Rising Gas Prices May Hasten Move by Consumers to More Efficient Vehicles

By Brendan Moore

02.27.2008

There is an article in The New York Times this morning about the damaging effect the increase in gasoline prices is having on many household incomes. The article states that the price of a gallon of gasoline could be an average of $4 a gallon by the second quarter of 2008.

Here is a quote from the end of the article:

Oil prices are unlikely to drop anytime soon, analysts said. Barclays Capital recently increased its long-term prediction, saying prices could reach $137 a barrel in 2015, up from a previous target of $93 a barrel.

“The remorseless move up in long-run prices has not yet fully played out,” Barclays analysts said in a note to investors.

While demand keeps growing, producers are struggling to catch up. They are not replacing the oil they are pumping out of the ground fast enough because of restrictions on access to fields, as well as rising costs. Meanwhile, demand in China, India and the Middle East is expected to push oil consumption up by more than one million barrels a day, each year, for the next decade.

“An oil crisis is coming in the next 10 years,” John B. Hess, the chairman of the Hess Corporation, said at a recent conference held by Cambridge Energy Research Associates. “It’s not a matter of demand. It’s not a matter of supplies. It’s both.”

Our focus here is on cars and the car business, so when I read an article like the one in the NYT, I start to wonder if the “sustained higher prices” scenario that people say will effectively move people to more fuel-efficient vehicles is finally here.

I am a disciple of that premise, as are many others, but I have to admit, I thought the market would have seen a little more movement towards fuel-efficient vehicles than it has so far at the $3 a gallon mark, so those results have left me a little unsure just what price-point that migration will show up in a big way. But, I can say with a great deal of certainty that if we end the year at an average $4 a gallon here in the U.S., then the migration towards purchase of more fuel-efficient (and generally smaller) cars will pick up considerably over the current positive trend in that direction.

So, if most Americans come to believe in the next few years that the price of gasoline will never go back down to, say, below, $3 a gallon, what does that mean for the auto industry?

My opinion is that it means that whatever efforts are occurring now regarding development of PHEV vehicles, hydrogen-powered vehicles, clean diesel, etc. need to be re-doubled by the players in the industry. Right now. Shifts in public consciousness tend to build slowly towards a tipping point, and then, suddenly, the attitudinal about-face arrives with a bang. I have a feeling that’s the way it’s going to work with this cultural sea change and woe to the auto manufacturer that gets caught out with a vehicle lineup that’s behind the curve of newly-minted public desire for the most-efficient car available.

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. I’d guess it be $5.00 by the end of 2009. I don’t think that’s much of a stretch at all.

  2. There is no oil shortage, only greedy oil companies manipulating the market. Everyone should just wake up.

  3. Conspiracy theorists, start your engines!

  4. There is more than enough oil here in America if the eco-nazis would just let us drill in ANWAR. Thank a liberal when you’re paying five dollars a gallon next year.

    It’s every citizen’s right to drive whatever they right no matter if it gets 10 mpg or 30 mpg. It is our government’s responsibility to provide the affordable fuel for those cars.

  5. The US has some of the cheapest fuel in the world….precisely because your Government is making it affordable. They are doing this by not taxing fuel to the same extent that every other nation does.
    But the actual cost of gas and diesel is pretty much the same world wide….certainly throughout the OECD.
    The only conspiracy is how the average consumer has ended up being just sooooooo ignorant about how the world actually works….for starters, if driving was a right then everyone on the planet would have a car…and they certainly don’t!!

  6. thetruthhurts –

    You are one deluded dude.

  7. thetruthhurts, you need to expand your view of the owrld beyond whatever neo-con radio program you listen to all day long.

  8. One ray of light on all this is a great research report by Hughes Knittel and Sperling (available on the net for free, just Google the names) on the falling price elasticity of demand for gasoline over time. That is, if 30 years ago a 10% spike in gas prices would reduce driving by 3% (say), today the same 10% spike might cut driving only 1%. Many reasons for this, such as: increased suburbanization mean fewer drivers have the option to NOT commute to work, regardless of gas price; improved fuel economy (do the arithmetic: if your Olds Tornado gets 5 MPG that 10% spike hurts a lot more than if your new Accord gets 25 MPG), rising incomes driving gas expense as % of income lower, etc. I am not saying any of this is good or bad, only that the economists think they have an explanation as to why it is happening. My completely-uninformed “gut” feel is we will see movement when cost per tank crosses some limit. E.g $75 to fill the tank. I think that registers more on consumers than $3.50 per gallon versus $3.00. Put it this way, if Americans REALLY REALLY cared about gas prices, why do gas stations with higher prices still exist? But take a look at the next 5 stations you see: the prices vary, right? If we were really upset about this, the low-ball stations would drive the high-price ones out. Methinks Americans like to complain about gas prices more than act on them. Sort of like we bitch about politicians endlessly, then re-elect 95% of them every time.

  9. Every time I have purchased the more fuel efficient version of a viehicle (I-4 instead of V-6, V-6 instead of V-8, 302 instead of 351) I’ve regreted it later.

    The slightly improved fuel ecconomy just does not make up for the diminished performance.

  10. From the Wall Stret Journal this morning:

    “As crude-oil prices climb to historic highs, steep gasoline prices and the weak economy are beginning to curb Americans’ gas-guzzling ways.

    In the past six weeks, the nation’s gasoline consumption has fallen by an average 1.1% from year-earlier levels, according to weekly government data.

    That’s the most sustained drop in demand in at least 16 years, except for the declines that followed Hurricane Katrina in 2005, which temporarily knocked out a big chunk of the U.S. gasoline supply system.”

    Maybe it’s starting to happen already…

  11. When our current president leaves office (and takes VP Smiley with him) you will see oil prices drop quickly. And take gasoline with it.

  12. Yeah, the tipping point arrived with a bang all right!

    Everybody wants a four-cylinder car now and a hybrid ASAP and an electric car after that!

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