High gas prices will make driving too expensive for many American families - forcing 10 million cars off the road: CIBC World Markets

Gasoline to hit $7 per gallon in two years

Jun 26, 2008, 01:00 ET from CIBC World Markets

    NEW YORK, June 26 /PRNewswire-FirstCall/ - 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
     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:
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SOURCE CIBC World Markets