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Report Projects 4% Shrinkage of US Vehicle Fleet in Face of $7/Gallon Gas by 2012

Rubin1
CIBC’s Rubin projects a decrease in the US vehicle fleet of 10 million by 2012 as scrappage overtakes new sales. Click to enlarge.

CIBC World Markets Managing Director/Chief Economist and Chief Strategist Jeff Rubin is projecting a shrinkage in the US vehicle fleet of 10 million vehicles in light of projected $7/gallon gasoline by 2012. A decline on that order would represent approximately a 4% reduction in the overall fleet—the largest such adjustment yet.

In the 26 June 2008 issue of the StrategEcon newsletter, Rubin lifts CIBC’s target for West Texas Intermediate by $20 per barrel to an average price of $150 in 2009 and by $50 per barrel to an average price of $200 per barrel by 2010. “Under prevailing refinery margins” he writes, “that should translate into a near-$7 per gallon pump price within two years, a 70% increase from today’s already record levels.

As gasoline prices climb inexorably, American driving habits are going to have to undergo a massive change, mimicking the driving habits long adopted by Europeans who have faced much higher gas prices. Average miles driven will likely fall by as much as 15%, 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 fundamental, and unprecedented change will be in the number of vehicles on the road.

...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. Many of those in the exit lane will be low income Americans from households earning less than $25,000 per year. Incredibly, over 10 million of those American households own more than one car. Soon they won’t own any.

To come up with the 10 million reduction, Rubin assumes an increase in the scrappage rate—the percentage of existing vehicles that every year are retired from service—to 6% (last year’s rate was 5.2%). Past experience has shown that scrappage rates rise with surges in oil prices, because older cars typically average much poorer fuel economy than newer cars and thus become increasingly expensive to run as pump prices rise.

A 6% scrappage rate would take roughly 14 million vehicles off the road every year. Coupled with decreasing new vehicle sales—Rubin forecasts those will drop to 11 million vehicles by 2012—the result is a reduction in the US vehicle fleet of about 10 million units by 2012. While some of the current weakness in vehicle sales can be attributed to the economic slowdown, Rubin estimates that higher gasoline prices have had almost twice the effect, and thus concludes that new vehicle sales will continue to decline.

Our analysis suggests that 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. At their current driving habits, filling up the tank will have risen from about 7% of their income to 20%, an increase that will see many start taking the bus.

Among the other projected results by 2012 of the ongoing rise in gasoline price, Rubin lists:

  • Average miles driven will shrink by more than 15%. While Americans are already driving about 4.3% less than last year, they still drive today about 30% more than they did before the OPEC oil shocks. The elasticity of driving to gasoline prices is estimated to be around the 0.06—a 10% rise in gasoline prices will eventually lead to a 0.6% reduction in miles driven. Using that rule of thumb, the 280% cumulative rise in gasoline prices between 2004 and the target $7 per gallon target price should induce more than 15% reduction in miles driven. That will turn back the clock to the mid 1980s as far as average mileage driven is concerned.

  • SUV and other light truck sales, which until 2006 accounted for almost 60% of total motor vehicles, will plummet to less than half that level, reversing the last fifteen years growth in market share.

Japan is also beginning to experience a slight “demotorization”—a decrease in its fleet size—caused by high fuel prices. (Earlier post.)

Resources

Comments

Ted McKeown

Contrary to what US Energy Secretary Samuel Bodman says I don't think supply and demand are really causing the problem. There are to many other factors at play here. Too many middle men skimming profits. Too much manipulation of supplies and inventories. The price of oil nearly doubled and gas went up a third in just one year and yet figures are coming out that indicate we are using less gas, not more, probably because people are cutting back on gas. That clearly means supply and demand have nothing to do with these prices. Speculation is driving prices !!! Lawmakers blame loopholes in commodities trading like the Swaps loophole or Enron Loophole. Whatever you want to call it, It's a get rich quick scheme and not much less obvious than a pyramid scheme. There is no way supply is causing this gas crisis. I put the full blame on speculators and commodities traders and I am sick of the smoke and mirrors. The meeting in Saudi Arabia hasn't achieved any substantial results from what I can see. The price of oil is still going up. There must be something else that's driving prices up and I think I know what it is. Although il appears to be a good hedge against inflation, a lower dollar and a low oil supply, in reality nothing could be farther from the truth. The main thing driving inflation is oil prices and as inflation goes higher investors buy more oil driving inflation higher again. Some experts predict this will trigger the worldwide recession. This will result in lower gas consumption and it will free up more gas supplies.. I am no expert but even I can see the writing on the wall. Investors are going to loose their shirts on oil. We may be looking at another ENRON. Hedge funds will topple leaving old age pensioners with nothing. The government won't be able to bail them out this time because the cost would be far to great. The CFTC and ICE will be too slow to react to the cracks forming in commodities trading so the govenment will finally step in. By that time it will probably be too late. www.nbtv.ca

Cervus

Oil hit $140 today. The situation is very volatile, even with the surprise crude supply gain reported yesterday. Right now it's about the dollar, it's about a supply threat from Libya, it's about OPEC mouthing off, it's about the ongoing credit crisis. It's about a lot of things.

This study is likely correct. Traffic around here in San Diego is noticeably decreased. The number of hybrids, scooters, motorcycles, and small cars is proliferating.

Gerald Shields, Seattle, WA

It has been truly odd. People who were normally driving to work in their SUVs are using mass transit as least 2-3 times a week. Whatever is the reason why gas prices are high, it's got to stop.

Cervus

I've barely used my car this whole month. I only drove it to work on Sunday and Monday because it was too hot to ride. Every other opportunity I've used my scooter or carpooled. I've actually carpooled more often than I've ridden.

No matter how much I tried, I can't use mass transit to work. The routes just aren't there. I'd have to move closer to work, which would cost me more than the gas, even at these prices.

Paul

Ted,

Good points. I pulled my money out of the oil market from my 401k at 80 because I can't see economies being able to make it after that. There is definetly something up with the stock piles as well. Our gas consumption has dropped and so has the inventories over the last month. Not including last week. Makes no sense.
Refineries where running at 84% months ago before the driving season not building inventories. Refineries don't want the heavy sulfur oil, the are ordering the sweet crude. How many billions of gallons of ethanol are we adding to gas these days. That has to have reduced our oil demands by a small margin but that should have also created an even demain on gas. These numbers don't make sense. I also agree that some people are going to loose their shirts and to bad. You play hard you loose hard. No bail out because we would have to have paid for it twice.

Adam

Ted,

There is no evidence whatsoever for speculation affecting prices. For that to happen, some of the production would have to be stored by speculators, and that's not happening at all. Production is flat-out, and it's all going into consumption.

See for example: http://www.nytimes.com/2008/05/12/opinion/12krugman.html

[q->t to email]

swen

I'm as right-wing a Republican as you can get and I
don't like getting raped by big oil any more than anyone
else. I've been ENRONed before and I know this is all
about GREED. Nationalize the oil companies. Obviously,
that's the only way to stop the raping of this economy.
Investigate, prosecute and send these boys to the slammer.

Axil

@ Ted McKeown

Ted you are spot on, but I would like to take this analysis a bit deeper.

From the mid 1920’s to the end of last century, a series of financial regulations was instituted in response to such things as bubbles and depressions. At the beginning of the Bush administration these regulations were systematically removed in response to the limited government laissez faire philosophy that was espoused by the neo-cons.


Reference:

http://www.bucknell.edu/x40027.xml

Excerpt:

Enlightened capitalists


In the end, he (Jim Cramer, the investing guru and host of CNBC's "Mad Money," )said, laissez faire policies are but a "fraud meant to get around the true role of a government in promoting the general welfare and enriching a select few" and called on enlightened caring capitalists to reassess the abilities of an unregulated marketplace and for the country to readdress the role of regulators "who would leave us at the hands of predator capitalists."

As a result, many of the old disasters reoccurred such as the housing market collapse, and the tech and oil bubbles.


What has happened? Our houses have lost money, prices are up on everything, our investments are in the tank, public and private debt is out of sight: In general we have lost a major fraction of our wealth and our predominance in the world.


From another informed observer:

Mr. Michael Greenberger
Professor
University of Maryland School of Law


Reference:

http://marketplace.publicradio.org/display/web/2008/06/16/cftc/

Excerpt:


Greenberger: From my own experience as a commodity regulator, I believe that if the Bush Administration were serious about its regulation, we could begin seeing prices drop within a month. If we don't get the kind of regulation that has been done for decades and the market proceeds along the pace its proceeding, we will have to go through a very, very serious recession. The question is do you want to deflate the bubble by that kind of suffering or do you want to deflate the bubble by applying tight U.S. regulatory controls?


"Notable Quotations from George Santayana


'Those who cannot remember the past are condemned to repeat it.'

Raymond

However, you don't want to over-regulate the economy, though. Too tight control on our economy will have just as bad effects as no control on our economy.

I do think that with developments in making motor fuels from biomass (especially algae) and the enormous promise of carbon nanotube supercapacitors, we can start the transition away from gasoline-fuelled automobiles to automobiles that either run on all-battery power or plug-in hybrids that use advanced, clean-burning diesel engines as part of the drivetrain.

We are very fortunate that most trucks, locomotives and ships run on diesel engines. Because these engines can be modified to run off biomass-derived diesel fuel, that means with improving production technology we can have essentially a totally-renewable supply of diesel fuel in the long run.

Axil

@Raymond

I have some words from Michael Greenberger for you

As long as the commodities markets are corrupt, any type of energy, including biofuels, will be subject to hording and speculation driving the prices up well beyond what they should be.

litesong

Raymond hasn't been paying attention. He wants to replace all fossil fuels with bio fuels, thus causing food prices, which are soaring because of a little bio-fuel, to really skyrocket, when you can't find an ear of corn to eat because its in a gas tank.

As for Supercapacitors....anyone hear from EEstor lately?

As for diesels, no aftermarket DPF is capturing fine & nano particles.

Cervus

Since when does algae compete with food crops?

Treehugger

You are all wrong pointing at speculation as being responsible of the soaring oil price, the market is doing his job, period. If the speculation can push the price of crude to 140$ it is just because the supply can't meet the demand. We have either to increase the supply,( but there is no margin on this side)or decrease the demand, but demand keeps growing. OK america reduces it's consumption by 1.5% but china and india are growing 10% a a year.

to control the price the oil you need at least 5Mbd extra capacity, the world doesn't have this capacity and won't have it any time soon. So bye bye chip gas, gone for ever, in the wind...

Drastic improvment in fuel efficiency (100MPG), alternative fuel, transition to electric, electrified mass transportation, work from home, carpool, Cycling, shrinking of urban sprawl, 4 days week work, you will need all this together to survive declining oil production.

Ha I forgot, less kids, since more than 2 you won't be able to afford it to grow them.

Cervus

What I want to know is:

At what point does the price of oil negatively impact Asian demand? India, China, Malaysia, and a few other countries are reducing the subsidies they give gasoline and diesel. Demand can't keep growing 10% per year if they abruptly raise the price 40% like they did in Malaysia.

Andrey Levin

Ted:

Multiple factors contributed to tight supply/demand: low oil prices of 90s reduced investment in exploration and infrastructure (hence falling production from Russia, Mexico, etc.), and no one could predict that economies of China, India, etc. will hold their 10%+ growth rate year after year. Plus, of course, SUV craze and suffocating of domestic oil and energy sector by US government.

Now, where market is tight, speculation goes out of control. Two things to note: oil companies do not make price of crude: futures stock exchanges (like NYMEX) do. Second, nothing wrong with speculation per se, it is how free market works.

However, current situation is way out of control. Two factors distorting oil price upward precipitously: falling dollar makes oil futures good investment to hedge against inflation and falling dollar, and even can yield good money. Second, huge money of mutual funds, first of all gigantic pension funds, are able to buy oil futures and they do. They do not even think to receive delivery of physical oil, they just hope to resell oil futures later at higher price. That’s how pyramid scheme creates bubble. Hedge funds will be fine: they will short the market in time. But pension mutual funds can not substantially short, and when amount of future holders will exceed future’s buyers, crush will be imminent. You bet who will be hit hardest.

Neither sharp increase of oil price, nor sharp drop is good for economy.

Axil

@Treehugger

Suppose your boss decides you’re a luxury he can’t afford anymore; he would rather heat the office with your salary then give it to you.

goodbye work from home,

goodbye carpool,

goodbye 4 days week work,

don’t need electrified mass transportation anymore,

sell that $6,000 Specialized bicycle and get a 40 year old Schwinn varsity out of the trash,

loss the house, go live in the woods, and hug some trees.

Axil

@Cervus, Andrey Levin

If not by regulation, this situation will be resolved by the “tipping point”: The old fashioned way of resolving economic imbalances. One day in the not to distant future, one Asian stock market will crash, then another, then another, then the USA: an unstoppable economic chain reaction. It has happened before: 1929, 1987, and 2000. But this time there will be no FED to bail everybody out; they will have used up all their bullets. It will be over. I don’t want to be an alarmist here; just a realest; a student of history.

Treehugger

Axil

in case things turn really bad, life in the woods could be more interesting than in a suburb devastated by the hedge effect of peak oil. But that was not the point of my previous message, I don't think I was as negative as you are in your message, I listed a long lists of solutions that we will need to strive in an environment of world oil declining production, it was not all about dooming, a modern civilization that is less energy intensive is possible but need profound change.

Also I think this discussion about how much the speculation is responsible for the price of oil is totally futile, when oil price was down to 10$ a barrel, nobody was blaming the speculation right ? and it was even more crazy than oil at 140$, how can something as precious as oil be sold at only 10$/barrel, but nobody was blaming speculation a a the time.

Andrey Levin

Axil:

The whole US energy sector is about 5% of the economy, three times less than in 1970. Oil crush (if any) most probably will be on pair with housing bubble: not catastrophic.
And Asian markets have very limited exposure to oil speculations; the bubble will burst (or deflate) right here, in US.

The bad news is that government intervention in oil (and other commodities) futures markets is 3 years late, and will not be effective today.

Cervus

Oil prices have become so volatile the past few months it's become impossible to predict just how quickly they'll keep on rising. I read tonight that the House overwhelmingly passed some (supposedly) speculation-restricting measures with a veto-proof majority.

Right now I'm inclined to think that speculation is a minor component, given the facts: 1) We're almost 50 million barrels under last year's crude stocks, and 2) We lost 24 million barrels in just five weeks. Now, at the same time gasoline supplies are a bit higher than they were last year, and diesel has had some robust supply growth as well.

But compare this to 2006, when the storage facilities were full to bursting and prices kept rising. I did read that in April the Iranians were storing oil they couldn't sell in tankers, which also happened in 2006. At this point, it would take many weeks of bearish inventory reports to change direction. Given the current supply threats, I consider that unlikely.

Last year oil prices were low and gasoline high due to refinery problems. Refinery utilization remains low due to gasoline demand, but oil supplies have continued to drop. We did have a supply rise of 800k barrels last week, but one week does not a pattern make.

Andrey Levin: They do not even think to receive delivery of physical oil, they just hope to resell oil futures later at higher price.

Only a very tiny fraction of all the futures contracts lead to the delivery of black, stinky, ooze. The rest is speculation in its purest form. Thats a dirty word though. Please use "price discovery" in formal discussion.

treehugger: when oil price was down to 10$ a barrel, nobody was blaming the speculation right

Well, when the price of oil was $10, was it $5 the previous year? Was there a massive, unprecedented, capital flight from credit to commodities? Was there a calumny of apologetics from the speculators about "hedging inflation" (their code word for "causing inflation" -- self-fulfilling prophecy at its finest!)? News releases, studies, and sound-bites from traders about the inevitability of high prices for the remainder of all time? Chief Economists standing up and predicting $20-$30 a barrel in the next 18 months, 5% draw downs in car populations? People getting on the Internet and posting at www.greencarcongress.com that until there is a 5 million bpd over-capacity, the price will not come down? (5 million barrels is 6% of current production ... can you say "flabbergastingly huge inefficient use of resources"? The big joke with that one being these speculators actually tout themselves as breathtaking engines of economic efficiency ... where would we be without these selfless workers to the common good?) Exasperated OPEC ministers goading the speculators on with talk of $15 a barrel in a few months? (Can you say 'oil troll'? I _knew_ you could!) Libya looking down at the stupid 'lawsuits', coming out of the US congress, against "limiting oil production by OPEC states", and probably thinking "If that's what they want, then that's what they'll get! Bring it on, suckers!"

Was any of this present at those times?

George

I have a question for any remaining right wingers who think that all regulation is bad and the unfettered free market will solve all problems: How's that workin' out for you now?

Trehugger

Andrey Levin

Like many economist you fail to understand the present crisis, you said the US energy sector is 5% of the economy ? yes but this is the wrong to look at the problem : it is only 5% of the economy because the price of energy has been grossly understimated these 30 past years anad we are due for a severe correction, because the origin of the crisis is underground. Last but not least, energy might be 5 % of the economy, but energy run 100% of the economy, the suffering of the housing bubble is nothing compared to what the end of cheap oil will be. The bubble will only deflate when demands will collapse, but even if the demand collapse in US, prices will ease, yes but temporary since it will then in turn boost the demand in emerging market.

Stop thinking that US is still controlling the whole world economy, that we can depreciate our dollards and the whole world just have to accept it.

Axil

@Andrey Levin

Andrey , I hope it is only speculation, but if it is a rapid decline in oil production then our oil hungry world will transform in a very painful way. Think about what economic segments will suffer: trade, farming, air travel, trucking, rail transportation, retail, and manufacturing… on and on.


I vacillate between dreamer and realist, this thread has pushed me to realest. Rollingstone has said it better then I can.


Reference:


http://www.rollingstone.com/news/story/7203633/the_long_emergency

Excerpt:


…. the Long Emergency will require us to make other arrangements for the way we live in the United States. America is in a special predicament due to a set of unfortunate choices we made as a society in the twentieth century. Perhaps the worst was to let our towns and cities rot away and to replace them with suburbia, which had the additional side effect of trashing a lot of the best farmland in America. Suburbia will come to be regarded as the greatest misallocation of resources in the history of the world. It has a tragic destiny. The psychology of previous investment suggests that we will defend our drive-in utopia long after it has become a terrible liability.

Before long, the suburbs will fail us in practical terms. We made the ongoing development of housing subdivisions, highway strips, fried-food shacks and shopping malls the basis of our economy, and when we have to stop making more of those things, the bottom will fall out.

The circumstances of the Long Emergency will require us to downscale and re-scale virtually everything we do and how we do it, from the kind of communities we physically inhabit to the way we grow our food to the way we work and trade the products of our work. Our lives will become profoundly and intensely local. Daily life will be far less about mobility and much more about staying where you are. Anything organized on the large scale, whether it is government or a corporate business enterprise such as Wal-Mart, will wither as the cheap energy props that support bigness fall away. The turbulence of the Long Emergency will produce a lot of economic losers, and many of these will be members of an angry and aggrieved former middle class.

Cervus

If The Long Emergency is right...

Billions are going to starve.

But it isn't like we aren't looking for alternatives:

http://www.ls9.com/

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