New Booz Allen Report Identifies Marketplace Factors That Could Lower Demand for U.S. Gasoline, Threatening Refining and Auto Industries

NEW YORK--Oct. 5, 2004--Booz Allen Hamilton:

-- High fuel prices, regulatory and technological shifts could lessen consumption and jeopardize refining industry "Golden Age"

-- Auto manufacturers would also face transformation if consumers seek more fuel-efficient vehicles

The U.S. refining industry believes it is now in a Golden Age, as gasoline demand outstrips domestic production for the foreseeable future, resulting in sustained profitability as margins are dictated by high priced imports. However, a new report from management consulting firm Booz Allen Hamilton cautions that shifts in consumer behavior, government regulations and auto technology could drastically lower demand for gasoline and erode industry profitability.

Historically, the two factors that determine demand--miles driven and vehicle fleet efficiency--have changed in response to consumer priorities and the external environment. Booz Allen developed three scenarios that would create unexpected shifts in these factors and analyzed the potential impact of each of them on the refining industry.

In each of these scenarios--a sustained gasoline price increase at the pump, regulatory changes, and successful adoption of new auto technologies --consumers seek out, and auto makers provide, more fuel-efficient vehicles, significantly lowering demand for gasoline.

-- Scenario 1: Consumers continue to pay high prices at the pump, due to fundamental or geopolitical impacts on crude price or refining structural changes.

        --  Impact: In the short term, drivers drive fewer miles; in
            the medium-term, drivers trade down to smaller, more
            fuel-efficient vehicles. Depending on how quickly the
            price changes in this scenario, gasoline demand could fall
            below domestic supply as soon as 2007.

-- Scenario 2: Changes in government CAFE fuel economy requirements force light trucks to meet the same standards as cars by 2015.

        --  Impact: As they reach the limit on gasoline technology,
            vehicle manufacturers turn increasingly to diesel engines
            to enable them to meet the new mandates while continuing
            to sell high-margin trucks and SUVs. Impact on gasoline
            could be substantial in the long-term, but slower to take
            root; diesel proportion of new vehicle sales reaches 46%
            by 2015, and gasoline demand falls short of domestic
            production as early as 2010.

-- Scenario 3: Continuing technology advancements or changes in consumer consciousness result in increased penetration of fuel-efficient hybrids, which represent as much as 80% of all new vehicles by 2016.

        --  Impact: Hybrid vehicles become a mainstream product, and
            hybrid engines are standard on all new autos, creating a
            substantially more fuel-efficient average fleet. Depending
            on the rate of adoption, gasoline demand could fall short
            of production by 2010.

While the authors acknowledge that none of these scenarios is likely to occur exactly as laid out, elements of each could affect the future market for both fuel and autos, noted Booz Allen Vice President Robert Lukefahr. "If nothing else, it is clear that refining executives will need to incorporate the possibility of a downturn into their planning," said Lukefahr, who noted that the cyclical industry has a heritage of low returns. "In fact, the entire automotive industry should track consumer behavior and weigh longer-term actions carefully."

To obtain "U.S. Refining Trends: The Golden Age or the Eye of the Storm?," contact Karen Guterl at guterl_karen@bah.com.

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