U.S. Markets closed

Why fuel economy requirements caused gas consumption to decline

Kshitija Bhandaru

Must-know: The fuel economy and its impact on the US oil industry (Part 4 of 6)

(Continued from Part 3)

Gas consumption declines

In the U.S. Energy Information Administration’s (or EIA) 2014 Annual Energy Outlook, gas consumption is slated to decline to six to eight million barrels per day (or bpd) in 2040 from the current levels of eight to ten million bpd.

Diesel consumption is stated to increase from the current levels of two to four million bpd to just over four million bpd by 2040.

According to the report, the decrease in gas consumption by automobile owners is largely driven by stricter fuel economy standards. As we discussed in the previous sections of the series, the Environmental Protection Agency (or EPA) and the National Highway Traffic Safety Administration (or NHTSA) estimates will require new light-duty vehicles to average ~50 miles per gallon (or mpg) in vehicle model year (or MY) 2025, versus their current compliance estimate of ~34 mpg in MY 2012.

At the same time, diesel consumption is slated to increase because of an increase in heavy-duty vehicle miles traveled (or VMT). These trucks haul 70% of all domestic freight. Therefore, greater miles traveled causes greater diesel consumption. Also, because of stringent fuel economy requirements, consumers are likely to shift to distillates, diesel and jet fuel, which might be another factor leading to increased diesel consumption.

However, the decline in gas consumption due to stringent Corporate Average Fuel Economy (or CAFE) standards wouldn’t be offset by higher VMT traveled.

It’s important to note that companies like Ford Motors (F), General Motors (GM), Honda Motors (HMC), and Tata Motors (TTM) need to comply with the fuel economy standards set by the Department of Transportation (or DOT). Most of these companies are a part of the SPDR S&P 500 ETF Trust (SPY) and the Vanguard Total International Stock ETF (VXUS).

Although gasoline demand is slated to decline, production of gasoline is likely to remain unchanged. In the first chart we can see that exports are projected to increase to almost four million bpd from the current levels of zero to two bpd.

To learn more about how refineries have capitalized on the gasoline-to-diesel switch, continue reading the following sections in this series.



Continue to Part 5

Browse this series on Market Realist: