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Gasoline Demand Set To Collapse

Gasoline

U.S. gasoline consumption in August hit a new peak at 9.7 million barrels a day, a growth in demand that many oil bulls believe will be the driver for higher crude oil prices.

The short-term energy outlook by the U.S. Energy Information Administration forecasts the gasoline consumption to increase by 1.9 percent to 9.33 million barrels a day in 2016, surpassing the record set in 2007. However, on closer scrutiny, the future growth in gasoline demand looks to be skewed to the downside.

Fuel efficient vehicles will gain popularity on greater environmental awareness

The world is realizing the need for a cleaner and greener earth. The popularity of cleaner energy resources around the world is testament of the change.

The Obama administration’s aggressive Corporate Average Fuel Economy (CAFÉ) standards to reduce carbon emissions require the automakers to develop highly fuel efficient vehicles that average 54.5 miles per gallon by 2025. If successful, it will be a quantum jump over the 25.5 miles per gallon clocked during 2009 when the program was launched.

Hence, even if the vehicle miles traveled (VMT) increases, the total gasoline consumption is likely to reduce considering the more fuel efficient vehicles in the market.

China’s auto sales

The Chinese government cut taxes on small-engine fuel efficient cars by half in October 2015, which has seen car sales increase 13 percent to 14.2 million units in the first eight months of this year. Though a few experts believe that the tax cuts, which will expire this year-end are likely to be extended in 2017, the growth rate in the passenger vehicle (PV) sales will not be as robust as in 2016.

Credit Suisse expects the PV sales growth to slow down to 10 percent YoY in the 4Q 2016, compared to the 30 percent growth expected in 3Q 2016. They expect the 1H17 growth rate to further slow down to only 3 percent year on year, reports Barron’s. Related: Trudeau Pushes Through LNG Megaproject Despite Environmental Concerns

Even with such robust car sales, the domestic gasoline demand in China grew by 5.8 percent in July compared to the previous year. Hence, a falling growth rate in PV sales will reduce the growth of gasoline demand in China.

New technologies to add pressure on gasoline demand

An analysis of the electric-vehicle market by Bloomberg New Energy Finance (BNEF) projects that 35 percent of the new cars by 2040 will be electric vehicles, as shown in the chart below.

(Click to enlarge)

In another report by Wood Mackenzie, Tesla’s Model 3 will alone lead to a slide in 300,000 barrels per day of gasoline demand in the US by 2035. They also expect that by 2035, around 12 percent of new car sales will be electric vehicles. Related: This Could Be One Of The Biggest Winners From OPEC’s Production Cut

China is also witnessing staggering growth in EV sales, with an annual growth rate of 95 percent in August. This is likely to push the EV market share to around 1.5 percent of all new car sales by the year-end. This makes China the global leader in both volume and market share.

Electric vehicles are likely to make a serious dent in the gasoline demand as their technology improves and their price reduces.

Slowdown in global growth and risks of a financial crisis

The IMF cut the global growth forecast in July and recently IMF Managing Director Christine Lagarde said that “we continue to face the problem of global growth being too low, for too long, benefitting too few,” reports the Chicago Tribune.

Systemic risks from the troubled Deutsche Bank and the Italian banks is also likely to impact growth and pose a risk of financial crisis.

Any global financial crisis is likely to impact the sales of PV’s and hurt global gasoline demand.

By Rakesh Upadhyay for Oilprice.com

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