Economic Forecasts

Fewer Buyers for Cheaper Gas

Is it possible that even if gasoline prices decline, consumption won't go up? I think it's a good bet.

Ever since the OPEC oil embargo 40 years ago, U.S. consumers have responded predictably, like rational economic beings, to every big swing in the price of gasoline. When it spiked, we drove fewer miles, switched to fuel-efficient vehicles, used mass transit more. But when the price declined for a long stretch, we went back to our old gas-guzzling ways. Every prediction of the permanent demise of, say, big SUVs, powerful sports cars, and commuting in pickup trucks proved premature.

Will the next time be different? Is it possible that even if gasoline prices decline consumption won’t go up? I think it’s a good bet, and we probably won’t have to wait long to find out.

My colleagues in the Kiplinger Business Forecasting Group have made a bold prediction that by 2016 the price of petroleum will fall by 20% to 30% from recent averages of about $95 a barrel. That would take a gallon of gasoline down by a similar amount, to an average of $3 a gallon.

That slide will be a boon to consumer budgets, and I have a hunch that this time around drivers won’t respond by boosting their use of gasoline. Instead, they’ll shift the money into other purchases or savings—unless governments take advantage of the price decline to raise gasoline taxes.

An oil boom. High gasoline prices in recent years were the result of tight supplies and surging global demand, especially in fast-growing emerging economies. Conversely, the long price slide we are predicting will be the product of soaring oil production and slowing global demand. Oil production will keep booming—everywhere from Iraq to Canada, and from offshore areas of Africa and South America to our own United States (up 30% just since 2008).

At the same time, oil consumption will continue to decline in the Western nations. In the U.S., we’re using 11% less petroleum today than in 2005, because of urbanization, reduced driving, stricter federal fuel-efficiency standards, a new vogue for small cars and hybrids, and the use of biofuels (ethanol and biodiesel).

Outside of the advanced nations, gasoline use will continue to rise, spurred by a growing middle class wanting to own cars. But governments in countries with fast-growing economies, such as China and India, will reduce their fuel subsidies, impose clean-air rules and perhaps push electric cars, restraining the public thirst for gas.

Overall, the rate of growth in global gasoline demand will slow, and demand will probably be more than matched by higher petroleum production, which will ultimately lead to lower prices.

Conservation habit. But today, unlike a decade ago, energy conservation is firmly entrenched in business practices and the public psyche. Not only do we use less for transportation, we also have more-efficient industrial processes, lighting, home appliances and electronics design. The conservation habit is driven not just by a desire to save money, but also by mounting concern about the effects of coal and oil usage on the environment, whether it be local air quality or global climate change.

Natural gas will be abundant and cheap, too. While booming production has its own issues—such as possible air and water pollution from the extraction process—natural gas burns more cleanly than coal and oil in power plants and more cleanly than gasoline and diesel in vehicles (as compressed or liquefied natural gas).

Some possible downsides: Lower prices for gasoline and diesel will lessen the demand for clean biofuels and slow the adoption of all-electric cars, whose high prices continue to turn off car buyers. Yes, there are always trade-offs in free markets.

Columnist Knight Kiplinger is editor in chief of this magazine and of The Kiplinger Letter and Kiplinger.com.

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