There are a number of factors leading to the oil price collapse from a high of $110 per barrel a few months ago to the present $50. The most subtle one is the improving fuel efficiency of motor vehicles. It is a technological advancement that proceeds in small increments mainly involving better engine combustion and lighter materials put into the car. Although the progress is slow, this advancement has accumulated to produce a significant impact that cannot be reversed.
The idea of fuel efficiency started to make sense after the first oil crisis of 1973 when OPEC began to raise oil prices by reducing their supplies. Despite rising oil prices, the number of motor vehicles continues to grow, exceeding one billion in the world nowadays. If the average vehicle burns one gallon less of oil in a month due to fuel efficiency, the world will be consuming 1 billion gallons less. These big numbers add up through the years and contribute to the oil glut we have today.
A good example of fuel efficiency is seen in the US which has the highest ownership of 240 million motor vehicles, accounting for nearly 25% of all the cars in the world. Among the 50 states, California stands out with 13 million vehicles, an average of 3 people per car, and an automobile culture very much alive.
Despite the increase in population and car ownership year after year, the total amount of gasoline sold at retail in California finally peaked in 2003. Then it decreased steadily, from $15.9 billion in 2003 to $14.6 billion in 2013. Since the state government imposes a tax on gasoline, the reduced sales caused a drop in the state income derived from gasoline from $2.87 billion to $2.62 billion during this period (San Jose Mercury News, 1/25/2015).
The reduced gasoline consumption in California is unprecedented. Prior to 2003, California had been consuming more gasoline year after year due to a steady rise in population and car ownership. This leads many experts to believe that the state has achieved a greater degree of fuel efficiency that began to bear fruits after many years of incremental progress in engine and light material technology. To illustrate, the average passenger car now burns about 30 miles per gallon on the highway while the heavy gas-guzzlers of the 1970’s could barely make 12.
Due to the shortfall of tax revenues derived from gasoline, the government is floating the idea of a new car tax based on the miles being driven. This idea is controversial because of its basic unfairness. The proposal taxes a poor person equally as a rich one if they drive equal distances, but the rich person drives a big car that consumes more gasoline and pollutes the environment more. It will be interesting to see how this new tax proposal play out. In any case, we have OPEC to thank for making people think about the high costs of gasoline that has resulted in better fuel efficiency for the world.