Fuel Standards Could Augur Market Shift

By ANGEL GONZALEZ and SUSAN DAKER

HOUSTON -- The Obama administration's toughening of fuel-efficiency standards is poised to knock U.S. gasoline demand lower in coming years and could help steer oil supplies to faster-growing economies in the developing world.
The new regulations, unveiled late Monday, are part of a broader policy to curb emissions of greenhouse gases and cut dependence on foreign-oil imports. The rules have vast implications not only for refiners, which have long faced the specter of falling U.S. demand, but also for global energy markets. The U.S. consumes about a fourth of the world's petroleum supply.
"When we move, the market moves with us," said Kenneth Medlock, an energy economist at Rice University in Houston.
Under the new rules, new passenger cars sold in the U.S. would have to meet an average mileage requirement of 39 miles per gallon by 2016. Light trucks would have to deliver an average of 30 mpg. That would bring the overall average of cars and light trucks on U.S. roads to 35.5 mpg by 2016, four years earlier than current federal law requires.
In a speech Tuesday, Mr. Obama said the new rules would save 1.8 billion barrels of oil over the lifetime of vehicles sold in the next five years.
The administration's move reinforces a secular shift in the U.S. gasoline market, which, after growing for more than a century, is beginning to show a slow decline on greater efficiency, changing consumer habits and biofuel mandates.
Daniel Yergin, head of energy consultancy IHS Cambridge Energy Research Associates, estimates that U.S. gasoline consumption peaked in 2007, and said the upcoming efficiency standard "reinforces the trend."
"It further highlights what has been clear over this decade: Growth markets for oil are not going to be in the developed world -- they are going to be in the emerging markets," he said.
Energy Security Analysis Inc., or ESAI, estimates that the new standards will curb U.S. demand by 350,000 barrels a day by 2016 and 750,000 barrels a day by 2020.
It's unlikely, though, that these demand reductions will result in dramatically lower global oil prices, as growing consumption in Asia will pick up the slack, said Greg Priddy, an oil market analyst with the Eurasia Group.
"Prices will be a little bit lower than they would otherwise have been, but you'll end up with more cars in China," he said.
Still, an acceleration in the drop of gasoline demand would add pressure to refiners, which are already looking for ways to increase diesel production as gasoline use declines. Diesel demand is expected to remain strong thanks to its use by the long-haul transportation fleet and by the fact that car makers could more easily reach the new efficiency targets by adopting diesel.
Refining companies say that they will have nearly a decade to adjust to the new standards because the U.S. vehicle fleet won't be able to change overnight.
"It's not a shotgun start," said Mike Jennings, chief executive of Frontier Oil Corp.
Although the impact on the demand will be substantial, "it won't put anyone out of business," said Sander Cohan, a transportation fuels analyst at ESAI in Wakefield, Mass.
Write to Angel Gonzalez at angel.gonzalez@dowjones.com and Susan Daker at susan.daker@dowjones.com