US gas demand is down

SUBHEAD: Speculators ignoring permanent drop in US gasoline demand. Image above: An abandoned car in the great plains after the Great Depression. From ( By Steven Zweig on 3 February 2010 in - ( Gasoline demand will never recover, says analyst Stephen Schork, and it's not because of the recession. Gasoline is made from crude oil. In any logical trading world, gas should be more expensive than crude, owing to the additional processing and transportation costs. So why then is crude more expensive than gas on the NYMEX? Do traders know something the rest of us don’t? Not according to veteran industry analyst and commentator Stephen Schork. In fact, it’s quite the opposite. In Schork’s view, covered by the Financial Times on Tuesday, traders don’t know—or simply aren’t paying attention to—what’s manifestly obvious: gasoline demand is down and it never is coming back up again. Schork does not attribute the decline solely to the recession. In fact, he believes that a recovery has already begun, but that it’s not a return to the status ante quo, or how things were before. Instead, he sees a changed economy, one in which gasoline demand is persistently and structurally lower than before. Schork feels that a significant portion of U.S. gasoline demand has been “wiped off the map and is not coming back.” If not the recession—at least, not as a cause of long-term declines in consumption—what then? What has caused lower gasoline demand in the United States? Several factors: • New fuel standards for cars and trucks are improving mileage—and decreasing gasoline usage. By 2016, new vehicles in the U.S. auto fleet will be over one-third more fuel-efficient than today’s vehicles. • The growth in the number of cars is peaking—just about everyone who can have or wants a car will have one soon. Growth in the number of cars was a major driver of increased gasoline consumption over the past decades, but with the cars: people ratio getting close to 1:1 (it was 844 vehicles per 1,000 people recently), the number of cars is almost at saturation point. • The increase in alternative vehicle fuels, such as biodiesel, ethanol, plug-in hybrids and fully electric cars, compressed natural gas, hydrogen . . . the number of ways other than gasoline to power cars and trucks is growing. • Demographics—the U.S. population is aging as the Boomers age. As they age, people drive less. They don’t have to shuttle children to play dates and soccer practice, they take fewer family road trips, and as they retire, they stop commuting. • The rise of telecommuting, online business, and online shopping—more can be done with less travel. This doesn’t mean that gasoline will go away as an automotive fuel—the Energy Information Administration, for example, predicts that petroleum products (including diesel) will still provide 88 percent of the fuel for cars and light trucks in 2035. Of course, not that long ago, gasoline and diesel provided 100 percent of automotive fuel, so a 12 percent decline (almost one-eighth) is significant. Remember, gasoline is made from crude oil. So are diesel, jet fuel, heating oil, and a number of other products. Historically, however, gasoline has been oil’s main product—around 40 percent of each barrel of oil gets turned into gas. Since nobody uses crude itself—it’s called “crude” for a reason; it’s not fit for use—the demand for crude ultimately depends on the demand for its refined products. Lower gasoline usage equals lower crude demand, or as Schork put it: “Without . . . end demand for [refined] product, crude prices are fundamentally crippled on the upper bound.” That’s a jargon-filled way to say that oil prices can only go so high if less of the substances made out of oil are consumed. The obvious immediate losers are refiners—the companies that turn oil into gasoline and other distillates. Low gasoline demand hurt them throughout 2009, the result being refinery closures to improve margins and stop massive financial losses. Longer term, though, decreased oil demand will remake the petroleum landscape. Oil prices can only go so high without gasoline consumption to lift them. Certain technically exploitable—but difficult and expensive—unconventional resources, such as some tar sands and oil shale, will lay fallow from lack of need. A combination of lower crude prices and surplus refinery capacity will help moderate heating oil prices. Energy and technology more generally may be affected. Lower gasoline demand means lower gas prices; lower prices mean less urgency for alternative fuel vehicles. (Especially given their price premiums—why pay $5,000 or $10,000 more for a plug-in hybrid when gasoline is below $3.00 per gallon?) The environment will be affected: less gasoline consumption means fewer carbon emissions. Even without anything concrete from Copenhagen, less greenhouse gases should get into the atmosphere. We can still do better, but it’s a start. In short, all the financial, ecological, and technological assumptions based on rising (or at least flat) gasoline consumption need to be rethought. Oil traders have seemingly not gotten the message yet, but the message is there: it’s a new game. .

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