A Tale Of Two Car Fleets  

Keith Johnson at the WSJ's Environmental Capital blog has a post on the potential for the US car fleet to shrink rapidly in the coming years - Oil Shock: Analyst Predicts $7 Gas, “Mass Exodus” of U.S. Cars.

Oil at $135? That was just the opening skirmish in the “peak oil” wars. The latest smart money? $200 oil in 2010, with gasoline at $7 a gallon. And that is going to turn Americans into car-shunning Europeans once and for all—poor Americans, at least.

That’s the latest gloomy forecast from Jeff Rubin at Canadian brokerage CIBC World Markets, who just a few months ago figured $200 oil would be a thing of the distant future—like 2012.

Mr. Rubin laughs off recent attempts to take the steam out of global oil markets. Saudi production promises of 200,000 barrels a day doesn’t dent the 4 million barrel-per-day decline from aging fields every year, for starters. And it will just be “gobbled up” by increasing domestic consumption in Saudi Arabia, like other oil-producing countries that subsidize fuel.

So what about China’s flirtation with market reality by unwinding some fuel subsidies? No luck in curbing demand or prices, either. Not only does China’s recent move translate into $3.25 a gallon gas—still a steal, relatively speaking—it’s given fresh legs to beleaguered Chinese refiners who’ve been operating in the red, thanks to Chinese price controls. So now they are producing even more gasoline and fueling even more cars than they were before. The upshot?

Over the next four years, we are likely to witness the greatest mass exodus of vehicles off America’s highways in history. By 2012, there should be some 10 million fewer vehicles on American roadways than there are today—a decline that dwarfs all previous adjustments including those during the two OPEC oil shocks.

And who will be parking their cars? The 57 million American households that have both cars and access to something resembling public transit. Gasoline at $7 begins to approach prices Europeans have paid for years, meaning that chunk of America “will start to act more and more like Europeans,” Mr. Rubin says. Not soccer moms in a minivan—soccer fans, searching for tokens:

Our analysis suggests that about half of the number of cars coming off the road in the next four years will be from low income households who have access to public transit. At their current driving habits, filling up the tank will have risen from about 7% of their income to 20%, an increase that will see many start taking the bus.

Gas prices already appear to be reshaping suburbia. But what Mr. Rubin is predicting is a far bigger shock to the American system. Europe has had decades to develop a society based on expensive energy. What will happen if Americans suddenly are forced to shoulder European-style energy prices — but without the European-style society to cope with them?

Record oil prices have failed to temper the enthusiasm of Chinese auto buyers. In 2006, 6.2 million cars were sold in China, enough for the Middle Kingdom to surpass Japan for #2 in total vehicle sales (the United States still sells twice as many). In the first five months of 2008, Chinese auto sales show no signs of decelerating, up 17.4% from the same period last year.

The rise in Chinese auto sales has been so dramatic that projections by China’s government for auto sales in 2020 were already exceeded by 2005.

Millions of tons of copper, nickel, aluminum have gone into China’s car frenzy, boosting the commodity prices of every raw material involved. But the most pressing consequence of China's great leap into the culture of happy motoring is its impact on crude oil demand.

Assuming that the 7.3 million new car owners in 2008 each drive 5,000 miles a year, and they achieve 40 miles per gallon, the result would be an additional 45.6 million barrels of crude demand, equivalent to 125,000 bbl/day. In other words, new Chinese drivers will devour 25-30% of the recently promised Saudi production increase in a single year.

To those predicting an imminent decline in world oil demand, we say: don't bet on it.