Americans will pay more at the pump this summer, but things could be worse for drivers

The US government forecasts that summertime gasoline prices this year will be at their highest level since 2014, when Taylor Swift’s “Shake It Off” was at the top of all the music charts and Andrew Garfield still played Spider-Man.

SUV owners and those who love to take summer road trips may not be pleased by the news, yet it’s important to view the outlook in context: Prices will be higher this summer, but things could also be worse for the average US driver.

TAXES

The US federal gasoline tax was last changed in 1993, when it was raised to 18.4 cents/gal, but was not indexed for inflation.

According to figures from the Brookings Institute, once adjusted for inflation, federal gasoline tax revenues peaked in 1994 and have been falling ever since. While there was some talk this year of a 25-cent/gal increase in the federal gasoline tax, even a novice to politics can see that the Republican Party – in control of both the White House and Congress – is unlikely to push a tax hike with pivotal midterm elections on the horizon. It’s true that some states increased fuel taxes at the start of 2018, but these changes were marginal and nowhere near the 25-cent/gal increase under discussion in Washington.

Americans can be somewhat reassured that supply and demand fundamentals – rather than the taxman – will be moving prices higher this summer.

THE ENVIRONMENT

Whether driving a pickup or a Toyota Prius, drivers should keep in mind that they are all direct beneficiaries of higher fuel prices in the form of cleaner air.

Specifically, gasoline values usually find their highest levels within any given year during the summer because the US Environmental Protection Agency requires that blenders hit a lower Reid Vapor Pressure, which makes fuel burn more cleanly, but is more expensive to produce. This is especially the case in larger cities, where the EPA requires the use of reformulated gasoline, which burns even more cleanly and emits less volatile organic compounds and nitrogen oxide, two of the main ingredients in smog.

The EPA says these standards “represent a significant part of the country's smog reduction strategy” and that “about 75 million people breathe cleaner air because of RFG.”

INCOME AND EXPENDITURES

An analysis from Bloomberg shows that fuel purchases in recent years have come to represent a shrinking portion of US household incomes even as prices at the pump have risen.

In the first quarter quarter of 2018, US drivers spent 1.76% of a typical day’s wages on gasoline, down from 2.41% in the same quarter of 2014. In other words, the impact of higher fuel prices this summer could be mostly nominal.

This is not something that should be taken for granted. In countries like Mexico and South Africa, gasoline prices rose from 2014-2017, while also taking up an increasingly larger portion of consumer expenditures.

The same analysis found that when viewed as a portion of income, the US has some of the most affordable gasoline in the world. It is in the same league as countries such as Kuwait and the UAE.

ELECTRIC VEHICLES AND DEMAND

In 2017, US gasoline consumption fell for the first year since 2012 even as the economy expanded at a healthy clip and Americans drove more collective miles than ever before.

The increasing popularity of electric vehicles no doubt played a role in making this possible. EVs now account for less than 1% of US vehicles and while that may seem trivial, it is increasingly clear they are on track to begin affecting liquid fuel demand. The Boston Consulting Group forecasts that EVs could account for 20% of America’s new-car registrations by 2030.

That outlook is not so different from S&P Global Platts Analytics’ projections, which assume that EVs will see their share of new car sales grow toward 40% by 2040. Platts Analytics notes that the process of turning over the existing fleet will be slow, however, and conventional vehicles will still account for well over 90% of miles traveled in the US through 2030.

But in the future, those conventional engines are expected to be more fuel efficient than they are now, which, combined with enhanced EV penetration, could mean that US gasoline demand will drop by 10%-15% by 2025 and 30%-35% by 2035 compared with 2015 levels, according to BCG research. This is a scenario being taken quite seriously among oil companies. Total recently acquired an electric utility after Shell announced plans to make electricity the “fourth pillar” of its business.

Citing EVs as a key reason, BP has said global oil demand could peak by the end of the 2030s. In short, American motorists can fill their tanks this summer with a bit more optimism as the outlook for gasoline demand (and by extension prices) seems to be trending in their favor, particularly in the long term.