"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," says Jeff Rubin, chief economist and chief strategist at CIBC World Markets. "Many of those in the exit lane will be low income Americans from households earning less than $25,000 per year. At their current driving habits, filling up the tank will have risen from about seven per cent of their income to 20 per cent, an increase that will see many start taking the bus."
With gasoline prices climbing from an average of $1.80 in 2004 to more than $4 today, car sales are already in decline. After averaging close to 17 million units per year over the first half of the decade, sales have dropped to 14 million units a year. CIBC World Markets forecasts that a $7 gallon of gasoline will see these sales drop to as low as 11 million units a year by 2012, the lowest level since the early 1980s.
Tumbling car sales and more prudent driving habits are already starting to hit fuel demand. 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. Per capita consumption has fallen by close to five per cent since 2004 and, like vehicle sales, will continue to decline as long as gasoline prices continue to rise.
"While Americans are already driving 11 billion fewer miles than they did last year, a decline of 4.3 per cent, they still drive today about 30 per cent more than they did before the OPEC oil shocks," notes Mr. Rubin. He believes that as prices continue to rise Americans will cut back on their driving even further and turn to more fuel efficient vehicles.
"Average miles driven will likely fall by as much as 15 per cent, while the market share of light trucks, SUVs and vans will be literally halved, reversing the trend of the last fifteen years. But the most dramatic result will be that roughly 10 million vehicles will come right off the road."
Mr. Rubin believes Americans will, by necessity, start to mimic the driving habits of Europeans, who have long faced much higher gasoline prices. He notes that over 90 per cent of American households currently use a car to get to work, while over 60 per cent of U.S. households own two or more cars. By comparison, just 60 per cent of British households use a car to get to work and less than 25 per cent own two or more cars. "Moreover, Americans drive their cars more. They make four driving trips a day while Brits make half of that per day. And last, but by no means least, some 30 per cent of Brits don't even have a car. In the U.S. less than 10 per cent of households don't own a car.
"Of course the flip side of this equation is public transit. America's obsession with the car is mirrored in its avoidance of public transit. When it comes to taking the train, bus, or subway, the U.S. ranks the lowest among OECD countries, just as it ranks the highest among the same group when it comes to the use of the car."
Mr. Rubin notes that people can't just abandon their cars if they have no other means of getting around, particularly in terms of getting to work. There must be at least a public transport alternative. While most Europeans have access to public transport by virtue of broad government infrastructure policies, there is less access to public transit in the U.S. as investment has focused on building massive highways and freeways for a population that owned and used their own cars to get around.
The report found that roughly 57 million American households that own a vehicle have reasonable access to public transit, slightly more than half of the number of households who own a vehicle. Eighty per cent of low income Americans (or roughly 24 million households) with less than $25,000 annual income own a car, 30 per cent own two. With gasoline bills surging to record highs, they won't be able to afford to fill their tanks and will be the first to come off the road.
"One in five of those low income Americans, or roughly five million households will probably stop driving or give up the second vehicle," says Mr. Rubin. "About half of the number of cars coming off the road in the next four years will be from low income households who have access to public transit."
Mr. Rubin does not see the small production increases from Saudi Arabia and reduced price subsidies in China doing much to slow the increase in global oil prices. "The additional 200,000 barrels per day pledged from Saudi Arabia is a pittance compared to the 4,000,000 barrels per day that depletion will hive off world production this year," adds Mr. Rubin. "What little additional production Saudi is capable of will probably all be gobbled up by that country's own voracious appetite for energy.
"Nor is the cut in Chinese fuel subsidies likely to dent demand much. Most North Americans would gladly line up at the pumps for China's now $3.25 a gallon gas. With over 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."
