Tipping Point for Gas Prices Seems to be $4.00/Gallon

Everyone wondered at what gas price we (American consumers) would stop driving. The answer is in - $4.00/gallon. Car usage has dropped for the first time in over 20 years and that softening in demand has started a decline in oil prices.

As oil and gas prices have soared over the last couple of months, everyone wondered at what point would consumers reduce their driving because of the high cost.  Over the last couple of weeks, it has become apparant that $4.00 gas seems to be the threshold.  At that price, shifts in dirving habits and in car purchases start to erode both driving and gasoline consumption.

Cambridge Energy Research Associates says in a report  “Peak Demand” -- U.S. Gasoline Demand Likely Peaked in 2007:

“U.S. gasoline demand will likely decline in 2008 for the first time in more than 17 years...For the first time since the 1970s and early 1980s the number of miles driven by Americans has clearly begun trending downward.”

The report goes on to say:

"Consumer preference has begun to shift toward more fuel-efficient vehicles. Hybrid vehicle sales increased by more than a third from 2006 to 2007. Last year, Americans bought more Toyota Prius hybrids than they did Ford Explorers, which was the best selling sport utility vehicle in the country for more than a decade."

In its Short Term Energy Outlook, the US Department of Energy wrote:

"Regular-grade motor gasoline retail prices, which averaged $2.81 per gallon in 2007, are projected to rise to an average of $3.84 per gallon this year and $4.06 per gallon in 2009.  These prices hit a record of $4.10 per gallon on June 30.  For the remainder of 2008, pump prices are projected to remain well above $4.00 per gallon. This forecast reflects very weak gasoline margins because of the decline in gasoline consumption and growth in ethanol supply. "

But this ignores the rapid pullback in driving that occurrs at the $4.00/gallon price range.  

As we move from Summer into Fall and Winter, it's a sure bet that Americans will also begin to think about heating and how they can insulate, switch from oil, and do anything they can to save energy and reduce their energy use.  All of this will have a strong impact on the price of oil going forward.

I'm still betting that oil will be below $100 by January 1, 2009.

Sam Cass
Sam Cass: Sam Cass, MBA, JD, University of Texas at Austin. Always a fan of Leonardo Da Vinci.

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  • John

    August 02, 2008

    This is a New York or Boston-centric view of the world. Demand for gas, especially in the US, is relatively inelastic. The latest catchphrase - demand destruction - is a pipe dream of those like you who want to see lower oil. The reality is that demand is growing dramatically and available supply dropping (and, in peril because of the leaders of Iran and Venezuela). It is that simple. We may see $100 again, but we will also see $150 and $200 in short order.

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