Fuel shock threatens permanent dent in demand

By Richard Valdmanis - Analysis

NEW YORK (Reuters) - The high price of crude oil has brought more than just a 1970s-style gasoline shock to U.S. motorists -- it may have triggered a 1970s-style slowdown in fuel use that could linger even if prices fall.

Gasoline demand in the world's biggest consumer is on track for its first annual decline in almost 30 years as high pump prices and an economic slump lead Americans to cut road travel, carpool, and buy smaller, more fuel efficient cars.

The drop in fuel consumption has been cited as the main reason crude futures slid more than 20 percent since mid-July -- begging the question of how quickly demand could return if prices keeping dropping.

"Some of this demand slowdown is definitely permanent. The question is how much," said Kyle Cooper, analyst at IAF Advisors in Houston. "Even if Americans return to their old driving habits, it will likely be in smaller cars."

U.S. oil demand this year has been running about 3.6 percent below the same period a year ago, with gasoline consumption down about 1.6 percent, according to the U.S. Energy Information Administration.

The last time annual gasoline demand fell in the notoriously fuel-hungry United States was during the period between 1979 and 1982 after the Iranian revolution.

A government report showed that during the first five months of the year, U.S. highway travel was down 29.8 billion miles, or 2.4 percent, from the same period in 2007.

"Demand is certainly taking a big hit now," said Peter Beutel, president of oil consultancy Cameron Hanover in New Canaan, Connecticut.

"The high price of energy has seeped into just about every part of our lives and consumers have found themselves in a position that they simply have to cut back on everything. I do not think they're likely to change those habits back easily."

While much of the decline in demand appears discretionary, there is mounting evidence the rally in oil prices has triggered more permanent shifts like an increasingly fuel-efficient auto fleet.

U.S. automobile sales data for July showed a continued dramatic slide in the number of gasoline-chugging trucks sold and relatively strong sales of smaller cars.

Meanwhile, Americans also are seeking to save on gasoline costs with four-day work weeks, telecommuting, car-pooling, and increased use of public buses and trains.

Some rural U.S. school districts are even turning to four-day weeks to cut fuel burned by school buses -- a move not widely seen since the 1970s oil shocks.

The trends have contributed to a slide in oil prices of more than $30 since the peak over $147 a barrel on July 11.

But crude oil prices still are up nearly sixfold since 2002. The rally has been driven by Asian growth and slow increases in world output capacity -- adding strain to a U.S. economy battered by a housing and credit crisis.