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Blur the lines: States like California are aggressively targeting petrol growth
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Shorter queues at the pump, more tax

US states are rolling out fresh gasoline taxes at a time when US road fuel demand has already gone flat

For the first time in 14 years, the US state of Ohio will hike gasoline taxes this summer, joining a wave of similar increases from Arkansas to Alabama. Long denied sufficient funding for road repairs from the federal government in Washington, state-imposed gasoline taxes are meant to plug budgetary gaps, but may have a knock-on effect by further constraining the growth of US gasoline demand.

For the second year in row, US gasoline consumption failed to make any progress in 2018, flattening out to just under 17.2 quadrillion Btu. More broadly, despite a recovery from the deep lows of the Great Recession, US gasoline demand still sits just below the all-time highs, set far back in 2006, of 17.5 quadrillion Btu—because of the declining heat content of US gasoline, Btu rather than barrels is the favored unit to measure US consumption over time. Carbon taxes are still not politically viable in the US, but new fuel taxes and other policies may have similar impacts, albeit by another name.

The state-led tax increases will arrive in unexpected domains; farm states and industrial states where sport-utility-vehicles and pick-up trucks dominate, and taxation of any kind is not popular. While few were bothered by Oklahoma's increase of 3 cents last year, the first since 1987, both Ohio and Alabama will tack on an extra 10 cents this year—although Alabama breaks its increase up over several years, to ease the pain.

Other states, including South Carolina, Oregon and California, are also rolling out their increases in steady increments, having started in 2017. Michigan is proposing the largest hike, at 55 cents per gallon. Politically, that is an intriguing proposal. The state narrowly voted for President Trump in 2016, but then voted Republicans out of office two years later, and now has a new Democratic governor with strong legislative experience. The current view is that a steep hike will indeed be enacted. All of the recent increases are in addition to the longstanding federal levy of 18.4 cents, among the lowest in the world, and itself unchanged since 1993.

Limited impact

'The recent increases in fuel taxes may dampen the demand for larger vehicles and slow any increases in vehicle miles travelled (VMT),' says Anup Bandivadekar, program director of passenger vehicles at the International Council on Clean Transportation (ICCT), in San Francisco. 'However, in most cases, the increases are phased in, and the impact on vehicle size and VMT will be small.' Unlike gasoline demand figures, VMT did finally exceed the previous high of 3.025tn miles set in 2007 by reaching 3.062tn in 2015. And yet, while VMT reached 3.218tn last year, on a per capita basis VMT sits about 4.5pc below the highs of 2004.

There has been no weakness in the American economy to explain the recent tail-off in gasoline demand growth. Fuel efficiency gains have been steady, but not particularly aggressive over the past few years. US motor vehicle sales have eased only slightly off their highs, falling gently from just over 17.45mn units in 2016, to slightly above 17.2mn last year. 2019 sales are expected, however, to finally dip below 17mn.

The dramatic decline in oil prices in the summer of 2014 did, though, usher in two strong years of growth when gasoline demand advanced by 2.8pc in 2015 and 1.7pc in 2016. And the halting of growth over the past two years does not necessarily point to imminent declines. 'I would hesitate to say gasoline consumption will fall rapidly,' says Bandivadekar. 'With Trump administration's proposal to stop further increases in CAFE standards, we might see, to borrow a phrase from Daniel Yergin at [IHS] Cera, ‘an undulating plateau' over the next few years.'

Plug-in California

The country's largest state, California, now the world's fifth largest economy, paints a different picture. Its economy has boomed and population has just crested 40mn for the first time, up 7.4pc since 2010. But California has aggressively pursued policies that attack gasoline demand growth from every angle. Plug-in vehicle sales climbed above 155,000 last year, or 7.9pc out of 2mn units sold, strongly suggesting that sales of internal combustion engine (ICE) vehicles have now peaked in the state.

A fresh round of petrol taxes was enacted in 2017 that will automatically adjust higher each year, indexed to inflation. ICE vehicles are also subject to new pollution surcharges, and no state provides a more generous package of subsides to electric vehicles. The policies are very much driven by the state's cities, in particular the sprawling conurbations of southern California.

'Cities are actors in their own right now,' says Colin McKerracher, head of advanced transport at consultancy Bloomberg NEF, in London. 'And city-level policies are going to front-run national regulation for quite a while because the problem they are trying to solve is present, personal, and local. They have a different level of urgency.' McKerracher also notes cities are becoming more powerful, increasingly populated by wealthy and influential residents, and are able to act more decisively than national-level policy makers.

Like the US as a whole, California's gasoline demand growth made a four-year recovery, starting around 2013-14, which then flattened out. Taxable gasoline sales data show the state consumed 15.5bn gallons last year, down 0.4pc from 2017. This level also sits below the all-time high set in 2005, of 15.9bn gallons. Over those 13 years, California added 4.25mn residents but has also invested heavily in upgraded or new transit systems in its major cities, especially Los Angeles.

Somewhat counterintuitively, California anticipates its gasoline tax schedule will be so effective at halting demand growth that it has placed a small flat fee of $100 on electric vehicles to counter future declining revenue from gasoline, and to reflect that EVs will still be using the roads but not the gas pumps. Always the leader, California's econometric modeling of the long-term impact of more aggressive taxation of fuel may be of interest to all states doing the same. Indeed, it appears Ohio may have taken notice, and is now proposing its own $200 annual fee for electric vehicles.

Congestion charges

The newest threat, though, to future motor fuel demand may come from a corner few anticipated: congestion charges. London put one in place 15 years ago, without a single response anywhere in the US. But, at the tail end of March, New York City passed legislation to place a $10 fee on every car entering the lower third of Manhattan, south of 60th Street. That is not going to tip national road fuel demand, of course, but it may give the green light to many US cities thinking of doing the same.

'Congestion charging may be the thin edge of a wedge,' says McKerracher. 'And not just to control the number of cars entering a city, but the type of cars that can come in.' For example, he explains, the initial charge in London controlled volumes. But this month, a new programme places a second charge on vehicles that cannot meet new, ultra-low emissions standards. 'If you had tried to go from no charges at all to an ultra-low programme, it probably would not have worked. Perhaps the US states now using a dosing strategy, releasing their new gasoline taxes in small tranches, are quite clever.

The car itself may also have started a process of falling from favour. Clearly, automobile sales do not reflect any such trend but how Americans use their cars has started to change. Owners still have a Ford F-150 or Honda Civic in the garage, but they are clearly not driving them as often, as seen in the decline in per capita miles driven nationally.

Driving to the mall or the shops was long a common pastime; but today real estate developers talk about 'the Amazon effect' as they struggle to find retailers for ground floor-space. No wonder: Americans are ordering everything they can online, to be delivered by UPS and FedEx. Cycling, walking, new subway and streetcar lines have combined to nibble away at driving time that, in a previous era, would have translated into strong year-on-year demand growth.

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