Travel and Gas Consumption Up Fueled by Lower Gas Prices
By Sampath Jayasinghe
Decision Innovation Solutions, 11107 Aurora Avenue, Urbandale, IA 50322
Americans have renewed their interest in bigger cars, pick-up trucks, and sport utility vehicles (SUVs) over more fuel efficient small cars, mainly because of falling gasoline prices. This was highlighted in an interesting article, “American Drivers Regain Appetite for Gas Guzzlers,” published in the New York Times in June. We expected that when crude oil prices were averaging $95 per barrel three years ago, Americans would gravitate toward more fuel efficient small cars and stay away from SUVs and pickups.
According to www.motorintelligence.com, new passenger car sales were down by 7.7% from January to July 2016 compared with the same period last year. However, new light truck sales soared by 9.1% from January to July 2016 compared with the same period last year. Light trucks accounted for 58.4% of new vehicles sold in the first half of 2016, and the vehicle fleet is now weighted approximately 60-40 in favor of trucks in the United States, according to an analysis by Sam Ori published in Forbes magazine.
In late July, the Monthly Energy Review from the Energy Information Administration (EIA) reported that the U.S. domestic transportation sector is now the biggest supplier of greenhouse gas (GHG) emissions, beating the power sector. The power plants had been the largest source of GHG emissions, mainly because of coal burning. Currently, the transportation sector accounts for 32.1% of total U.S. GHG emissions versus 31.7% for the power sector.
According to the Environmental Protection Agency (EPA), the largest sources of GHG emissions from the transportation sector come from passenger cars and light-duty trucks, including SUVs, pickup trucks, and minivans. They account for over half of the total emissions from the transportation sector. The significant increase in GHG emissions from transportation is largely due to increased demand for travel and the limited gains in fuel efficiency. The higher demand for travel (i.e., increase in travel miles) can be attributed to a range of factors, including economic growth, population growth, low gasoline prices, and many other macro-economic trends.
Reducing travel demand is a challenging public policy strategy. But there are a variety of opportunities to reduce GHG emissions from transportation by improving fuel efficiency and switching to alternative fuels such as hydrogen, electricity, and biofuels that emit less GHG than does regular gasoline. Reducing GHG emissions from traditional gasoline (or diesel) through low-carbon fuel alternatives (i.e., conventional and advanced biofuels) is vital, mainly because other options, such as hydrogen and electric vehicles, have been unable to reach capacity levels fast enough to make the needed emission reduction in time.
In this article, we first look at the increased demand for travel as commonly measured by total vehicle miles traveled per year. Then we turn to the domestic demand for motor gasoline in the recent past. Finally, we address an interesting dilemma about fuel economy standards in relation to mitigating GHG emissions and their unintended consequences, which are mostly ignored by public policy regulators.
Vehicle Miles Traveled: Motorists Are Driving More Again
Figure 1 illustrates total vehicle miles traveled (VMT) in the U.S. expressed as a moving 12-month count from 1992 through June 2016. In general, VMT varies greatly according to the seasons of the year. There is a long rise in VMT from 1992 to 2007. This was reversed in 2008 mainly because of the start of the Great Recession and the significant spike in oil prices. From 2009 to June 2014, VMT in the U.S. stayed relatively constant.
Right after July 2014 we saw a spike, and 2016 is becoming a record year for VMT. By the end of June 2016, U.S. drivers traveled 3.18 trillion miles compared with 3.08 trillion in June 2015, which is an approximately 3% increase. This continued trend of VMT growing on a year-over-year basis since July 2014 puts 2016 on a pace to be the highest ever. This increase likely reflects the decreased price of gasoline since July 2014 and the U.S. economic recovery from the Great Recession. Next we look at the historical data on motor gasoline consumption in the United States in order to partially explain recent VMT trends.
Domestic Motor Gasoline Demand
The Short Term Energy Outlook published on August 9th by the Energy Information Administration (EIA) forecasts that U.S. motor gasoline consumption will increase by 150,000 barrels per day (1.7%) to 9.31 million barrels per day in 2016. This would make it the highest average gasoline consumption on record. As shown in Figure 2, the previous highest was recorded in 2007. The average gasoline consumption for the first seven months of 2016 has been the highest ever in the United State at 9.38 million barrels per day compared with 9.34 in the first seven months of 2007. It turns out that for July 2016, average gasoline demand was at 9.75 million barrels per day in comparison with 9.68 million barrels per day in July 2007.
Gasoline prices have fallen significantly since July 2014 following the crude oil price collapse. The average U.S. retail regular gasoline price was $3.35 per gallon in 2014 and then plunged to $2.43 per gallon in 2015. The average regular retail price fell under $2.00 per gallon from January to mid-March 2016 and is on a recovery pace at around $2.20 per gallon through mid-August 2016. This significant fall in the gasoline price coupled with the high summer driving season has spurred the historically highest motor gasoline demand for 2016.
Fuel Economy Standards
As a result of record VMT as well as domestic gasoline consumption during the past few months, transportation is now the largest GHG emission sector in the United States. To mitigate GHG emissions and energy security issues, transportation is an obvious and visible target for federal as well as state regulators. The first regulatory standards related to Federal fuel economy standards were finalized in May 2010, covering model years 2012-2016, and the second set of standards, finalized in October 2012, cover model years 2017-2025. However, economists usually disagree about whether fuel standards are the best approach to finding a solution rather than market-based instruments such as gasoline taxes or carbon fees. Those in favor of market incentives may encourage market-based tools instead of regulations or standards because the regulations generally reduce overall economic welfare to society.
Fuel efficiency standards are aimed at spurring innovation, cutting gasoline use, and reducing GHG emissions for all transportation vehicles. The U.S automakers have been significantly improving fuel efficiency standards, as shown in Figure 3.
In 2012, the Department of Transportation’s National Highway Traffic Safety Administration (NHTSA) and the EPA issued a final rule as a national program to reduce GHG emissions and improve corporate average fuel economy (CAFE) standards for model years 2017 through 2025 for new cars and trucks. This rule is applied to passenger cars, light-duty trucks, and medium-duty passenger vehicles for model years 2017 to 2025.
The final standard is supposed to achieve an average 163 grams/mile of carbon dioxide (CO2) in industry fleet-wide level for model year 2025. This is equivalent to a 54.5 miles per gallon fuel economy by 2025. The standards increase their stringency every year and come in two phases: 2012-2016 and 2017-2025.The first phase 2012-2016 was projected to achieve 250 grams per mile CO2 emission level, which is equivalent to 35.5 miles per gallon fuel economy by model year 2016. EPA’s projected fleet-wide emission targets and corresponding fuel economy standards are shown in Table 1. A comparison with Figure 3 shows we are far behind in the first half of 2016 in achieving the 35.5 miles per gallon target.
On July 18, 2016, NHTSA, EPA, and the California Air Resource Board completed the first step in the mid-term evaluation process for GHG emissions standards and CAFE standards. The mid-term assessment appraises fuel economy improvements made in response to CAFE and GHG emissions standards established in 2012 and how auto manufacturers could meet more stringent standards leading up to 2025. The final standards are now revised to be lower than what was established in 2012. It is now projected to result in an average industry fleet-wide level of 175 grams/miles of CO2 in model year 2025, which is equivalent to 50.8 miles per gallon if achieved exclusively through fuel economy enhancements.
The new revisions reflect some significant changes and trends in the light-duty vehicles market since the 2012 final rule. Vehicles sales have been considerably strong, gasoline prices have come down significantly, and the truck share in the light duty vehicle market has grown. In the meantime, fuel efficient technologies are rapidly emerging at affordable costs.
As shown in Figure 3, the current average fuel economy is 25.4 miles per gallon. The highest average was recorded in August 2014 at 25.8 miles per gallon. Since 2007, the average fuel economy increased substantially until August 2014. It then slipped back to 25.0 miles per gallon in December 2015. Again we see a slight increase, up to 25.4 miles per gallon in July 2016. Overall, fuel economy improvements have been stagnant for the last two years.
The benefits of nearly doubling the fuel economy of many vehicles are encouraging, from reducing GHG emissions to energy security. But the CAFE regulations may inherently have significant unintended consequences. In an interesting paper published in the American Economic Review, Mark Jacobsen and Arthur van Benthem discuss some unintended costs of establishing such high standards. The first effect is known as “rebound effect.” That is, people tend to drive more than they did in the past when they switch to more fuel efficient cars. The authors estimate that people drive about 10% more when shifting to cars that are twice as fuel efficient. Therefore, more gasoline is consumed than expected.
They also quantify the impact of higher fuel economy on the used car market. The prices of new vehicles will rise with the higher standards as manufactures need to invest in new technologies to improve fuel efficiencies. As a result, the demand for used cars also goes up and in turn the prices of used cars also rise. Then people will tend to keep their used cars longer than otherwise expected. This will result in more GHG emissions from the fleet of used vehicles. These effects again reinforce the importance of biofuels as way to reduce GHG emissions in our transportation sector. A large part of the solution to reducing GHG emissions in the U.S. transportation sector could be filled by biofuels.
Development in 2016-17
The current administration proposed new fuel economy standards for large trucks, buses, and all other heavy duty vehicles on August 16, 2016. Note that the 2012 ruling on CAFE was only on light-duty vehicles. This will promote cleaner, more fuel efficient trucks by encouraging innovations in new and advanced technologies.
EIA (U.S. Energy Information Administration), various. Monthly Energy Review.
———, various. Short Term Energy Outlook.
Jacobsen, M.R., and A.A. van Benthem, 2015. “Vehicle Scrappage and Gasoline Policy,” American Economic Review, vol. 105, no. 3, pp. 1312-38.
University of Michigan, Transportation Research Institute, 2016. Average Sales-Weighted Fuel-Economy Rating of Purchased New Vehicles, accessed August 10, 2016.
U.S. Environmental Protection Agency, 2012. “EPA and NHTSA Set Standards to Reduce Greenhouse Gases and Improve Fuel Economy for Model Years 2017-2025 Cars and Light Trucks.” Office of Transportation and Air Quality, EPA-420-F-12-051, August 2012.
U.S. Environmental Protection Agency, 2016. “Midterm Evaluation of Light-Duty Vehicle Greenhouse Gas Emission Standards and Corporate Average Fuel Economy Standards for Model Years 2022-2025,” EPA-420-D-16-901, Draft Technical Assessment Report, Office of Transportation and Air Quality, July 2016.