Soaring world oil prices will drive the cost of gasoline in the U.S. into the stratosphere over the next two years, forcing many Americans off the road and drastically altering the driving habits of millions more, according to a report released Thursday by CIBC World Markets.
The report, prepared by economists Jeff Rubin and Benjamin Tal, predicts that the price for West Texas Intermediate will rise to $150 per barrel next year and to $200 in 2010. "Under prevailing refinery margins, that should translate into a near-$7 per gallon pump price within two years, a 70% increase from today's already record levels," wrote Rubin and Tal.
Higher oil prices spell stagflation for the U.S. economy next year, they say, leading them to mark down their GDP growth forecast to "barely over 1% for 2009. The biggest impacts will be in transport and none greater than the adjustments on the road. After all, America is the quintessential land of the car."
American driving habits will have to undergo a massive change, they say, "mimicking the driving habits long adopted by Europeans who have faced much higher gas prices. Average miles driven will likely fall by as much as 15%, while the market share of light trucks, SUVs and vans will be literally halved, reversing the trend of the last 15 years."
The most fundamental, and unprecedented, change will be in the number of vehicles on the road, they contend. "Over the next four years, we are likely to witness the greatest mass exodus of vehicles off America's highways in history. By 2012, there should be some 10 million fewer vehicles on American roadways than there are today - a decline that dwarfs all previous adjustments including those during the two OPEC oil shocks."
Many of those in the exit lane will be low-income Americans from households earning less than $25,000 per year. "Incredibly, over 10 million of those American households own more than one car. Soon they won't own any."
The change in car buying and driving habits is already starting to happen, their report says. "As gasoline prices have risen steadily since 2004, car sales have just as steadily trailed off. After averaging close to 17 million units per year over the first half of the decade, sales have already declined to 14 million, and are expected to decline further as pump prices rise to as much as $7 per gallon. In fact, we expect vehicle sales to fall to as low as 11 million units by 2012, the lowest level since the early 1980s."
Overall gasoline demand in the United States has fallen sharply since the beginning of the year and is headed for the first annual drop in 17 years, Rubin and Tal write. Per capita consumption has dropped by close to 5% since 2004, "and, like vehicle sales, will continue to decline as long as gasoline prices continue to rise."
But even though they are buying less gas, rising prices still mean Americans are spending more of their disposable incomes on fueling up. "Over the last four years, gasoline sales have grown five times as much as the rest of retail sales in the United States," their report says. "And at that rate, gasoline will take over grocery store spending as the largest item in households' non-vehicle retail spending by late next year."
Their study compares driving habits of U.S. residents with those in parts of Europe, where gas prices have been high for years. Per capita, Americans drive twice as much as drivers in Sweden, the U.K., Germany, and France, where gasoline prices are already over $8 per gallon, they say.
Their report says there is virtually no chance of world oil prices coming back down. Recent announcements from OPEC and China won't be sufficient to hold oil prices in check, they write, and the additional 200,000 barrels per day pledged from Saudi Arabia "is a pittance compared to the four million barrels per day that depletion will hive off world production this year. What little increase in production Saudi is capable of will probably all be gobbled up by that country's own voracious appetite for energy."
Nor is the $145 per tonne cut (48 cents per gallon) in Chinese fuel subsidies likely to dent global demand much, they write. "Most North Americans would gladly line up at the pumps for China's now $3.25 a gallon gas, particularly those of us who live north of the border."
"With half of the world's population never having to pay world oil prices, it shouldn't come as a great surprise that $130 per barrel crude prices have yet to quash world demand. And the only supply response to date has been yet another round of cost overruns and lengthy project delays running the gamut from Canadian oil sands to deepwater Gulf of Mexico wells."
By Geoff Matthews edited by Stephen Huebl