Posted by: carlbrannen | April 30, 2008

US Gasoline Consumption Decreases

There’s a certain hope that high gasoline prices will lead to a reduction in gasoline usage and this will bring in a new era of conservation in the United States. Recent fuel prices have the Presidential candidates talking about how they’re going to reduce prices. So fuel prices are high enough to start conservation?

Prices have been high now for several months, and the new data is out. Yes, the public is using less gasoline, but it ain’t much less, from the US Department of Energy
Short‐Term Energy Outlook Supplement: Motor Gasoline Consumption 2008
, US consumption of gasoline will decrease by 0.1% in 2008 over 2007. An increase in ethanol means that the average Btu in a gallon has gone down 0.5%, so the net decrease is 0.6%.

And why is consumption so little changed? It’s because the price of gas isn’t very high. It’s close to unchanged since 1945:
US Gasoline Prices 1946 to 2007

So what does this tell us about the future? I’ll make a guess on the supply demand curve for gasoline:
Price of gasoline as a function of supply, guess by Carl Brannen
Why? See below the fold.

The 2008 data show that a 50% increase in the price of gasoline only resulted in a 0.6% decrease in gasoline consumption, and part of that was probably due to a possible early recession.

Linear Extrapolation

The 0.6% decrease amounts to a decreae in supply. Suppose that the supply decreases by 6%. This is 10x larger, so, assuming a linear price relationship, the price should increase by 10x 50% or around 500%. That would put the price of gasoline at about 500% over $4 per gallon or maybe $24. I guess I can imagine putting $240 into my gas tank, but I can’t imagine treating it as anything less than gold afterwards.

Suppose that some sort of catastrophe, say a war, or maybe just oil running out, decreased the supply by 60%. That would mean an increase in price of 5000% to $306 per gallon. I doubt that gasoline priced at that level would still see 40% demand. In other words, I think that long before gasoline gets to $300 per gallon, the demand will fall because people will just quit buying it and walking instead.

Right now, gasoline accounts for around 6% of US “real disposable personal income” (see figure 12 in the above link). I doubt that this number can get much larger than 50%. So I expect that a really severe gasoline crunch could get prices to around 8x current prices, maybe 32 dollars per gallon, but not much higher than that.


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