Reuters: Once people ditch oil, they won’t come back

High prices don’t affect oil consumption much over the short run. But stubbornly elevated ones, as with the current outlook, can change demand growth permanently.

About two-thirds of the commodity used in the United States goes to transportation, according to the US Energy Information Administration. Americans love gas guzzlers: The three top-selling vehicles in 2021 – the Ford F-150, the Ram pickup, and the Chevrolet Silverado – are all trucks. And the average car on the road is 12 years old, so it takes a lot to move the needle, according to Reuters. 

During pockets of price spikes, gas consumption remains steady. From the summer of 2017 to 2018, the price of oil rose by two-thirds, with little change in demand. Consumption and behaviour adjust more if prices remain high for a longer period. A 10% increase in fuel costs reduced traffic by 3% and fuel demand by 6% over five years in multiple countries, according to a study from University College London.

When prices reverse course after staying high for a long period, demand doesn’t completely recover. Oil consumption increased about 4% annually prior to the 1970s according to the EIA. Between 1972 and 1980, the inflation-adjusted price of oil more than quadrupled. Gas growth slowed to about 1% annually after that.

High prices some three decades later caused demand to stall entirely. Oil went over $100 in 2008, and except for a pocket during the Great Recession, remained persistently high until 2015. U.S. gasoline demand plateaued in 2007, yet the economy is now two-thirds larger.

While gas prices are off more than 20% from their peak, they may remain elevated because supply can’t increase easily. Public oil firms prefer to repurchase shares over expanding production. Halliburton recently talked of consolidation among oil field service firms limiting expansion in drilling on a quarterly conference call. Saudi Arabia may not be able to increase capacity either.

With US gas demand stagnant, the next step is shrinkage. Advances in technology and stricter environmental laws are cutting into demand. A Ford F-150 now gets 22 miles per gallon, over twice as much as in the 1970s. Over 7% of workers now telecommute according to the government. Plus electric vehicle sales hit a record in the second quarter this year, according to Cox Automotive, and those consumers will hang onto their cars for a while. Once people ditch oil, they won’t come back.

The average price of gasoline in the United States was $3.90 per gallon on August 22, according to the American Automobile Association. A year ago, the average price was $3.16 per gallon.