Analysis-Bumpy road ahead for US gasoline demand and energy transition

By Shariq Khan

(Reuters) – While U.S. gasoline demand is unlikely to rescale the pre-pandemic peaks of 2018 as the energy transition accelerates, the pace of its decline is uncertain, illustrating the challenge for industry and the government in planning the shift to a low-carbon economy.

The complex interplay between the transition, policy, economic performance and consumer preferences have made it harder than ever to forecast gasoline demand.

Those forecasts are important for oil refiners making decisions on production and capacity, as well as for policy makers overseeing the transition. If refiners close capacity more quickly than demand drops, motorists could face higher fuel prices or even shortages.

American motorists alone consume 9% of all the world’s oil, so the trajectory of U.S. gasoline demand is arguably the most important consumption metric in determining global fuel prices.

“(U.S. gasoline) is the single biggest country-product combination in the oil markets, so it is really symbolic of something bigger: if this turns, then it could impact the entire energy transition’s progress,” said Ciaran Healy, oil market analyst at the Paris-based International Energy Agency.

“What makes it particularly hard to predict U.S. gasoline demand is that it is so finely balanced – there is this dynamic equilibrium where you have a number of factors really pushing demand up, and a number of factors counteracting that.”

U.S. gasoline consumption likely topped out at around 9.33 million barrels per day (bpd) in 2018, according to the Energy Information Administration.

Since then, the post-pandemic transition to a hybrid workplace has cut fuel demand for commuting. Rising vehicle efficiency standards have steadily increased the number of miles motorists drive per gallon, while a rapid hike in electric vehicle (EV) sales is eating away at fuel consumption. The spike in fuel prices after Russia invaded Ukraine also cut demand.

Against all that, there are more cars on the road than ever, and Americans are buying record numbers of gas-guzzling vehicles, such as pick ups and truck SUVs.

With the difficulty of predicting where gasoline demand goes from here, the EIA has revised its forecast several times this year.

In January, it pegged demand this year at 8.74 million bpd, a fall from 8.76 million bpd last year. By July, it forecast demand to complete its post-pandemic recovery this year at 8.92 million bpd – up from last year but 410,000 bpd short of the 2018 average annual record.

GAUGING THE EV IMPACT

The EIA forecasts demand for the motor fuel will fall to around 8.12 million bpd in 2030 in its reference case scenario. But it also says that depending on oil prices, policy changes, economic growth and EV sales, demand could range anywhere between 7.85 million bpd and 8.57 million bpd.

EVs are less than 1% of the 286 million vehicles on U.S. roads, but sales are rising fast. Sales are expected to grow to 1.6 million cars this year from a million last year, and could rise to as much as 8.3 million by 2030, but only if automakers meet the voluntary output pledges they have set in recent years, the IEA estimates.

“EVs are especially relevant in the medium-term version of the gasoline story,” Healy said.

“The numbers are rising fast, and the impact is almost entirely concentrated on gasoline so it’s likely to have a big impact but exactly how much is hard to say.”

The administration of U.S. President Joe Biden is investing billions of dollars on promoting EVs through subsidies and infrastructure and is finalizing steep efficiency improvement targets for combustion engines.

If EV sales and fuel efficiency rise as fast as this administration wants, drivers would cover 8% more miles between 2022 to 2030 on 16% less gasoline consumption, JPMorgan (NYSE:) analysts wrote in February.

This administration’s targets, however, could be modified by successors. The previous Trump administration rolled back efficiency targets set under former President Barack Obama.

JPMorgan estimates that efficiency gains and EV sales wiped around 100,000 bpd from gasoline demand last year.

EFFICIENCY

The U.S. light-duty vehicle fleet’s fuel economy has grown to a record 26.4 miles per gallon (mpg) in 2022 from 13 mpg in 1975, when Corporate Average Fuel Economy laws were first introduced, according to Environmental Protection Agency (EPA) data. Biden wants to nearly double this to 52 mpg by 2026.

Most Americans, however, are buying SUVs, pickups and mini vans, which have the worst fuel efficiency in the light-duty vehicle fleet.

In 2022, SUVs accounted for a record 45% of new vehicle output, while pickups accounted for 16%, according to EPA data. Sedans and wagons fell to 26%. Pickups and SUVs had a fuel economy of 19.3 mpg and 24.1 mpg, respectively, in 2021. Sedans and wagons had the highest efficiency at 32.2 mpg.

U.S. refiners are geared to produce more gasoline than anything else. During the pandemic, many oil companies and top trading outfits predicted demand would never recover. That precipitated refinery closures – six refineries shut or converted to biofuels production from 2020 to 2021, removing 750,000 bpd of capacity, according to the EIA.

Since then, some capacity has been added to match rising demand, and some refiners have started transitioning their output to focus on the growing petrochemicals markets, said Alex Hodes, energy analyst at StoneX.

Others are tapping international markets to make up for lower domestic demand, exporting a record 323 million barrels of gasoline last year, according to EIA data.

Landlocked Midwest refiners are likely to be in the worst position because they do not have easy access to the export market, said Patrick De Haan, head of petroleum analysis at GasBuddy.com.

The U.S. could lose up to 2 million bpd, or more than 10% of refining capacity over the next 5-10 years, depending on the pace of the transition, he said.