Lower Gas Prices Likely?

By Luigi Fraschini

While we drivers suffer at the gas pump, the U.S. refining industry believes it is now in a Golden Age.  With gasoline demand outstripping domestic production for the foreseeable future, the result for the oil refiners is sustained profitability because profit margins are dictated by high-priced import sources of oil. However, a new report from management consulting firm Booz Allen Hamilton says that shifts in consumer behavior, government regulations and auto technology could drastically lower demand for gasoline, resulting in significantly lower gasoline prices.  While that would erode oil industry profitability, it is unlikely that many consumer tears would be shed over that.

Historically, the two factors that determine demand, vehicle miles driven and vehicle fleet fuel-efficiency, have changed in response to consumer priorities and the external environment, otherwise known as gasoline price changes. But according to the management consulting firm, unexpected shifts in these factors could put a crimp in demand for gasoline.

The firm created three potential scenarios and analyzed the potential impact of each of them on the refining industry. In each of the scenarios -- a sustained gasoline price increase at the pump, regulatory changes, and successful adoption of new auto technologies -- consumers would seek out, and auto makers would provide, more fuel-efficient vehicles, significantly lowering demand for gasoline.
 
Let's look at each of the three:

In Scenario 1, consumers would continue to pay high prices at the pump, due to fundamental or geopolitical impacts on crude oil price or refining structural changes. In the short term, the firm theorized that drivers would drive fewer miles.  In the medium-term, drivers would trade down to smaller, more fuel-efficient vehicles. And depending on how quickly the price changes in this scenario, gasoline demand could fall below domestic supply as soon as 2007.

In Scenario 2, changes in government CAFE fuel economy requirements would force light trucks to meet the same standards as cars by 2015. This would substantially change how and what we drive, because as car manufacturers reach the limit on gasoline technology, they will turn increasingly to diesel engines to enable them to meet the new mandates while continuing to sell highly profitable trucks and SUVs. In such a scenario, impact on gasoline prices could be substantial in the long-term, though slower to take root, but it is likely the diesel proportion of new vehicle sales would reach 46 percent by 2015, and gasoline demand would fall short of domestic production as early as 2010.

Finally, in Scenario 3, continuing technology advancements or changes in consumer consciousness would result in increased penetration of fuel-efficient hybrids, which could represent as much as 80 percent of all new vehicles by 2016. The shift to hybrids would create a substantially more fuel-efficient average fleet, and, depending on the rate of adoption, gasoline demand could fall short of production by 2010.

While the authors acknowledge that none of these scenarios is likely to occur exactly as laid out, elements of each could affect the future market for both fuel and autos, noted Booz Allen Vice President Robert Lukefahr. So don't make a long-term vehicle choice on a short-term fuel price trend.  You could well regret it.

Cleveland-based auto journalist Luigi Fraschini has been tracking fuel prices and auto industry trends since the 1970s.