AFPM ’16: US gasoline demand to peak in 2016, decline thereafter

By Ben DuBose
Digital Editor

SAN FRANCISCO -- The recent upswing in US gasoline demand is likely to reverse course by 2017, a leading industry analyst believes, driven by improvements in the fuel efficiency of light vehicles.

"Despite low fuel prices and the recent upward trend, we see this as a temporary recovery in demand," said Linda Giesecke, director of research for the Americas refining industry at consultancy Wood Mackenzie. She spoke at Monday afternoon's technical session on gasoline processes at the AFPM Annual Meeting.

In her presentation, "How real is the peak in US gasoline demand?" Giesecke noted that demand for US gasoline has recovered to levels not seen since the recession of late 2008.

Demand in the US is back up to more than 9 million bpd and continues to account for nearly half of total domestic fuels demand, making the outlook pivotal to refiners.

"Barring a major weakening in the economy, gasoline demand will likely match its 2007 peak in 2016, even if demand growth slows from last year," she said in her presentation at the AFPM Annual Meeting. "The question is whether positive growth will be sustained over the medium term, or whether 2016 will mark a renewed peak in demand for gasoline."

In the present upward cycle, the gasoline recovery gained strong momentum in late 2014 with the plunge in fuel prices. As a result, gasoline was a key component behind the surge in total US demand in 2015, resulting in the US accounting for nearly one fifth of total global oil demand growth, she said.

Nonetheless, Wood Mackenzie still views the recovery as temporary.

"This outlook is based on a moderation in growth of vehicle miles traveled (VMT) and, more importantly, accelerating fuel efficiency improvements of light vehicles," she said.

In addition to falling prices, Giesecke said that improvements in the US labor market have also played in a role in gasoline's recovery. Over two million more Americans are working now than a year ago. Assuming that the majority commute to work and travel 12 miles each way, the increase in commuting alone would be over 50,000 bpd, or 0.5%, she said. Moreover, that figure does not include the impact that having a job has on travel for other purposes.

A look at the 2015 fourth quarter, however, showed a moderation in those gasoline gains. Although still positive, year-on-year growth in gasoline demand slowed to an estimated 150,000 bpd in the fourth quarter. Early estimates for January suggest even lower demand, she said.

"The moderation in growth in the 2015 fourth quarter ties closely to our outlook for 2016," Giesecke said. "In general, gasoline's positive growth should continue in 2016, but at a slowing rate. Growth in [VMT] is expected to average a more moderate 2% for the year, still supported by low retail gasoline prices and an improving labor market. Fuel efficiency should improve, but not enough to counter the effect of rising miles."

By 2017, however, Wood Mackenzie expects the growth in gasoline demand to shift into decline, she said, based on an outlook for further moderation in VMT, along with the effect of sluggish gross domestic product (GDP) growth and rising fuel prices.

"More importantly, it is coupled with accelerating fuel efficiency improvements in response to government standards," she said.

From there, Giesecke expects the beginning of a long-term downward trend for US gasoline demand. In her presentation, she noted that last year's rate of growth in VMT was well above historical levels, adding that the general long-term historic trend has shown slowing growth since the late 1990s.

Over the medium and longer terms, she notes that VMT growth is expected to slow due to an economic slowdown expected in 2018 (owing to a worsening trade deficit), and because of a more gradual increase in the working-age population.

Additionally, aggressive government mandates, such as the Corporate Average Fuel Economy (CAFE) standards, are likely to dictate further improvements in the fuel efficiency of light vehicles. She noted that the 2025 CAFE target, which is not yet final, is equivalent to an "on-road" fuel economy of about 40 miles per gallon. To put that into perspective, the current average fuel efficiency of the vehicle stock is about 22 miles per gallon.

Overall, Giesecke expects fuel efficiency of vehicles to rise by 2%/year over the long term.

"Automakers will rely on a more rapid adoption of advanced gasoline technology and the use of lighter materials to meet these targets," she said.

That being said, the overall volume of vehicles will still grow, and gasoline will remain the dominant fuel, Giesecke said, adding that she does not expect electric vehicles and plug-in hybrids to be cost-effective enough to significantly replace conventional gasoline vehicles through 2025. However, the increased efficiency of those gasoline vehicles could lead to lower production needs, Giesecke said.

"After stabilizing at over 9 million [bpd] in 2016, and thereby marking a renewed peak, we see gasoline demand slipping under 8 million by 2025," she predicted.

One way gasoline demand could surprise to the upside is if consumers continue to shift from cars to light trucks, which has been seen in recent years as fuel prices declined.

"Consumer preference is an upside risk to demand, but we do not expect it to be strong enough to undo the overall declining trend, especially given our forecast for rising crude and gasoline prices.”

As a result, the focus for refiners could shift from overall production volumes to advancements in technology.

"In our view, the peak in gasoline demand is real," Giesecke concluded.

The AFPM Annual Meeting continues through Wednesday. As the exclusive show daily provider, stick with Hydrocarbon Processing for continued coverage.

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