|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.)
Heading for the Exit Lane. StrategEcon, 26 June 2008