in demand in at least 16 years, except for the declines that followed Hurricane Katrina in 2005, which temporarily knocked out a big chunk of the U.S. gasoline supply system. This time, however, there is evidence that Americans are changing their [image-nocss] driving habits and lifestyles in ways that could lead to a long-term slowdown in their gasoline consumption, said the report.
As supplies have outstripped demand, gasoline inventories have been on the rise for four months, reaching their highest levels since February 1994. Yet, in a sign of the growing disconnect between demand and the market, prices at the pump are being driven higher by a powerful rally in crude oil to nearly $104 per barrel.
As refiners pay more for the oil they use, gasoline prices have gained sharply in recent weeks to an average of $3.13 a gallon in the week ended February 25, up 40% from $2.24 a gallon in January 2007. That is stoking worries, said the Journal, that prices will rise even more sharply as demand gets a boost from the approaching vacation season, when more Americans take to the road. Some experts predict gasoline could cost as much as $4 a gallon this summer.
If oil prices pull gasoline higher in the current economic climate, Americans are likely to pare back consumption even more, the paper speculated, which should help at least dampen the rise in prices as refiners build up a safety margin against fears of supply disruptions, experts said.
If the economy perks up, gasoline consumption could rise again, said the report. After softening between 1989 and 1991 as U.S. economic growth slowed, gasoline demand started to recover in 1992 and continued to expand until 2007, according to the report, citing the Energy Information Administration (EIA); however, economists and industry executives said demand would be likely to grow at a slower pace than in the past as Americans gradually become more fuel-efficient.
Over the past five years, the climb in gasoline prices, driven largely by the run-up in crude oil, hardly seemed to dent the nation's growing thirst for the fuel. Conventional thinking held that consumption would begin to taper off when gasoline hit $3 a gallon, the Journal said. But $3 came and went in September 2005, and gasoline demand didn't flinch. Consumers complained about the cost of filling their tanks, pinched pennies by shopping at Wal-Mart, and kept driving, it said.
Economists who study the effects of gasoline prices on demand say consumers tend to look at short-term price spikes as an anomaly, and do not do much to change their habits. They might spend less elsewhere to compensate, or take short-term conservation measures they can easily reverse, such as driving slower or taking public transportation, but the impact is minimal.
Regular gasoline prices jumped to $2.34 a gallon at the end of 2006, up 62% from 2003, according to the EIA. Yet demand continued to grow at an average 1.1% a year. Consumers were better able to absorb the increase because it was spread over four years, and the economy was doing fairly well, the report said.
Now, a weakening economy is intensifying the effects of high gasoline prices, at the same time Americans are being pinched by broader inflation, the paper said.
The combination of forces is prompting Americans to cut back on driving, sometimes taking public transportation instead. It's also setting the stage for what may be a long-term slowdown in gasoline demand by forcing Americans to become more fuel-efficient faster.
"If you think about the fact that U.S. motorists are responsible for one out of nine barrels of oil consumed in the world...and that consumption is no longer growing the way it used to, that's a major structural change in the market," Adam Robinson, analyst with Lehman Brothers, told the Journal.
The longer gasoline prices remain high, the greater the potential consumer response. A 10% rise in gasoline prices reduces consumption by just 0.6% in the short term, but it can cut demand by about 4% if sustained over 15 or so years, according to studies compiled by the Congressional Budget Office cited by the paper.
As consumers make major spending decisions, such as where to live and what kind of vehicle to drive, they are beginning to factor in the cost of fuel. Some are choosing smaller cars or hybrids, or are moving closer to their jobs to cut down on driving. Those changes effectively lock in lower gasoline consumption rates for the future, regardless of the state of the economy or the level of gasoline prices.
A weaker economy gets some of the credit for lessening demand. The EIA estimates that a 1% reduction in personal income cuts gasoline demand by 0.5% as consumers, along with truckers who deliver goods, cut back on driving, Laurie Falter, an oil-industry economist at the agency told the Journal.
The nation's slumping housing market has magnified that effect, the report said. In past years, when the housing market was booming, consumers used home equity to finance spending, including the cost of filling their gas tanks, Antoine Halff, an analyst with Newedge, told the paper.
Pinched consumers also are speeding up their shift to more fuel-efficient cars. Sales of large cars dropped by 2.6% in 2006 and by 10.5% in 2007. In January, they plummeted 26.5% from a year earlier, according to the report, citing Autodata Corp. Car dealers are selling fewer minivans and large sport-utility vehicles. In fact, only small cars and smaller, more fuel-efficient SUVs, are showing a rise in sales.
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