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Oil price spike would accelerate US shift to electric vehicles

Oil prices have a complex impact on new vehicle purchases and fuel economy in the United States that depends on the extent and expected duration of price changes.

In general, periods of high and rising oil prices have resulted in consumers opting to buy more smaller, lighter and more fuel-efficient cars and trucks, reducing gasoline consumption growth compared with the previous trend.

By contrast, periods of low and falling prices have resulted in consumers opting for larger, heavier, more powerful and less fuel-efficient vehicles, increasing gasoline consumption compared with the prior trend.

The full impact of price changes on fuel consumption is often distributed over several years, across several changes in the economic cycle, which makes attribution and correlations difficult.

In future, however, higher prices could have a much larger and faster impact on gasoline consumption because full-electric and hybrid vehicles have emerged as a viable alternative to gasoline-fuelled cars and light trucks.

Gasoline-hybrid, full-electric and other alternative-powered vehicles accounted for 11 per cent of all new vehicles produced in 2020, up from just 3 per cent in 2015, according to the US Environmental Protection Agency (EPA).

High and rising prices are likely to accelerate the adoption of hybrid and electric vehicles as consumers attempt to reduce fuel bills and regulators push for a faster transition away from gasoline-fuelled powertrains.

If oil prices surge again, as they did between 2005 and 2014, the result is likely to be a relatively rapid and permanent loss of consumption in the United States.


Vehicle fuel economy is the result of choices made by regulators (who set minimum legal standards); motor manufacturers (who make choices about development, production and marketing of model ranges within the envelop set by regulators); and consumers (who make choices about which models to purchase within available ranges).

Over the last four decades, consumers have shown a clear preference for larger, heavier and more powerful vehicles, with a long-term trend towards more truck-based rather than car-based platforms.

Between 1980 and 2020, the share of cars in new vehicles fell from 84 per cent to 43 per cent, while the share of light trucks grew from 16 per cent to 57 per cent (“Automotive trends report”, EPA, January 2021).

Over the same period, the average weight of new vehicles increased by 949 pounds (29per cent) and average engine power increased by 143 horsepower (138 per cent).

Motor manufacturers have also generally preferred producing, marketing and selling larger, heavier, more powerful vehicles, and trucks rather than cars, since the profits are higher.

But within this long-term trend, periods of high and rising oil prices have temporarily shifted the balance from heavier and more powerful vehicles to more fuel-efficient ones, with both short-term and long-term impacts.


High and rising prices encourage greater fuel economy through two channels.

First, when prices are high, consumers opt for smaller, lighter and more fuel-efficient vehicles within existing ranges. This impact is largely short-term and is quickly reversed if prices fall again.

Second, high prices encourage regulators tighten fuel-economy standards for future ranges. This impact is long-term, playing out over multiple years, much stickier, and less likely to reverse if prices fall again.

In contrast to consumers and motor manufacturers, regulators tend to favour greater fuel efficiency for economic, national security and environmental reasons.

But their willingness to push for tougher fuel economy standards in the face of resistance from consumers and lobbying from manufacturers has largely been a function of prices.

High and rising prices make regulators more willing to toughen fuel economy standards and consumers and manufacturers more willing to tolerate them.


The impact of high and rising oil prices on fuel economy was most evident between 2004 and 2014, when prices were well above long-term averages, except for a relatively brief period following the financial crisis in 2008/09.

The median real price of Brent surged to US$105 per barrel between 2005 and 2014, compared with just US$40 between 2000 and 2004, and US$61 between 2015 and 2021.

In response, the federal government tightened fuel economy standards several times while consumers attached higher priority to fuel economy.

From 2005 to about 2014, there was a shift back from trucks towards cars; vehicle weight, which had been increasing, was largely flat; and engine power increased slightly more slowly than before or afterwards.

As a result, vehicle fuel economy increased at a compound annual rate of 2.25 per cent over the ten high-priced years between 2004 and 2014, after declining 0.55 per cent per year over the previous ten low-priced years from 1994 to 2004.

US gasoline consumption, which peaked in 2007, did not exceed this level again until 2016, according to the US Energy Information Administration (“Petroleum supply monthly”, EIA, June 2021).


In the short term, the impact of oil price changes on whole-fleet fuel economy and gasoline consumption is relatively minor.

New fuel-economy standards take years to draft and go into effect, new vehicles account for only a small share of the whole fleet, and older vehicles are retired slowly (less than 10 per cent of the fleet turns over each year).

But the impact of higher prices on fuel economy and gasoline consumption increases over time as new standards go into effect and apply to an increasing share of the fleet.

The delayed impact of high prices between 2005 and 2014 is still boosting fuel economy and dampening gasoline consumption growth today.

If prices spike again over the next few years, regulators, manufacturers and consumers are likely to switch to hybrid and all-electric vehicles much faster, resulting in a permanent loss of oil consumption.
Source: Reuters

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