Jeff Rubin and Behjamin Tal of CIBC World Markets, Inc. have issued a short paper addressing what will happen in the US if we see $200/barrel oil and $7/gallon gasoline by 2010, as their analysis says is possible.

The paper is Getting Off the Road: Adjusting to $7 per Gallon Gas in America [5 page PDF], and it describes massive change (emphasis added, although hardly needed):

We stand at a turning point for US transport. Real gasoline prices have already surpassed the peak levels that followed the second OPEC oil shocks, and even when adjusted for potential fuel efficiency improvements, have increased to the point where they will dramatically change driving behaviour in America.

The some 57 million Americans who own a car and have direct access to public transportation will start to act more and more like Europeans, who have long paid much higher gasoline prices. By 2012, average miles driven will have shrunk by more than 15%. SUV and other light truck sales, which until 2006 accounted for almost 60% of total motor vehicles, will plummet to less than half that level, reversing the last fifteen years growth in market share.

More fundamentally, the freeways are about to get less congested. Not only will the number of vehicle registrations in the United States not grow over the next four years, but by 2012 there should be roughly 10 million fewer vehicles on the road in America than there are today.

For the past half century, America has spent the bulk of its infrastructure money on building highways—only to see that soon, $7 per gallon gasoline prices will lead to fewer and fewer people using them.

Gasoline prices in America have risen from around $1.80 in 2004 to the current $4 per gallon mark. The most recent surge in pump prices has, in inflation-adjusted dollars, already taken pump prices to a buck a gallon above the record prices seen in 1981 (Chart 1). And in percentage terms, the latest increase is almost twice the increase in oil prices that followed on the heels of supply disruptions after the Iranian Revolution.

Yet as daunting as these price increases have been, there is much more to come. Our updated oil price forecast of $200 per barrel oil by 2010 points to Americans paying as much as $7 per gallon for gasoline within the next two years.

Even the temporary 1979-1981 oil shock led to huge changes in driving behaviour. The prospect of a permanent price regime of $200 per barrel oil should trigger changes that will dwarf the adjustment we saw nearly thirty years ago.

See the paper for all the details of fewer cars, escalating transportation costs, people seeking public transportation, etc.

I won’t offer an opinion on the $200 oil/$7 gasoline projection, as talking about such pinpoint numbers (or even ranges) is the equivalent of trying to hit the bull’s eye on a dartboard while on a boat in very rough seas. But the ensuing analysis of what such prices, if they were to happen, would mean seem to be on the mark, with one glaring exception: There’s no discussion of the electrification of personal transportation.

Given that this paper is only talking about the years 2010 to 2012, for the most part, this seems reasonable–EV’s and PHEV’s will account for an infinitesimal share of the vehicles on the road in that time frame. But we’re very likely to see an “adjustment to the adjustment” once several mainstream companies have such cars in their showrooms (around 2009/2010) and production ramps up (likely by 2012). The per-mile cost of fueling an EV or PHEV is so much less than putting gasoline into even a Prius that they will be an economic game-changer all by themselves. Add in the virtually certain government support for residential solar PV panels, and suddenly you have many people in single-family homes (i.e. those with control over their own roof) using solar power from government subsidized hardware to partially offset the cost of recharging their plug-in Prius or Volt or iMiEV or whatever.

If there is an accelerated rate of retirement of gas guzzlers (like my Scion xA, as perceived in 2012 or 2015), combined with the people who have the longest drives flocking to EV’s and PHEV’s, we could see a higher than expected portion of vehicle miles fueled with electrons instead of hydrocarbons. And that, in turn, will reduce the incentive to make sweeping societal level changes.

In other words, we’re headed for not one major wrenching change, but a long, interrelated cascade of them, all triggered by much higher oil prices, that will pull different consumers, businesses, and institutions in different directions at various times.

And for the record, I wouldn’t bet against $7/gallon US gasoline in two years.