Luxury Truck Buyers and the Price of Gasoline

By Brendan Moore

07.29.2007

There have been several articles recently in various publications (Automotive News, The New York Times, etc.) concerning the fact that although light-truck sales have dipped as the price of gasoline has remained higher than in the recent past, sales of the largest and/or most luxurious of the full-size pickups have actually increased. Consumers cannot seem to get enough of pickup trucks like the massive Toyota Tundra CrewMax and the King Ranch Ford F-150, which also, by the way, have massive price tags of $40,000 and up. If the truck happens to be both large and luxurious, there are sometimes waiting lists for specific models. Large, luxurious, or the usual combination of both, I will state the obvious and mention that these behemoths drink down gasoline at alarming rates.

Even though I am fully aware of the consumer behavior noted above regarding truck purchases (I look at the sales figures of every vehicle every month so it’s tough to miss), it still is perplexing to me how these truck buyers seem to be able to willfully ignore the ever-increasing price of gasoline in terms of justifying the purchase of a full-size pickup truck.

And, I should be more specific here: I’m not referring to commercial concerns or small businesses like tradesmen or delivery services, etc. that actually use their pickup truck in the pursuit of profits, I’m referring to the consumer buyer that buys a Crew Cab pickup as a family vehicle, or buys a new Toyota Tundra or a Chevy Silverado to use as a commuter vehicle.

Much like SUV buyers, a large percentage of these truck buyers tend to rationalize their purchase by over-estimating the frequency of “maximum-need instance” events in their lives.

So, an SUV owner may tell you that she “needs” a 3-ton, seven-passenger SUV because it will seat seven people, and she carries seven people “all the time”. The reality you find upon analysis in this specific example is that this maximum-need instance occurs on the average once every 35 days, and even then, it wasn’t a necessity – the six kids she carried could have been split up into different vehicles after soccer practice, but the choice was made to put them all together since space was available.

Many consumer truck buyers engage in the same sort of rationalization; if you ask them why they bought a truck, they’ll tell you that they “need” it for picking up lumber at Home Depot or moving furniture or something else that they do “all the time”, when the actual frequency of these maximum-use events is very low indeed.

2007 Toyota Tundra 4×4 CrewMax (5704 lbs.)

Of course, to be fair, human beings rationalize all sorts of things, and it’s not to be expected that people who buy trucks or SUVs when they don’t really need them would be different in that regard. What is surprising is that the desire to have a large truck seems to be so resilient in the face of rising gasoline prices. A reasonable assumption would be that every rationalization has its limits. Even consumers that can afford a $40,000 or a $50,000 pickup truck are not immune to the price of gasoline. I mean, I like trucks, too – I’ve owned over 12 pickup trucks so far, so I can understand the attraction, (although I’ve never used one as commuter vehicle) but gasoline where I live (Northern CA) is around $3.50 a gallon and it keeps going up inexorably. The situation is the same in the rest of the country, even if the price isn’t as high. Even if you skip the rationalization, and say, “Well, I don’t have a good reason, I admit it, I just like driving a truck, and that’s my reason for having a truck”, there still has to be some point at which the price of gasoline intrudes upon the fulfillment of your desire to drive a large truck.

And not to get sidetracked here, but people often ask us here at Autosavant if we think the price of gasoline will keep going up and what it will be two years from now (24 months into their 60-month auto loan).

In case you have the same question, here is the general answer I give them:

Oil is being depleted steadily while demand worldwide continues to rise. There are no indications currently that any new oil reserves in any significant amounts will be suddenly available in the future. There are no indications currently that demand for oil will do anything except increase dramatically in the next 20 years. There may be hiccups in the price of oil that manifest themselves as price plateaus such as the one we had recently, but the long-term forecast is for oil prices to continue their steady trajectory upward over at least the next two decades.Oil prices will drop when there is less demand for oil. That condition is extremely unlikely in the foreseeable future. You should prepare yourself for higher oil prices, and therefore higher retail prices of gasoline until substitutes are found for one or both. To not prepare yourself for this pricing environment is to delude yourself.So, the summing up is this: If you’re in an income range where it doesn’t really matter how much gasoline costs, then buy whatever you wish without regard to future price increases. If you are in an income range where paying $4 a gallon of gas would take up too much of your after-tax income, then I would suggest you do the math based on gasoline being $5 a gallon (it’s not that unlikely within the service life of the vehicle) and buy what you can afford to buy gas for at that price per gallon.

In terms of a temporary spike to $5 a gallon, refinery capacity is so stretched at this point that we may be only one Gulf hurricane away from the five-dollar mark. But I digress.

Back to the big trucks: And so, of course, occasionally the question about what we think the price of gasoline will do comes from someone considering buying a big ‘ol truck. Despite the answer above, I’ll still get an email back from a percentage of those prospective truck buyers saying something along the lines of: “Thanks for your advice, but I got the Dodge pickup with the Hemi engine I was looking at. I just couldn’t pass it up. Hey, what can I say, I just love driving a pickup truck, and besides it will be handy for carrying stuff around, right?”

So, another guy using a truck as a daily driver that gets 10-15 mpg. There are millions and millions of people that have made the same decision.

Part of my background is in consumer research and statistical analysis, and obviously, there must be some price point at which the cost of gasoline will decrease the sort of behavior you see regarding the purchase of trucks and SUVs by consumers, but I must admit, although large SUVs are showing serious declines in retail sales, I thought that we would also see much bigger declines in full-size truck purchases than we have so far at the current price point of gasoline. You see some deterioration in consumer sales in these segments, but no large-scale abandonment. And, as noted previously, the upper-end vehicles in the light-truck segment are actually showing healthy sales gains. It’s stunning, really – there actually seems to be a point-for-point inverse correlation between fuel mileage and unit sales. The lower the fuel economy, the greater the sales gains in the full-size truck segment.

2007 Ford King Ranch F-150 – be prepared to pay over sticker

How much will gasoline have to cost before economic self-interest supersedes the desire for a large truck for most of the people in this group of consumer buyers? Right now, I’m just not sure. A Reuters/Zogby poll released last week stated that 40% of Americans would curb their driving habits if gasoline reaches an average $3.50 a gallon, but, personally, I don’t think that that’s the magic number (see Ok, but if they go any higher, THEN we’ll cut back by Chris Haak printed earlier this month). I think it’s the psychological barrier of $4 that will really do it.

But, I think we’ll find out soon enough whether I’m right about the $4 a gallon threshold. Then, the question will be whether this group of consumers that buys large luxury trucks and so far has been impervious to large increases in the retail price of gasoline, will show any signs of migration to other types of vehicles. Theoretically, their price point could be $5 a gallon. I cannot fathom this, but I suppose it could even be as high as $6 a gallon for the buyers in this segment. It’s a price point that would have seemed ridiculously high to me if I had plugged it into a statistical model 24 months ago, but now, I’m not so sure. A sustained average retail price of gasoline at $5 a gallon would decimate a lot of vehicle segments in the U.S., but I’m uncertain about this buyer segment. It seems to have a lot in common with the high-performance sports car segment in terms of its ability to absorb fuel price increases.

COPYRIGHT Autosavant.net – All Rights Reserved

Author: Brendan Moore

Brendan Moore is a Principal Consultant with Cedar Point Consulting , a management consulting practice based in the Washington, DC area. He also manages Autosavant Consulting, a separate practice within Cedar Point Consulting. where he advises businesses connected to the auto industry. Cedar Point Consulting can be found at http://www.cedarpointconsulting.com.

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12 Comments

  1. Two tangential comments:

    1. Let’s face it, virtually ALL new vehicle buyers are “irrational;” if we were purely rational I guess we would all buy a 4-year-old Civic, Accord, or Odyssey, according to family size. And if I want to really beat myself up (grin), how does Porsche ever sell a 911, given the practical performance of a Subaru STi at 1/3 or 1/2 the price? (grin)

    2. My own ‘research’ re big pickups and SUVs and fuel price (maybe 3 whole data points) is that the per-gallon price has less impact than the per-fill-up price: once one hits $100 to fill up the Yukon then the owner starts to get really annoyed.

  2. Is driving around a truck that gets 12 mpg anywhere near as much fun as driving around a performance car that gets 12 mpg? A Toyota Tundra Crewmax vs. a Lamborghini? There doesn’t seem to be much contest there. How much pleasure can most people get from driving around a huge truck?

  3. A great article and an interesting observation.But I think that Mr. Moore’s price point is too low.

    People who can afford it will keep buying new $40-50k trucks even if gas is $5 a gallon or it costs more than $100 a tankful. The cost of gas is no object for most people when you compare it to the cost of other forms of transportation, especially short and medium distance trips.

    There was an article on NPR a couple of weeks ago that basically said even at $5 a gallon, it was still cheaper for a family of four to drive from Washington DC to Boston than it was to fly or take the train. Greyhound came close though.

    For short trips, public transit is underdeveloped in most American cities and small towns. So while the cost might break even, it is an inconvenient time waster outside of NYC, Washington DC or San Francisco. (Mind you, I am a fan of public transit, but there is not enough of it). If you have to be on time to work, and you cannot trust public transit to get you there on-time, you will pay $5 a gallon for gas.

    We can expect everyone to suck it up, and shell out $8-10 a gallon for gas before we see significant changes in consumer behavior.

  4. Gasoline comes from oil, and a fair percentage of oil comes from countries that have people that wish to do the United States harm.

    Using more gasoline than required is not in our country’ best interests. Just sayin’.

  5. A luxury truck? Isn’t that an oxymoron? A truck is something you use to haul bricks or pull out tree stumps with, not drive to work as you sip your latte.

    Give me a tough truck you can hose out, one with no frills and a bad attitude. That’s truck.

  6. I have a crew cab truck that I use to cary my family around in and I love it. I take it to work, too. If you have a problem with that, tough, this is America, and I have a right to drive whatever I want. If you’re concerned about using less gasoline, then you use less gasoline. I’m going to use as much as I want whenever I want.

  7. The bigunknown seems to be intent on defining himself as a big selfish person.

  8. People that can afford a $40k pickup truck can afford to buy gasoline fo it? Huh? This is news? Anyone that can afford to spend that much money on something they don’t actually need is obviously loaded, so it would make sense that they don’t care how much gasoline they use. As to your question about how much gasoline would have to cost before these people start to care, I think it’s probably around 7.00 a gallon. Which means that the rest of us get to enjoy their company on the road for a long time in the future.

  9. I’m surprised it took six comments before we got one like thebigunknown’s, but I knew we’d see it eventually. It is a matter of simple economics, though – at some price point (variable depending on the person an their economic situation), all but the wealthiest people will attempt to reduce their petrolem consumption. I used to think the price point was $3 per gallon, but consumers have become numbed to high gasoline prices and just keep pumping.

    My guess is that not only do people NOT know what their own breaking point is until they reach it, but each person has their own breaking point. I don’t believe that at $x we’ll see a flock of people trading in Yukons for Civics, but instead, as gas prices continue their upward climb, we’ll see more and more people reaching their personal tolerance limit for high prices and shopping for something smaller next time around.

    Another thing to consider is that most of the cars on the road were not purchased in the past 2-3 years of high gas prices. Only a (relatively) small percentage of our auto fleet was purchased in this environment, so we MAY see more market share for efficient cars as the fleet turns over in an expensive gasoline environment.

  10. I agree with thebigunknown, so what if my truck gets 14 mpg? I’m the one paying for the gas, so I’ll drive whatever I want. If we need more oil, drill in ANWAR or off the coast of kommunist kalifornia, or take over over Iran next. Everyone’s always trying to take away our rights in America and I’m sick of it. If you think we should conserve gasoline, then you can ride a bike, and that will conserve gasoline. Don’t tell me what I should do. I’m going to do whatever I want, not what you want.

  11. The moronic comments of thebigunknown (AKA George Bush) and deathray (AKA Dick Cheney) are perfect arguments for taxing both vehicle engine displacement and the gasoline itself. Just as they do in the European nations, Japan, etc. You know, those communist countries.

  12. GOLDURN COMMIES TRYING TO TAKE AWAY MY PICKUP TRUCK!

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