Oil Industry Braces for Drop in U.S. Thirst for Gasoline

By RUSSELL GOLD and ANA CAMPOY DALLAS -- Since Henry Ford began mass production of the Model T nearly a century ago, car-loving Americans have gulped ever-increasing volumes of gasoline. A growing number of industry players believe that era is over. Among those who say U.S. consumption of gasoline has peaked are executives at the world's biggest publicly traded oil company, Exxon Mobil Corp., as well as many private analysts and government energy forecasters. The reasons include changes in the way Americans live and the transportation they choose, along with a growing emphasis on alternative fuels. The result could be profound transformations not only for the companies that refine gasoline from crude oil but also for state and federal budgets and for consumers. Much of contemporary America, from the design of its cities to its tax code and its foreign policy, is predicated on a growing thirst for gasoline. As Americans commute less, use more fuel efficient cars and take more public transportation, gas stations have shut down. There are 11% fewer places to pump gas in the U.S. today than there were a little over a decade ago. In the vast market for crude oil, American gasoline consumption matters. One of every 10 barrels of crude ends up in U.S. gasoline tanks, more than is used by the entire Chinese economy. Right now, the recession is curbing U.S. gasoline consumption, as laid-off workers stop commuting and budget-conscious families forgo long road trips. Drivers filled their cars with 371.2 million gallons of petroleum-based gasoline every day in 2007, according to the U.S. Energy Information Administration. It expects that to fall 6.9% to 345.7 million gallons in 2009, as demand at the pump declines and the use of plant-based ethanol increases. Even if usage climbs after the recession ends, it won't exceed 2007 levels, according to EIA forecasts. Demand for all petroleum-based transportation fuels -- gasoline, diesel and jet fuel -- fell 7.1% last year, according to the EIA. This is the steepest one-year decline since at least 1950, as far back as the federal government has reliable data. Many industry observers have become convinced the drop in consumption won't reverse even when economic growth resumes. In December, the EIA said gasoline consumption by U.S. drivers had peaked, in part because of growing consumer interest in fuel efficiency. Exxon believes U.S. fuel demand to keep cars, SUVs and pickups moving will shrink 22% between now and 2030. "We are probably at or very near a peak in terms of light-duty gasoline demand," says Scott Nauman, Exxon's head of energy forecasting. If Exxon is right, the full impact of falling demand for fuel would take years to be felt. But some deep changes are under way. Impact on Local Funds Declining gasoline-tax revenue is forcing local and federal governments to search for new sources of funding. Oil refiners, which for decades focused on bringing U.S. drivers more gallons of gasoline, are retooling their businesses. Some have said they could shut down some of their refineries entirely, along with thousands of small gas stations. Oil companies are beginning to invest in biofuels and battery technology. Diverse trends are adding up to a steady drain on gasoline demand. Gasoline engines are being designed to burn fuel more efficiently. Hybrid and other advanced-technology vehicles that minimize gasoline usage are joining the nation's fleet. Tanks of gasoline and diesel fuel are being leavened with increasing amounts of biofuel, now made mostly from corn but in the future also from perennial grasses and municipal waste. President Barack Obama's pledge to end the "tyranny of oil," and a push for energy efficiency and biofuels in recent legislation, could accelerate these trends. Skeptics of the notion that gasoline demand has peaked point to a population that is likely to keep growing as Americans have children at roughly the same pace and the flow of immigrants increases. "Anyone who looks at population must think there is going to be some big bird flu if they think we've peaked," says Tom Kloza, chief analyst at Oil Price Information Service, a firm in Wall, N.J., that tracks prices and consumption. Lower gasoline prices are back after a multiyear spike in prices. That could reignite consumers' desire for big, fuel-guzzling SUVs and tolerance of long commutes, especially when the economy strengthens. After the 1979 spike in crude-oil prices, U.S. gasoline consumption dropped for four years, but then rose again when fuel prices plummeted in the mid- to late-1980s. This time, the forces suppressing gasoline usage are formidable. The 2007 Energy Independence and Security Act toughened requirements for both efficiency and biofuels use. By 2020, vehicles sold in the U.S. must average 35 miles a gallon, versus 27.5 for cars now and 23.5 for light trucks. The Obama administration is working on proposals to further increase the standard. Makers of U.S. transportation fuel must blend in 36 billion gallons of biofuels a year by 2022, compared with about 11 billion this year. High corn prices last year, combined with low gasoline demand from consumers, decimated ethanol producers' margins, forcing several into bankruptcy. But government mandates requiring refiners to blend ethanol into gasoline aren't expected to change. The 2009 economic-stimulus law includes large new loan guarantees to help renewable-energy businesses get financing -- and provides huge incentives for oil companies to dive in, too. Most big oil companies declined to discuss their views on the direction of demand for petroleum-based gasoline for this article, but most are expanding their push into alternative fuels. U.S. government policy is pushing gasoline consumption "down, down, down," says Ed Feo, a partner with law firm Milbank, Tweed, Hadley & McCloy LLP, who advises clients on renewable-energy policy. "There isn't a single policy I can think of that supports increasing gasoline use." Americans are changing, too. Demographic shifts that once spurred higher gasoline consumption have run their course, such as more women joining the work force and the flight to the suburbs. More people are minimizing their commutes by living closer to their jobs. Inner cities and surrounding suburbs are growing denser, shortening trips to work and to the mall. Between the early 1990s and 2007, the majority of metropolitan areas in the U.S. saw an increase in the share of residential permits granted near or in their downtown centers, according to the Environmental Protection Agency. One quarter of new homes constructed in the Denver area in 2007, for example, were in the central city, up from 5% in the early 1990s. In Chicago, that figure rose to 40% from 7% in the same period. A growing number of Americans are commuting by bus or train or working from home. And even as the population continues to rise, the rate of gasoline consumption appears to be slowing. From 1960 to 1970, the U.S. population grew 13% while vehicle miles rose 54% and gasoline demand 45%, according to government data. Between 1990 and 2000, the population grew at the same 13% rate, but miles driven rose only 28% and gasoline demand by 17%. A very different scenario is playing out in China and other parts of the developing world. Exxon expects China's passenger-vehicle fuel demand to triple by 2030, as the number of cars per capita grows along with its economy. The company is starting up a giant refinery complex in China that will feed a network of 750 gas stations. In the U.S., Exxon is getting out of the business of gasoline retailing, where profits are shrinking, and leaving it to others to own and operate Exxon stations. In contrast to China, the number of miles Americans drive started falling in December 2007. There have been a few other declines, but this one is longer and steeper than any other since 1971, the year that the government began tracking monthly data. These trends are reflected in Seattle resident John Scroggs's odometer. A decade ago, the information-technology specialist logged 10,000 miles a year in his Jeep Grand Cherokee. Today he drives only about 6,000 miles a year in a Toyota Prius hybrid, using only a quarter as much gasoline. Mr. Scroggs, 43 years old, works from home one day a week and commutes to his job downtown by bus to avoid traffic snarls and expensive parking. "We go for relatively long stretches not going anywhere beyond five miles away," he says. Road Repair As people like Mr. Scroggs pump fewer gallons, government has less money available for one of its most basic functions: keeping roads in working order. Federal gasoline-tax revenue fell 3% last year, according to the Department of Transportation. That plus other tax shortfalls left Congress having to plug an $8 billion hole last year in the Highway Trust Fund, previously kept flush by growing gasoline use. Localities have begun facing their own gas-tax gaps. Neon-lit Las Vegas offers a glimpse of a possible future of transportation-budget squeezes. To save money, local officials are building some new roads without street lights, curbs or traffic lights. They've cut two bus routes in the suburbs. One remedy proposed by a commission Congress formed to study the problem: Base taxes on the number of miles people drive, rather than on how many gallons they pump. The aim is to continue raising money as biofuels and other fuels displace oil-based gasoline. Oregon is considering the idea. More than a dozen states are considering an increase in their own gasoline taxes. Refiners must adjust not only for less driving but for a higher biofuels component in what they sell. Last year, plant-based fuel made up about 7% of the gasoline Americans pumped into their tanks, according to an analysis of government data by researchers at the University of Texas's Center for International Energy and Environmental Policy. The federal EIA forecasts a doubling of that percentage over the next decade as mandates to use more biofuels kick in. The lost business from falling gasoline demand has contributed to the demise of at least one oil refiner. Flying J Inc. filed for bankruptcy reorganization in December. It closed its refinery in Bakersfield, Calif., and hasn't said when or if it will restart production. Larger Sunoco Inc. says if it can't sell a refinery in Tulsa, Okla., by the end of the year, it will shut it down entirely. View Full Image Getty Images The recession is curbing U.S. gasoline consumption, as laid-off workers stop commuting and budget-conscious families forgo long road trips. Other crude-oil refiners are moving in to the biofuel business as new fuels grab market share. Big refiner Valero Energy Corp. started a renewable-fuels division last year. In March, Valero won a bid to buy a group of ethanol plants for $477 million out of the Chapter 11 bankruptcy of VeraSun Energy Corp. Numerous start-up companies are building "biorefineries" to turn plants into ethanol or diesel, a response to mandates that say these fuels can't all be made from corn. One concern is that if too much corn is grown for fuel it could result in higher prices for corn-based food products. A Colorado company called Range Fuels Inc. is building a facility in Georgia to turn lumber-industry waste into ethanol, initially at 10 million gallons a year. Gas stations are also feeling squeezed. There are 11% fewer in the U.S. than a decade ago, according to trade publication NPN Magazine. The trend, partly a result of retail consolidation, accelerated last year due to weak gasoline demand. In Springfield, N.J., a 99-year-old Exxon station attached to a small auto-repair shop may not make it to 100. Exxon told the owner last year that it was "uneconomical" to keep supplying the station with gasoline and the oil giant wanted to remove its tanks, says Jeff Pinkava, the owner and a great-grandson of the station's founder. He filed a suit in an effort to keep the tanks, because the pumps attract customers for oil changes and other garage work. The case is pending. Exxon declined to comment. The station has provided for the family for four generations, said Mr. Pinkava. Now, he says, Exxon is "kicking us to the curb." Write to Russell Gold at russell.gold@wsj.com and Ana Campoy at ana.campoy@dowjones.com