Will Electric Vehicles Actually Drive Down Prices at the Pump?

High inflation seems to have a withdrawal time. Even though the trend has been down for about a year, it still ranks as a top problem in the minds of many Americans. I think some of this is forgetting that even if inflation is slowing, overall prices don’t go down, they just go up more slowly.

Some prices, notably energy and food do both rise and fall, but the overall cost of living rarely drops. Right now, gasoline and eggs dominate our thinking about inflation. They are things we buy frequently, keeping them in our mind.

The good news gasoline is about where it was before the Ukraine war exploded the energy markets. There is a longer-term issue, however. We have likely passed peak gasoline consumption, and while you might think that would lower prices, oil companies are way ahead of us.

To be fair, when you see gasoline production virtually stopped growing in 2007 and predictions of slowly declining consumption from the EIA, there is little incentive to refine more. This is not about EV’s either.

Less than 1% of cars on the road are electric. It’s caused by improved mileage from more efficient engines. As older cars are replaced, the fleet mileage curve is locked into an uptrend. There are signs that vehicle miles driven may have plateaued as well.

These developments are not news to the oil industry, and it’s one reason no new refineries will likely ever be built in the US. In fact, to keep existing refineries running at capacity, US refiners have relied upon exports to replace fading domestic demand. It is good business for gasoline refiners to manage production to match demand forecasts. Older, smaller refineries are simply being shut down, reducing future refining capacity, and providing little idle capacity for demand surprises.

The bottom line for consumers as EVs become more popular, reduced gas demand likely will not lower prices as refiners constrict supply. In fact, supplies will probably decrease slightly faster than demand, keeping prices high. Any small mismatch between supply and demand could cause considerable price volatility.

This dispels one misconception I had – that EV’s would lower gasoline prices. They will eventually, but refiners are prepared. Strong gasoline prices will aid the economics of electrification as well as turnover to more efficient conventional vehicles.