The gasoline refining industry seems to have entered a golden age. Gasoline demand has been rising steadily since the mid-1980s and shows no sign of flagging. Yet supplies are tight and getting tighter. The predictable result of rising demand and inflexible supply: higher margins for refiners. Indeed, industry sources predict that gasoline demand will continue to grow for the next quarter century, keeping prices and margins high. But a recent Booz Allen Hamilton study suggests that refiner optimism may be premature. The study considered three possible scenarios: 1) sustained high gas prices; 2) tighter fuel-efficiency standards; and 3) adoption of fuel-efficient hybrids. Each scenario resulted in demand falling substantially below current industry estimates. In the worst case, a gasoline surplus could occur as early as 2007.
If gas prices rise to $2.00 per gallon and stay at that level, demand would plummet below supply by 2007.
Consumers are already reacting to higher gas prices much as they did before. Carmakers now have to offer incentives to sell SUVs because buyers are looking for better fuel efficiency. In a recent poll by Kelly Blue Book and Harris Interactive, 40 percent of car shoppers said that they factored gas prices into their purchase decision, and 17 percent said that high gas prices had already changed their minds about which car to buy.
Booz Allen’s analysis found that if gasoline prices were to spike to a real inflation-adjusted average of $2.00 per gallon, close to today’s price, and stay at that level, demand would plummet below supply by 2007. In a more conservative scenario, if real prices were to increase only 2 percent per year faster than forecasted by the U.S. Department of Energy’s statistical agency, the Energy Information Administration (EIA), demand for gasoline would slip beneath supply by 2014.
Consumers weren’t alone in depressing gasoline demand during the last price shock. Regulators pitched in as well. In 1975, with oil prices high and the vulnerability of supply demonstrated by the Arab oil embargo, Congress introduced new Corporate Average Fuel Economy (CAFE) standards. The standards mandated that automakers produce more fuel-efficient fleets, with a target of 27.5 miles per gallon (mpg) for cars and 20.7 mpg for light trucks by 1985. What if regulators were to respond to current price and supply uncertainties by requiring light trucks to meet the same fuel-efficiency standards as cars? Diesel engines would likely be an attractive option for manufacturers, because they are much more efficient than gasoline engines.
Assuming regulators phased in new CAFE standards with a target of car and light truck parity by 2015, Booz Allen’s analysis shows that diesel vehicles could account for 43 percent of light truck production in 2012, and that gasoline supply would exceed demand in the same year.