Wall Street History

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Wall Street History

12/08/2006

Talkin' Gas

Cambridge Energy Research Associates recently released a
report titled “Gasoline and the American People.” Following are
some tidbits gleaned from summaries released to the public.

--The average motorist used 703 gallons in 2005 – and drove
41% more miles than 25 years ago.

--In 1990 the average car was driven 10,277 miles. In 2005 this
rose to 12,375 miles; 20% growth in 15 years.

--The U.S. has 1,148 registered personal vehicles for every 1,000
licensed drivers, 700 per 1,000 in Great Britain, 608 in Japan,
208 per 1,000 in Mexico – and just 11 per 1,000 in India, and 9
per 1,000 in China.

--In 1975, just 16% of all vehicles in the U.S. were light trucks
(including SUVs and minivans). In 2005 this had risen to 41%.
Hybrid vehicles, while gaining in popularity, make up only 1.4%
of sales through November 2006.

--Americans paid an average of $2.86 a gallon in the third
quarter of 2006. Chinese drivers paid the least among the larger
consumers, at $2.21 per gallon, and the British the most, $6.50
per gallon. The disparity has to do primarily with tax rates. Here
in the U.S., the gas tax is 15% of the retail price, 30% in Canada,
45% in Japan, 61% in France, and 64% in Britain.

--Asia now consumes more oil than North America.

--The rate of growth in gasoline demand in America rose 1.6%
per year from 1990-2004, but with the rise in oil in 2005, the rate
of growth slowed to 0.3%, with a further 1.0% increase in 2006.
As a percentage of average household budgets, however,
gasoline is 3.8% currently, slightly above the 1960s pace of 3.4%
to 3.6%. While oil prices have risen sharply over the past 40
years, improved automotive efficiencies and relatively low fuel
tax rates have resulted in a negligible increase compared to the
overall budget.

[The above is amazingly stable when matched against household
spending on healthcare, up from 11.2% in 1981 to 17.3% in
2005, while food declined from 20% to 13.4% over the same
period.]

--In the U.S., the average price of gasoline was $1.59 in 2003 but
climbed to $2.30 in 2005. Through mid-November 2006, the
price has averaged $2.61, with a high of $3.00 in July. Today it
is averaging around $2.25.

--As for ethanol, it provides about 4% of total fuel consumption,
having risen from 11,000 barrels per day in 1980 to about
350,000 bd in 2006; thanks in no small part to a current 51-cent
per gallon tax credit. But as Cambridge Associates concludes,
“Conventional ethanol from corn is not expected to exceed 10%
by volume of total gasoline usage because of food-for-fuel
tradeoffs and ethanol’s logistical challenges. This would still be
a significant number – close to a million barrels per day. But,
since ethanol provides about two-thirds the energy as the same
volume of gasoline, more volume of ethanol is needed for every
barrel of gasoline replaced.”

--The “China growth story” was largely responsible for the
“demand shock” that hit the world in 2004 as world consumption
of crude surged by 3.1 million barrels per day – much of it from
China and the rest of Asia. Over the previous ten years, world
demand growth had averaged 1.2 mbd. While the overall global
economy was picking up steam, China was the main factor on
the demand side. But this results not just from an increase in
motorist demand in China, but also a shortage of electricity,
which was partly solved by burning more oil as opposed to coal
to generate it.

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Separately, the Energy Information Administration, part of the
U.S. Department of Energy, released its “Annual Energy Outlook
2007” (AEO2007) on December 5.

Some conclusions:

“Despite the projected rapid growth of biofuels and other non-
hydroelectric renewable energies and the expectation of the first
new orders for nuclear power plants in over 25 years, oil, coal,
and natural gas are nonetheless projected to provide roughly the
same 86% share of the total U.S. primary energy supply in 2030
as they did in 2005 absent changes in existing laws and
regulations. This reflects a situation in which rapid growth in the
use of biofuels and other non-hydro renewable energy sources
begins from a very low current share of total energy use, the
share of a growing electricity market supplied from nuclear
power falls despite projected new plant builds, and hydroelectric
power production, which accounts for the bulk of current
renewable electricity supply, is stagnant.”

AEO2007 projects that ethanol will grow from 4% of total
gasoline consumption by volume to 8% in 2030.

And AEO2007 had some interesting takes on natural gas.

“Natural gas consumption is projected to grow to 26.1 trillion
cubic feet (tcf) in 2030, well down from projected consumption
of 30 tcf or more that had been included in the AEO reference
case only a few years ago. Much of this change results from
projected natural gas prices that significantly cut the expected
growth natural gas use for electricity generation over the last
decade of the projection period. In the AEO2007 reference case,
overall natural gas consumption is almost flat between 2020 and
2030, as growth in residential, commercial and industrial
consumption over this period is nearly offset by a decline in
projected gas use for electricity generation.”

Why?

“Coal is projected to play a growing role in the AEO2007
reference case, particularly for electricity generation. Coal
consumption is projected to increase from 22.9 quadrillion
British thermal units (quads) in 2005 to over 34 quads in 2030,
with significant additions of new coal-fired generation capacity
over the last decade of the projection period. *The projections
for coal use are particularly sensitive to the underlying
assumption for the reference case analysis that current energy
and environmental policies remain unchanged throughout the
projection period.”

Coal remains the primary fuel for electricity generation. The
coal share of generation increases from 50% in 2005 to 57% in
2030. The natural gas share of generation increases from 19% in
2005 to 22% in 2016, before falling to 16% in 2030.

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Wall Street History returns next week.

Brian Trumbore

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