Peter Tertzakian: Hard to break gasoline habit

I pulled in to the filling station somewhat reluctantly. It was packed with a parade of cars, SUVs and pickups, each jockeying for their use nourish their internal combustion engines having a tank of gasoline. I do not like waiting. However i did, after the ordeal I went into the station to purchase coffee.

“What’s going on out there,” Gurus the teller, “what’s with all the cars?”

“Don’t know sir,” said the teller, prompting me in my debit card. “Lots of people; I suppose that they like to drive.”

Good vague answer, I thought. Should be an economist. I thanked him and turned my mind to just how much the price of gasoline has fallen in North American markets. In some American states the cost per gallon dipped momentarily within dollar, the very first time since 1999.

Sitting in my car I checked out my large coffee. On the volume basis, the java cost three-to-four-times around the stuff that comes out from the pumps. But that’s OK, I thought, merging back to the highway C a minimum of I get good mental mileage out of coffee.

But here’s the thing: My gas station visit validated things i already was sensing. Back in the office I confirmed that which was happening with charts and stats (see Figure 1). Collectively, we are all driving more in North America; specially in the showcase U.S. market.

The total amount of driving is measured with a stat called “vehicle miles travelled” or VMT. Take all of the vehicles within the U.S. and accumulate the collective distance they drive each year and you get VMT. In 2007 it hit an incomprehensible 3.04 trillion miles. That’s like returning and forth to rescue Matt Damon from Mars over 6,000 times.

Annual VMT began stalling around 2006, understandably coinciding with a steady doubling of gas prices. Then in 2009, the economic crisis place a crimp on all wallets; further encouraging car-pooling, commuting less or staying home altogether for being out of work.

Consumers put the brakes on driving and even highway vacations became “staycations.” For the first time because the oil price shocks of the 1970s, consumers’ behaviour toward driving changed.

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Now, a turnaround of prices in the pumps is getting individuals to jump behind the wheel again. VMT in 2015 hit a new record: 3.15 trillion miles. And also the trend line suggests a record rate of growth that is steeply continuing into 2016. I, for just one, will be loath to line up at a touristy service station again C cheap gas along with a better tone towards the economy is nearly certain to kick cars, SUVs and RVs into high gear by June. And U.S. gasoline consumption? The last data point confirms a record degree of consumption with this time of year.

Yet there’s more for this story. Cheap gas is also luring consumers into auto show rooms to buy bigger and heavier models C a renewed trend toward vehicle obesity.

Pickup trucks and SUVs have inferior gas mileage due to their extra weight, slurping more gas per mile than lighter-weight passenger cars. Since U.S. retail gasoline prices have halved in the last 20 months, the fraction of big vehicle sales has jumped from 52% to almost 60%.

Not surprisingly, data implies that U.S. sales-weighted fuel economy has flattened out over the same period of time (after improving steadily from 20 mpg in 2007, to in excess of 25.5 mpg by mid-2014; today it remains at 25.2 mpg).

Neither of these related phenomena is totally new. People consume more when price goes down. So when vehicles be fuel efficient, consumers trade their new-found financial savings in for upsized vehicles and more driving.

I take a look at my screen and see that oil has risen to US$40 a barrel. It’s too cheap to invest in future supply. But it’s low enough to produce cheap gasoline that everyone loves to consume. Who says economic theory isn’t working?

Some are. “Oil prices are likely to stay low, because demand is going down,” is a thesis I often read and hear.

Who came up with that?

The data shows what any economist would say, and what any gas station attendant would see: consumption goes up, because oil/gasoline costs are low. And despite lots of talk about changing attitudes toward global warming along with other deleterious effects on our world, vehicle sales data reveals that sense at all of conservation gets lost when prices drop and efficiency goes up.

So it’s back to bad habits. The only real commodity I’m able to consider that’s harder to stop is coffee.

Peter Tertzakian is chief energy economist and managing director at Calgary-based ARC Financial Corp.