Column: Soaring oil prices would speed up US shift to electric vehicles: Kemp


LONDON, July 1 (Reuters) – Oil prices have a complex impact on new vehicle purchases and fuel economy in the United States that depends on the magnitude and expected duration of price changes.

In general, periods of high and rising oil prices have led consumers to purchase smaller, lighter and more fuel efficient cars and trucks, which has reduced the growth in gasoline consumption relative to the previous trend.

In contrast, periods of low and falling prices have led consumers to switch to larger, heavier, more powerful and less fuel efficient vehicles, increasing gas mileage from the previous trend.

The full impact of price changes on fuel consumption is often spread over several years, across several changes in the business cycle, making attribution and correlations difficult.

In the future, however, higher prices could have a much bigger and faster impact on gas mileage, as fully electric and hybrid vehicles have become a viable alternative to gasoline cars and light trucks.

Hybrid gasoline, fully electric and other reciprocating engines accounted for 11% of all new vehicles produced in 2020, up from just 3% in 2015, according to the US Environmental Protection Agency (EPA).

High and rising prices are likely to accelerate the adoption of hybrid and electric vehicles as consumers try to lower their fuel bills and regulators push for a faster transition from gasoline powertrains.

If oil prices soar again, as they did between 2005 and 2014, it is likely to result in a relatively rapid and permanent loss of consumption in the United States.

ECONOMIC CHOICES

The fuel economy of vehicles is the result of choices made by regulators (which set minimum legal standards); automobile manufacturers (who make choices on the development, production and marketing of model ranges within the envelope set by regulators); and consumers (who choose which models to buy from the ranges available).

Over the past four decades, consumers have shown a clear preference for larger, heavier and more powerful vehicles, with a long-term trend towards more truck-based rather than car-based platforms.

Between 1980 and 2020, the share of cars in new vehicles increased from 84% to 43%, while the share of light trucks increased from 16% to 57% (“Automotive Trends Report”, EPA, January 2021 ).

During the same period, the average weight of new vehicles increased by 949 pounds (29%) and the average engine power increased by 143 horsepower (138%) (https://tmsnrt.rs/3jwG48e).

Automakers have also generally preferred to produce, market and sell larger, heavier, and more powerful vehicles and trucks than cars because the profits are higher.

But in this long-term trend, periods of high and rising oil prices have temporarily shifted the balance from heavier, more powerful vehicles to more fuel-efficient vehicles, with both short and long term impacts.

IMPACT ON THE PRICE OF OIL

High and rising prices encourage greater fuel economy through two channels.

First, when prices are high, consumers switch to smaller, lighter and more fuel efficient vehicles in existing ranges. Much of this impact is short-term and quickly reverses if prices fall again.

Second, the high prices encourage regulators to tighten fuel economy standards for future ranges. This impact is long term, taking place over several years, much stickier and less likely to reverse if prices fall again.

Unlike consumers and automakers, regulators tend to favor greater fuel efficiency for economic, national security and environmental reasons.

But their willingness to push for stricter fuel economy standards in the face of consumer resistance and manufacturer lobbying has largely depended on prices.

High and rising prices make regulators more willing to toughen fuel economy standards and consumers and manufacturers more willing to tolerate them.

A DECADE AT A HIGH PRICE

The impact of high and rising oil prices on fuel economy was most evident between 2004 and 2014, when prices were well above long-term averages, except for a relatively short period. after the 2008/09 financial crisis.

The real median price of Brent jumped to $ 105 a barrel between 2005 and 2014, from just $ 40 between 2000 and 2004, and $ 61 between 2015 and 2021.

In response, the federal government has repeatedly tightened fuel economy standards as consumers put more priority on fuel economy.

From 2005 to around 2014, there was a return from trucks to cars; the weight of the vehicles, which had increased, was largely stable; and the engine power increased slightly more slowly than before or after.

As a result, vehicle fuel consumption increased at a compound annual rate of 2.25% in the ten high-priced years between 2004 and 2014, after decreasing by 0.55% per year over the ten years at previous low prices from 1994 to 2004.

Gasoline consumption in the United States, which peaked in 2007, did not exceed this level until 2016, according to the US Energy Information Administration (“Petroleum supply Month”, EIA, June 2021).

DELAYED EFFECTS

In the short term, the impact of changes in oil prices on the fuel economy of the entire fleet and on gasoline consumption is relatively minor.

New fuel economy standards take years to draft and implement, new vehicles only make up a small portion of the overall fleet, and older vehicles are slowly phased out (less than 10% of the fleet is renewed each year).

But the impact of higher prices on fuel economy and gas mileage increases over time as new standards come into effect and apply to a growing portion of the fleet.

The delayed impact of high prices between 2005 and 2014 continues to boost fuel economy and dampen growth in gasoline consumption today.

If prices rise again over the next few years, regulators, manufacturers and consumers are expected to switch to hybrid and all-electric vehicles much faster, resulting in permanent loss of oil consumption.

Associated columns:

– Rising oil prices will prompt consumer reaction (Reuters, June 30) read more

– Oil prices skyrocket even as consumption remains below trend (Reuters, June 25) read more

– Uneven recovery of global passenger aviation after the pandemic (Reuters, June 21) read more

– Rising oil prices signal the need for more production (Reuters, June 16) read more

Editing by Mark Potter

Our standards: Thomson Reuters Trust Principles.

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