US gas demand should fall for good after '06 peak

By Jonathan Fahey, AP Energy Writer

New York (AP) - The world's biggest gas-guzzling nation has limits after all.

After seven decades of mostly uninterrupted growth, U.S. gasoline demand is at the start of a long-term decline. By 2030, Americans will burn at least 20 percent less gasoline than today, experts say, even as millions of more cars clog the roads.

The country's thirst for gasoline is shrinking as cars and trucks become more fuel-efficient, the government mandates the use of more ethanol and people drive less.

"A combination of demographic change and policy change means the heady days of gasoline growing in the U.S. are over," says Daniel Yergin, chairman of IHS Cambridge Energy Research Associates and author of a Pulitzer Prize-winning history of the oil industry.

This isn't the first time in U.S. history that gasoline demand has fallen, at least temporarily. Drivers typically cut back during recessions, then hit the road again when the economy picks up. Indeed, the Great Recession was the chief reason demand fell sharply in 2008.

But this time looks different. Government and industry officials - including the CEO of Exxon Mobil - say U.S. gasoline demand has peaked for good. It has declined four years in a row and will not reach the 2006 level again, even when the economy fully recovers.

In fact, the ground was shifting before the recession. The 2001 terrorist attacks, the war in Iraq, Hurricane Katrina and pump prices rising to a nationwide average of $3 a gallon for the first time in a generation reignited public debates about the political and economic effects of oil imports and climate change. Also, the popularity of SUVs began to wane, and the government started requiring refiners to blend corn-based ethanol into every gallon of gasoline.

Americans are burning an average of 8.2 million barrels - 344 million gallons - of gasoline per day in 2010, a figure that excludes the ethanol blended into gasoline. That's 8 percent less than at the 2006 peak, according to government data.

The decline is expected to accelerate for several reasons.

- Starting with the 2012 model year, cars will have to hit a higher fuel economy target for the first time since 1990. Each carmaker's fleet must average 30.1 mpg, up from 27.5. By the 2016 model year, that number must rise to 35.5 mpg. And, starting next year, SUVs and minivans, once classified as trucks, will count toward passenger vehicle targets.

- The auto industry is introducing cars that run partially or entirely on electricity, and the federal government is providing billions of dollars in subsidies to increase production and spur sales.

- By 2022, the country's fuel mix must include 36 billion gallons of ethanol and other biofuels, up from 14 billion gallons in 2011. Put another way, biofuels will account for roughly one of every four gallons sold at the pump.

- Gasoline prices are forecast to stay high as developing economies in Asia and the Middle East use more oil.

There are demographic factors at work, too. Baby boomers will drive less as they age. The surge of women entering the work force and commuting in recent decades has leveled off. And the era of Americans commuting ever farther distances appears to be over. One measure of this, vehicle miles traveled per licensed driver, began to flatten in the middle of the last decade after years of sharp growth.

"People wildly underestimate the effect that all this is going to have" on gasoline demand," says Paul Sankey, an analyst at Deutsche Bank. Sankey predicts by 2030 America will use just 5.4 million barrels a day, the same as in 1969. Aaron Brady, an analyst at CERA, predicts a more modest drop, to 6.6 million barrels a day.

As a result, families will spend less on fuel, the country's dependence on foreign oil will wane and heat-trapping emissions of carbon dioxide will grow more slowly.

The shift from SUVs began in 2004 and has saved Americans $15 billion on gasoline this year, according to the National Resources Defense Council. By 2020, improved fuel economy is expected to lower annual carbon dioxide emissions by 400 billion pounds, the equivalent of taking 32 million cars off the road.

In reality, there will be 27 million more cars on the road - a total of 254 million - a decade from now, according to government projections.

Environmentalists are looking at the trend with a mixture of disbelief and delight. A decade ago they thought demand would continue to grow 1-2 percent a year far into the future.

"Now you look and, wow, we've actually bent the curve," says Roland Hwang, transportation director at the Natural Resources Defense Council.

There are scenarios that, while unlikely, could temporarily upend the long-term trend. If the U.S. economy booms and global oil prices fall, demand for gasoline could rise.

"Sometimes what we think is a structural shift is really just a temporary phase," says Antoine Halff, an analyst at the brokerage firm Newedge. "U.S. demand has rebounded with a vengeance before."

To be sure, America will continue to burn more gasoline than any other country, in total and per capita, for decades to come. China is second in total consumption, but, despite its explosive growth, still uses just half of what the U.S. uses. Canada is second in consumption per capita but is on its own path toward a more fuel-efficient economy.

While America's diminishing demand will temper global demand, it will be more than offset by rapidly growing demand in China, India, the Middle East and Africa. As a result, declining U.S. gasoline demand will not bring lower pump prices.

Worldwide oil demand will hit a record 88.3 million barrels per day next year, according to the consulting firm Wood Mackenzie.

Put simply, "we're entering a period where the U.S. motorist is no longer the king of the road," Yergin says.

(Copyright 2010 by The Associated Press. All Rights Reserved.)

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