Recently the U.S. Energy Information Administration (EIA) released an early version of its “Annual Energy Outlook” report for 2014 (AEO2014). Each year the organization publishes a long-term energy assessment that is intended to be used “as a starting point for analysis of potential changes in U.S. energy policies, rules, or regulations or possible technology breakthroughs.”
Contained within the pages of the early AEO2014 release are numerous projections that deal with the EIA’s reference case (or the most probable forecast) for energy market trends, which should they come to pass, will greatly influence both the national economy and auto demand in general.
While the EIA’s report is full of important and revealing information, including how increased domestic production of natural gas raises the fuel’s potential for both personal and commercial transportation use, for this blog I want to concentrate on the organization’s predictions for crude oil – and thus gasoline – prices.
Per the EIA’s reference case projection, domestic crude oil production will approach historical highs by 2016 due to advances in extracting crude oil from “tight” formations using a process known as hydraulic fracturing (a.k.a. “fracking”). This should see domestic production of oil grow by an annual average of 0.8 million barrels per day through 2016, thereby placing production at 9.5 MMbbl/d, a figure just shy of the record 9.6 MMbbl/d produced back in 1970. Production at this level would see the import share of total petroleum and other liquid supply fall to about 25% (down from a high of 60% in 2005). By 2019, domestic production is expected to begin declining through 2040, with import share of supply growing to 32% the end of the term (still below 2013-levels).
In addition to higher crude oil production, the EIA also expects light-duty vehicle (LDV) gasoline consumption to fall as a result of increased fuel efficiency (mandated by federal Corporate Average Fuel Economy and Greenhouse Gas Emission requirements). While the number of Vehicle Miles Traveled (VMT) is expected to rise subtly through 2040, the EIA states that “the rising fuel economy of LDVs more than offsets the modest growth in VMT.”
Naturally higher supply and lower energy consumption by LDVs should translate into lower gasoline prices (should demand not be replaced by other sources) and that’s exactly what the EIA is predicting. Specifically, the organization predicts that gas prices will fall from an average of about $3.50 per gallon in 2013, to $3.03 per gallon in 2017 (in 2012 dollars) before rising to $3.90 per gallon in 2040.
Obviously a lot can happen over a twenty-five year span to push this figure up or down from the reference case estimate, but if this were to occur, real prices in 2040 wouldn’t be too far off from 2012’s historical high of $3.63 per gallon. Where gas prices end up in 2040 aside, it is very likely that gas prices will at least remain static on an annual over the next few years (or even drop as the EIA predicts).
This moderating trend along with increased internal combustion engine efficiency has significant implications for hybrid and electric vehicle (in any form) demand. Over the past few years, used vehicle price trends clearly indicate that consumers have become desensitized to the dramatic swings in gas prices that have become the norm. For example, over the first half of both 2011 and 2012 gasoline prices rose by $0.80 and $0.52, respectively, to hit annual highs of around $3.90 per gallon. Concurrently, prices for hybrids – and to a lesser extent, small engine-equipped cars – skyrocketed.
For example, the average wholesale price of a 2011 Toyota Prius jumped by more than $5,000 and $3,000 over the spike periods in 2011 and 2012, respectively. In addition, as gas prices fell, the same used Prius gave back all of the gains that had been accrued during the run up in gasoline prices.
But fast-forward to the latter half of 2012 and we don’t see the same strong correlation between gas and hybrid prices. Again, pump prices jump up by ~$0.40 in the fall and there is no discernible change in hybrid prices. The same thing occurs in early 2013 as fuel prices again spike in the spring (and remain at a high level for the better part of the year). These trends strongly indicate that consumers are comfortable sticking with their vehicle of choice through pronounced gas swings, as long as prices remain within known levels.
Considering this point along with the EIA’s gas price forecast for the coming years, we should expect to see a couple of things from a used price perspective; 1. There will be less volatility in used hybrid or PEV prices as gas prices move up and down, and 2. Hybrid and PEV demand won’t gain much support from higher fuel-related expenses.