Gasoline to hit $7 per gallon in two years

    NEW YORK, June 26 /CNW/ - CIBC (CM: TSX; NYSE) - Gas prices will soon hit
$7 per gallon and that will make driving a car too expensive for millions of
Americans, taking an unprecedented 10 million vehicles off U.S. roads over the
next four years and dealing another body blow to the reeling auto sector,
finds a new energy report from CIBC World Markets.
    The report forecasts that continued growing global demand combined with
ongoing supply challenges will see oil prices continue to rise and hit $200
per barrel in 2010. This will translate into further pain at the pump for
motorists and businesses as the national average price for gasoline will
approach $7 per gallon two summers from now.
    "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," says Jeff Rubin, chief
economist and chief strategist at CIBC World Markets. "Many of those in the
exit lane will be low income Americans from households earning less than
$25,000 per year. At their current driving habits, filling up the tank will
have risen from about seven per cent of their income to 20 per cent, an
increase that will see many start taking the bus."
    With gasoline prices climbing from an average of $1.80 in 2004 to more
than $4 today, car sales are already in decline. After averaging close to
17 million units per year over the first half of the decade, sales have
dropped to 14 million units a year. CIBC World Markets forecasts that a
$7 gallon of gasoline will see these sales drop to as low as 11 million units
a year by 2012, the lowest level since the early 1980s.
    Tumbling car sales and more prudent driving habits are already starting
to hit fuel demand. Overall gasoline demand in the United States has fallen
sharply since the beginning of the year and is headed for the first annual
drop in 17 years. Per capita consumption has fallen by close to five per cent
since 2004 and, like vehicle sales, will continue to decline as long as
gasoline prices continue to rise.
    "While Americans are already driving 11 billion fewer miles than they did
last year, a decline of 4.3 per cent, they still drive today about 30 per cent
more than they did before the OPEC oil shocks," notes Mr. Rubin. He believes
that as prices continue to rise Americans will cut back on their driving even
further and turn to more fuel efficient vehicles.
    "Average miles driven will likely fall by as much as 15 per cent, while
the market share of light trucks, SUVs and vans will be literally halved,
reversing the trend of the last fifteen years. But the most dramatic result
will be that roughly 10 million vehicles will come right off the road."
    Mr. Rubin believes Americans will, by necessity, start to mimic the
driving habits of Europeans, who have long faced much higher gasoline prices.
He notes that over 90 per cent of American households currently use a car to
get to work, while over 60 per cent of U.S. households own two or more cars.
By comparison, just 60 per cent of British households use a car to get to work
and less than 25 per cent own two or more cars. "Moreover, Americans drive
their cars more. They make four driving trips a day while Brits make half of
that per day. And last, but by no means least, some 30 per cent of Brits don't
even have a car. In the U.S. less than 10 per cent of households don't own a
car.
    "Of course the flip side of this equation is public transit. America's
obsession with the car is mirrored in its avoidance of public transit. When it
comes to taking the train, bus, or subway, the U.S. ranks the lowest among
OECD countries, just as it ranks the highest among the same group when it
comes to the use of the car."
    Mr. Rubin notes that people can't just abandon their cars if they have no
other means of getting around, particularly in terms of getting to work. There
must be at least a public transport alternative. While most Europeans have
access to public transport by virtue of broad government infrastructure
policies, there is less access to public transit in the U.S. as investment has
focused on building massive highways and freeways for a population that owned
and used their own cars to get around.
    The report found that roughly 57 million American households that own a
vehicle have reasonable access to public transit, slightly more than half of
the number of households who own a vehicle. Eighty per cent of low income
Americans (or roughly 24 million households) with less than $25,000 annual
income own a car, 30 per cent own two. With gasoline bills surging to record
highs, they won't be able to afford to fill their tanks and will be the first
to come off the road.
    "One in five of those low income Americans, or roughly five million
households will probably stop driving or give up the second vehicle," says
Mr. Rubin. "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."
    Mr. Rubin does not see the small production increases from Saudi Arabia
and reduced price subsidies in China doing much to slow the increase in global
oil prices. "The additional 200,000 barrels per day pledged from Saudi Arabia
is a pittance compared to the 4,000,000 barrels per day that depletion will
hive off world production this year," adds Mr. Rubin. "What little additional
production Saudi is capable of will probably all be gobbled up by that
country's own voracious appetite for energy.
    "Nor is the cut in Chinese fuel subsidies likely to dent demand much.
Most North Americans would gladly line up at the pumps for China's now $3.25 a
gallon gas. With over half of the world's population never having to pay world
oil prices, it shouldn't come as a great surprise that $130 per barrel crude
prices have yet to quash world demand."
    The complete CIBC World Markets report is available at:
http://research.cibcwm.com/economic_public/download/sjun08.pdf.

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