Power of Haas Ideas

The High Cost of Cheap Gas

Effects of soaring U.S. gas consumption

August was the biggest month ever for U.S. gasoline consumption. Americans used a staggering 9.7 million barrels per day—more than a gallon per day for every U.S. man, woman, and child.

The new peak has surprised many. In 2012, after five years of falling gasoline consumption, the U.S. Department of Energy forecast that U.S. gasoline consumption would steadily decline for the foreseeable future. That same year, President Obama announced aggressive new fuel economy standards that would push average vehicle fuel economy to 54 miles per gallon.

Fast-forward to 2016, and U.S. gasoline consumption has increased steadily four years in a row to a new peak. This dramatic reversal has important consequences for petroleum markets, the environment, and the U.S. economy.

How did we get here? There were a number of factors, including the Great Recession. When people have less to spend, they trade in their vehicles for more fuel-efficient models and drive fewer miles. But now, as incomes are increasing again, Americans are buying bigger vehicles with bigger engines and driving more total miles.

The other important explanation is gasoline prices. It is hard to remember now, but gasoline prices peaked during the summer of 2008 to above $4 a gallon and remained steep until late 2014. These high prices reduced gasoline consumption, but now that $2 gasoline is back, Americans are filling up their tanks like never before. U.S. vehicle sales peaked last year, led by trucks and SUVs, and this summer Americans took to the roads in record numbers.

This all illustrates the deep challenge of reducing fossil fuel use in transportation. The available substitutes, such as electric vehicles and biofuels, are expensive and not necessarily less carbon-intensive.

Can new fuel economy standards turn the tide? Perhaps, but as I show in new research, the new rules are yielding smaller fuel economy gains than was expected. With the new rules, the fuel economy target for each vehicle depends on its overall size. So as Americans have purchased more trucks, SUVs, and the like, this relaxes the overall stringency of the standard. So, yes, fuel economy has improved­—but much less than it would have without this mechanism.

Fuel economy standards may be able to continue increasing fuel economy, but unlike a gasoline tax, standards cannot increase the cost per mile of driving. Americans will drive 3.2 trillion miles in 2016, more miles than ever before. Why wouldn’t we? Gas is cheap.

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This is a shorter version of a post on the Energy Institute’s blog: http://energyathaas.wordpress.com.

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Prof. Lucas Davis Prof. Lucas Davis