Petroleum: The American Surprise

Gasoline consumption in the United States has reached its “peak” and is changing the game for petroleum companies.

You have to be wary of the consensus. Until now, many anticipated a very strong increase in the demand for petroleum after the hard recession that struck the global economy. History proves this hypothesis. After the second petroleum shock (1979), consumption decreased for nearly 4 years before increasing back to its average in the 80s. Future petroleum contracts forecast a similar scenario. While the price of a barrel of the black gold hovers around $50, future contracts indicate $70 barrels. Logically, Chinese and Indian consumption should amplify this price increase through the simple effect of the law of numbers. Simply put, an oil barrel at $100 or more is possible, if not probable.

However, the reality could be different. There is no doubt that a decisive part of this petroleum scenario will be played out in the United States, as a poll by the Wall Street Journal shows. This poll draws on recent projections from the American Energy Agency (EIA). According to these projections, the decrease in fuel consumption started to accelerate in 2007 and will follow a specific rhythm. Of course, the crisis and its slow recovery partially explain the dip in consumption, but they conceal a more long-lasting change.

American households pay more and more attention to their gasoline consumption and, interestingly, the huge movement to the suburbs from city centers has been interrupted. An even more important number of households chose to move back towards the urban centers they left, emigration originally due to insurmountable traffic congestion. A few figures: from 1960 to 1970, the American population increased 13% and the number of kilometers traveled increased 54%, leading to a 45% increase in fuel consumption. From 1990 to 2000, the population increased in the same proportion, but the number of kilometers traveled only increased 28%, and fuel use 17%. This trend would continue. To this extent, many cities that financed their building projects by raising taxes on fuel registered a very significant decrease in their revenue. Federal funds for national roads showed a deficit that became alarming. Some towns even stopped lighting certain sections of roads and planned to raise new taxes on gasoline to meet their investments.

A Congressional committee just proposed that the gasoline tax be replaced by a tax per kilometer. The proposition is not completely safe: the Congressional committee members anticipate a decrease in fuel consumption and an increase in the power of substitute fuels, like ethanol, for a tax reduction. In 2008, biofuels represented 7% of the consumption of American gasoline; this proportion should double around 2020 with the production of second generation “green” gasoline (waste, specific plants, etc.), strongly encouraged by Obama’s administration. Oregon could be the first state to introduce a tax per kilometer, a revolution in a country where everything is planned and organized to favor an increase in individual traffic.

This dip in the curve is slowly being reinforced with the arrival of hybrids, electric cars, and new long-distance railway projects announced on the country’s East and West Coasts. Finally, new automobile standards, blocked by the former Bush administration, now have higher chances of being imposed.

For petroleum companies, the stakes are enormous. Although they made gigantic profits in 2007 and 2008, the decrease in petroleum sales places them in an uncomfortable situation. Their production capacity cannot be mobilized if the price of petroleum continues to remain around $50 per barrel, and justifying the profitability of continuing to drill in areas that are difficult to access is reaching its threshold. They also are more hesitant to invest in the growing petroleum substitute movement, and will play the role of moderator as requested.

Of course, history is in favor of petroleum: the decrease in consumption in industrialized countries should be compensated for by the frantic consumption of Chinese and Indian gluttons. But it is also clear that, new automobiles aside, they understand that it is not in their best interest to increase their dependency on fossil fuels. If the International Energy Agency will reach the “peak” of gasoline consumption around 2030, many ask themselves today if they are not intervening too early.

With rare exceptions, petroleum companies refuse to forecast a decline in demand. According to the American magazine Business Week, ExxonMobil is a giant with feet of clay. In spite of its profit record, the old black gold master is worse and worse at developing deposits controlled by countries little inclined to give them carte blanche to exploit their treasure (Venezuela, Russia, Saudi Arabia, etc.). To be more specific, the petroleum industry is not prepared to face an underlying reflux in the market in the years to come. However, it is not ready to acknowledge the petroleum “shock” that could arise if the potential for new deposits proves insufficient. The long tranquil path for “all petroleum” was undoubtedly interrupted independently of the crisis. It has become a very risky bet: the long-term trend of market evolution is anything but predictable.