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Monday, December 18, 2017

How will increased bio-fuel use and better vehicle efficiency affect U.S. gasoline demand?

It is said that driving is as American as apple pie. At more than 9m barrels a day, gasoline accounts for almost half of U.S. oil demand, and more than a tenth of that of the world. According to the Financial Times, Capitol Hill wants to curb this. Use of biofuels, mainly ethanol, is to be expanded five-fold to 2.4 million barrels per day (mbd) by 2022. In addition, new cars must achieve 35 miles per gallon (mpg) by 2020, up from 21 mpg today.


The question is how this will affect the future U.S. gasoline demand. Ethanol provides only two-thirds of the energy of gasoline, and the dominant corn-based variety requires a lot of energy to produce. So the extra 1.3 mbd of ethanol possibly on the market by 2017 would actually displace only 0.7 mbd of gasoline consumption.



With regard to better vehicle efficiency, Michael Canes of the Logistics Management Institute (LMI) Research Institute has analysed the potential gains. Assume the average mpg for new vehicles improves evenly, and the total vehicle pool turns over at a rate of 7% a year. Then adjust for factors such as more traffic on the roads and the fact that greater fuel efficiency tends to encourage more driving. By 2017, average actual fuel efficiency might be 23.5 mpg, implying "savings" of another 1.3 mbd. In theory, then, biofuels and less thirsty cars should more than offset an expected 1.5 mbd of incremental U.S. gasoline demand by 2017. The savings would equate to perhaps one seventh of global incremental oil consumption.


Vehicle efficiency forecasts look robust - just reducing the weight of America's bloated cars would help. The annual increase in fuel efficiency mandated by Washington - about 3% - might seem ambitious. But vehicle manufacturers did much better than that in the decade after fuel efficiency standards were first passed in 1975, clocking up a 5.5% cent improvement each year.


A biofuels breakthrough, however, requires big technological strides, and quickly. Start-ups such as Coskata, backed by General Motors, are developing such wonders as swamp bacteria that turn old tyres and other waste into fuel. But expanding a laboratory process into a nationwide industry is a huge challenge.



The bigger near-term risk to oil prices is the economy. Gasoline demand growth in the U.S. has slowed to zero already. It turned negative in the recession at the start of the 1990s. China and the Middle East are now the centres of incremental demand, fuelled in part by domestic price subsidies. A U.S. recession seems unlikely to slow them to a stop but could have a noticeable short-term effect and recalibrate demand forecasts beyond that.


Washington's policy will have a real impact nonetheless, on a 10-year view. GSW Strategy Group, a U.S. energy consultancy, points out that all the presidential frontrunners have committed themselves to initiatives such as greenhouse gas cap-and-trade schemes. A bubble may be developing in alternative energy. But that does not mean all the technologies it spawns will be duds. And their use would not be confined to just one country - China, for example, also worries about energy security.


Contact: Erik Ranheim