Modeling the Inflation Reduction Act Part 2

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We provided a high level summary of our recent modeling of the Inflation Reduction Act (IRA) in Part 1As we continue to model and run scenarios for the U.S. power grid build-out through 2031, our concern about policy makers overpromising and underdelivering on stated energy transition goals growsMake no mistake, the IRA appears poised to help materially transform the U.S. power grid and reduce power plant emissions by 40-50% by 2031 on our assumptionsTransportation emission reductions are the concernSwapping out an entire vehicle fleet will take decades even with federal and state regulations and mandates promoting the fleet transitionThe numbers suggest gasoline demand remains flattish for the next 8-9 years despite significant EV growth and that diesel demand continues to growToday's tight diesel markets and high diesel cracks are a warning to policy makers and industry participants on the risk of being short refining capacity

Shot Across the Bow

Diesel is wagging the oil and product markets today. Record cracks, massive premiums to gasoline, low storage levels.  Whatever metric you want to use, products and diesel in particular are tight.  The situation is further exacerbated by infrastructure constraints (pipeline network to move product) and policy errors (Jones Act).Policy makers and industry participants should be wary of premature refining capacity reductions.

We explain.

Using historical EV registrations, we modeled the EV fleet out to 2031.

Assuming 1% U.S. vehicle fleet growth (lower than the 3, 5 & 10 year CAGRs), EV penetration is limited by simple math and manufacturing capacity growth.2031 EV registrations should be 6-7 times larger than 2022.  Even so, EV fleet penetration doesn't surpass 7%.

Using our modeled U.S. total fleet together with refining yield splits, assumptions on miles per gallon efficiency gains and vehicle miles traveled, we calculated forward gasoline and diesel demand.  Gasoline demand remains quite flat.

Diesel demand increases.

Differing state policies and subsidies as well populations that may have vastly different views on climate change will result in uneven EV fleet growth.  We have the U.S. fleet and product demand modeled down to the state level but rolled into PADD districts above.

The U.S. is enacting policies and throwing significant resources at the U.S. transportation market to incentivize a move away from fossil fuels.  Although we haven't modeled further out, our expectation is that EV growth and manufacturing capacity will accelerate into the 2030s but material differences to what we've shown by 2031 would be mathematically challenging.

We believe the perception or message from some is that EV growth will quickly reduce oil demand.  We'd suggest tapping the breaks on that idea.