(John Kemp is a Reuters market analyst. The views expressed are his own)
LONDON – Traffic on U.S. roads is growing at the fastest rate in almost two decades, as cheap gasoline, coupled with a strong economy, encourages motorists to use their cars more.
U.S. motorists drove 3.12 trillion miles in the 12 months ending in September 2015, an increase of 3.4 percent from the same period ending September 2014.
The increase was the fastest since 1997 according to data compiled by the Federal Highway Administration (http://tmsnrt.rs/1QHEiNh).
The driving boom shows no sign of fading. Traffic volume was up 3.4 percent in September compared with the same month a year earlier after seasonal adjustments.
Cumulative traffic volume in the first nine months of 2015 is 3.5 percent higher than in the same period of 2014 (“Traffic Volume Trends” Sep 2015).
Traffic volume growth reflects changes in the driving age population, employment, incomes, economic growth and fuel prices.
In general, demographic factors (population) and economic ones (employment, income and GDP) have a bigger impact on traffic volumes than fuel prices.
By extension, structural and economic factors have a bigger impact on consumption of gasoline and diesel than prices.
Gasoline consumption is four times as responsive to a small change in average real personal disposable income as a small change in prices, according to Hendrik Houthakker, Philip Verleger and Dennis Sheehan, who conducted a detailed study of gasoline consumption in the 1960s and early 1970s.
But even a small degree of responsiveness to prices can produce a big change in gasoline consumption when prices shift by a large amount in a short space of time.
In 1973 and 1974, sharp increases in the cost of gasoline linked to the oil shock resulted in a significant fall in consumption.
“Preliminary indications from simulations for the first two quarters of 1973 indicate that rising prices are already reducing demand substantially,” Houthakker, Verleger and Sheehan concluded.
“Arguments made for energy rationing by many politicians and some economists are unfounded. The market mechanism by itself appears to be capable of bringing about the necessary adjustments in demand,” they wrote (“Dynamic demand analyzes for gasoline and residential electricity” 1974).
In 2014 and 2015, the reverse has been true, with a sharp drop in the price of gasoline producing an unusually large increase in driving and gasoline consumption.
Average pump prices are currently about 25 percent cheaper than at the same point in 2014 and 35 percent cheaper than in 2013, according to the U.S. Energy Information Administration.
Unsurprisingly, cheap fuel prices on top of continued economic growth and employment gains have stimulated even more driving and gasoline demand.
Compounding this effect, cheaper fuel has encouraged motorists to opt for larger vehicles that consume more fuel for every mile driven.
Sales of cars and light trucks are on track to hit a record in 2015, surpassing the previous peak set in 2000, according to WardsAuto (“U.S. light vehicle sales on track for record year” Nov 24).
November sales are up 12 percent compared with the same month in 2014, but while car sales are flat, sales of light trucks, including sport utility vehicles and crossover utility vehicles, are up by almost 15 percent.
Rapid growth in traffic combined with the shift to larger vehicles has more than offset continued improvements in fuel economy mandated by federal regulations and boosted gasoline consumption.
Gasoline consumption is forecast to increase by 190,000 barrels per day in 2015, around 2.1 percent, by the U.S. Energy Information Administration (“Short-Term Energy Outlook” Nov 2015).
Even that could turn out to be an underestimate. Actual consumption, measured by the amount of gasoline supplied to the domestic market, rose by 2.7 percent in the first eight months compared with the same period in 2014.
Looking forward, the critical question is whether the rapid growth in driving and gasoline consumption will be sustained in 2016.
Fuel economy regulations will continue to tighten, offsetting some of the impact of economic and population growth on travel. EIA forecasts gasoline demand will increase by just 20,000 barrels per day, 0.2 percent, in 2016.
But if gasoline prices remain low, the percentage of light trucks rather than cars in the light duty vehicle fleet will continue to increase, which will boost fuel consumption for any given traffic volume.
There is considerable uncertainty about how quickly traffic will continue to increase. Traffic growth showed no sign of slowing through September.
Recessions, which have a major impact on traffic growth, are impossible to predict in advance but the next one is most likely 2-3 years away.
But it is uncertain how much of the effect of lower gasoline prices on driving behavior has already filtered through and how much is still to come.
Assuming gasoline prices do not fall by another $0.75-$1.20 per gallon, the impact of the big drop in late 2014 and early 2015 should start to fade, but whether that happens in 2016 or 2017 is not clear.
(Editing by William Hardy)
This article was from Reuters and was legally licensed through the NewsCred publisher network.