The cost to fill a tank of gas is one of the single biggest expenses most families have aside from the cost of housing. When the cost of gas goes up, it puts a strain on our bank accounts, and when it falls it’s a small reprieve.
So, long term, the cost of gas and oil is very important to the economy, and for the past decade the cost has been moving higher. The good news is that demand for oil has been falling, U.S. production is rising, and alternatives are becoming a reality. With those facts in mind, here are the three biggest reasons gasoline won’t move much higher and why I think we’ll never see $5 per gallon at the pump.
Demand is falling
Demand for oil and gas in the developed world has been declining for nearly a decade, and the pace is increasing. The biggest factor driving down demand for oil isn’t that people are driving less; it’s efficiency in the miles we are driving. A decade ago, SUVs and massive trucks were the most popular wheels on the road; today, small cars, hybrids, and even electric vehicles are replacing them.
Long-term, this trend will only continue. The Obama administration has rolled out a 54.5-mile-per-gallon corporate average fuel economy standard for the auto industry, which will take effect in 2025. Not every vehicle will get 54.5 miles per gallon, but fleets have to improve efficiency dramatically, and as they do, demand for oil both in the U.S. and internationally will fall.
Oil isn’t as inelastic as it used to be
It used to be that oil could climb continuously and people would pay whatever it cost, with little alternative. In economics we call that situation inelastic demand, and it’s why OPEC had such power over the global economy.
But over the past decade, the elasticity of oil has increased, and alternatives have a lot to do with it. Clean Energy Fuels Corp (NASDAQ:CLNE) is supplying buses and local trucks with natural gas at a lower cost than diesel, and the company is building a national infrastructure for the trucking industry. Westport Innovations Inc. (NASDAQ:WPRT) is providing the technology to bring that natural gas to the trucking industry, saving money over diesel and lowering demand from one of the biggest users of oil.
As these two companies gain traction in trucking fleets, the availability of natural gas will grow, and even passenger cars will begin to see more natural gas options. The relatively high cost of oil and the relatively low cost of natural gas has made this alternative a reality.