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Peter Tertzakian

Peter Tertzakian

Peter is an economist, investment strategist, author and public speaker on issues vital to the future of energy. He has clocked over 30 years of…

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The Upcoming Surge In U.S. Oil Demand Explained In One Chart

Oil Rigs

Wow. It’s not often a chart can say so much about human behavior, economic theory, oil consumption and maybe even the future of energy all in one spreadsheet column.

For one thing, the data I show this week confirms the maxim that “size matters.” When it comes to buying a new vehicle in North America, the bigger-is-better sentiment has been growing over the past 30 years, and especially so in the past three.

The simple line graph in Figure 1 shows the percentage of people that walk into a car dealership in the United States, kick a few tires of various size, and then drive off with a new pick-up truck or SUV. That choice trumps opting for a more modest set of wheels on a smaller car. Canadian data reflects similar buying sentiments.

(Click to enlarge)

Back in 2006, new car buyers began shifting to smaller vehicles, because the price of oil (hence gasoline) was rising quickly. Then came the Financial Crisis, which further amplified frugality. On the flip side, it’s quite remarkable what a recovering economy and cheap oil will do to consumer choice of mobility.

Never in the history of the automobile has the shift to progressively bigger vehicles been as aggressive as the last three. Back in 2013 the split was 50/50 – an average new car buyer could swing either way between big or small. Three years later almost two-thirds now choose a pickup truck or SUV. Related: The Oil Market Is At A Major Turning Point

From the perspective of energy demand, size matters in vehicle choice. That’s because fuel economy is dominantly a function of weight followed by aerodynamics. Larger vehicles mean more metal to haul around and box-like profiles means more drag. On average an SUV weighs about 1,000 pounds more than a car; a pickup truck 1,500 pounds greater.

Fuel economy differences between cars and light trucks are fairly stark. On average, a pickup truck will get 20 mpg (11.7 L/100km) versus 30 mpg (7.8 L/100km) for a regular car.

It’s true that technology and material weight reduction has improved fuel economy of all vehicle classes over time. But an important principle of energy economics is validated by the consumer data: Many gains realized through fuel economy and fuel prices are quickly eroded by people buying bigger vehicles and driving more. In other words, people eat their efficiency gains by consuming more.

This is nothing new; Figure 2 shows a 40+ year view of the expanded data in Figure 1. The same pattern happened back in the late 1970s during and after the oil price shocks. High gasoline prices put the brakes on big cars and people shifted their tastes to smaller vehicles like the Ford Pinto. But it was back to bigger-is-better by 1982. And like today fuel consumption numbers began to grow again.

(Click to enlarge) Related: Oil Has Room To Fall As Speculators Bail On Bullish Bets

Bigger, energy obese vehicles are back in vogue in a big way. And it’s not just in the Western world. The Lincoln Navigator is being resurrected in China feeding off the base human instinct that size matters. Around the world gasoline consumption is growing at a rate that is likely to set new records this summer; by association the global use of oil is barreling toward a staggering 100 million barrels every day.

The propensity for consumers to buy oversized petroleum powered vehicles highlights an oversized inconsistency in near-term arguments about “the end of oil.” Any influences acting to make oil cheaper—either on the supply side or demand side—is serving to only strengthen the pervasiveness and dominance of the product.

By Peter Tertzakian for Oilprice.com

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  • R Finch on March 23 2017 said:
    Or maybe, beyond hauling around work-related stuff (livestock, veggies, baked goods, stuff to sell on eBay, etc), people are just carpooling a lot?
  • Dave on March 23 2017 said:
    Sorry but it doesnt work like this. Ever heard of CAFE standards? These low mpg vehicles have to be offset by higher mpg sales. Sure the average fuel economy may drop slightly because of this but to act like gasoline demand will suddenly surge is ludicrous!
  • Jon on March 24 2017 said:
    Demand, only if the supply is manipulated. There is more than enough oil, period. Over 500 million excess barrels.
  • callmebob on March 24 2017 said:
    Takes several years for the newly bought vehicles to become a substantial portion of the rolling fleet. We saw 17.5M vehicles sold in 2016. Scrappage rate is about 4% annually... There are about 270M in the fleet... There's a problem with decreasing the demand for better CAFE fuel economy in the trucks/suv class - once they're in the fleet, we're burdened with them as a national consumption issue until they scrap out or get used for less miles via replacement/choice. In crude availability (price or blockage) crisis - you're stuck with them... What maybe ought to happen is give multipliers for improvements in those higher consuming vehicle's individual MPG numbers so the vendors have an incentive to address both. They're better than they once were, but stopping improvements has serious (and likely) long term negative consequences. It is perhaps a research project worthy of defense dept dark $ project ;)
  • JRATT1956 on March 24 2017 said:
    Sure some people are buying larger cars and trucks, but with 10,000 boomers retiring each day (driving less) I see gasoline use going down in the USA. My older sister just retired and is no longer driving 84 miles round trip to work. Her first month in retirement she has used 8 gallons of gasoline and she tells me when the new Walmart opens on April 26th, just 2.5 miles from her house it should drop to less than 4 gallons per month. I use about 14 gallons per month, only because I go to the mall every day to walk for exercise, when the weather gets warmer and I can walk in my neighborhood my fuel use will drop.
  • JHM on March 24 2017 said:
    One of the biggest misconceptions in the peak demand debate is confusing consumption with demand. Price sensitivity is the key issue. Consumers will consume wastefully when the price is low, but this is simply moving along a demand curve. It is not lifting the demand curve at all.

    So the industry believe that there is a buyer for every barrel they produce. This is true if you count traders who store oil as a buyer too. Simply having a buyer is not the point. The point is that when you oversupply the market, the price goes down.

    Ultimately, the quantity supplied will decline as producers reckon that the price of oil is too low to make money. So the real notion of peak demand is not that consumption declines, but that consumers will not pay a high enough price for oil to keep growing supply. As production declines, consumption declines too. The price might rise a bit, but not enough to bring production back to prior peaks.

    Moreover, demand elasticity is increasing. Technology is giving consumers many more compelling choices about the energy they use. Just having compelling EVs in the market place creates this sort of option. Thus, if and when fuel prices climb, then consumers will have better alternatives than simply trying to minimize trips. With increasing consumer choice, it will be more difficult for oil to sustain higher prices for longer periods of time. So what is happening to the demand curve is that it is tilting downward. It is not as inelastic as it used to be.

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