End of the Road

Monday 12 December 2022

After a long plateau going back twenty years, California gasoline consumption has finally entered decline. The turning point likely offers lessons to other domains, also seeking to kick petrol consumption into decline, or, trying to figure out why doing so is hard. California’s population grew a full 10% from 36 million to 40 million over the ten year period from 2010 to 2020. And the state’s tech-led economy boomed during that time, creating budgetary surpluses. But phased-in gasoline taxes, incentives for purchasers of EV, disincentives for ICE ownership, and a buildout of public transportation eventually produced moderate traction against fuel consumption. The final shove down the stairs came of course from the pandemic. California is unsurprisingly ground zero for the type of flex-work typical within tech companies, and the Golden State embraced work-from-home enthusiastically. Even if you price in a mean reversion to office work, there will likely be a remainder of workers—at least 10% to 15% of the state’s workforce—that adopt flex arrangements permanently.

The turning point brings resolution to a long, historical arc that began nearly a century ago, as fast population growth and cities built around the automobile flourished in the American west, not just Los Angeles. Petrol consumption advanced with few interruptions. Within California, only San Francisco, really, existed as a pre-automobile city having developed originally during the Gold Rush and the Victorian eras. Southern California by contrast would become the American epicenter of a different kind of city, one anchored by suburbs at the core, rather than suburbs on the periphery. Indeed, L.A. was originally marketed on a plan that promised single family home ownership within the city, replete with a yard and a driveway. As a marker for the central place parking itself enjoyed in California planning history, it was not until this year 2022 that the state made significant changes, reducing mandates to developers—freeing them to build residential capacity without parking spaces. And it should be mentioned, apartment and condo building has been robust in Los Angeles in the past decade, and a new, younger group of people have increasingly attempted to make a life in the city without a car.

Perhaps the most intriguing long term outcome from the decline will arrive in the form of reduced petrol tax revenue to the state. The other side of the ledger in California’s car culture has meant, for a very long time, tidal waves of growing tax revenues from petrol sales. And when the state began to contemplate higher petrol taxes, it modeled that eventually gas tax revenues would decline. The boosted gas tax regime was in fact part of a mitigation plan that would give the state a kind of running start, before gas tax revenues finally turned down. Going forward, California will need to be creative in how it manages its vast network of highways, or really, the punishing cost of maintaining them, as the EV era unfolds and comes to dominate the state’s vehicle fleet. One possibility: the state moving to a VMT tax (vehicles miles traveled).

The peak in ICE sales, now anchored to the year 2016 via quickly advancing sales of EV, is now a key part of the state’s petrol trajectory. On the chart below, you can see the decline and how it’s proceeding. ICE sales are on course to be down 32% from the peak through the end of this year.

From a total fleet perspective, the aggregate plug-in count still looks quite small, and had only reached over 800,000 on-road units by the end of 2021, in a total state fleet of over 30,000,000. What’s important to recognize here, however, is that combined with all the other factors, including small net outward migration of the population (California lost a congressional seat in the 2020 census), the state stopped adding to its ICE fleet years ago. Hence, there is simply no growth driver for higher levels of gasoline consumption. Now consider that plug-in sales will nearly reach 19% share of the market this year (315,000 plug-in units in a 1,700,000 total market) and you can see how a drag, and now a decline, would set in on the state’s petrol demand.

But the decline will not be rapid, and will not be steep.

EV adoption alone will not produce road fuel demand declines in any domain, absent other contributing factors, until market share gets to much higher levels. The existing ICE fleet always looms as a kind of expansionary, or contractionary, force on petrol demand depending on booms and busts in the economy, and yes, on rare factors like a pandemic which leads to a change in workplace commuting. All that said, the hurdles to a resumed growth phase in California gasoline demand are many, and imposing.