What Effect Will Rising Gasoline Prices Have on the Auto Industry?
By Chris Haak
That retail gasoline prices have been on the rise over the past few months, and that crude oil is concurrently on the march. You may have also heard something about a war in Libya, an oil-exporting state in the Middle East. Crude oil, which hit an all-time high of $147.27 per barrel on July 11, 2008, only to collapse to less than a third of that just a few months later, is now about $110 per barrel.
However, that’s about 32 percent below that July 2008 high. News out of the most-recent Lundberg Survey of nationwide gasoline prices found that the average price of a gallon of self-serve regular is $3.76. Three weeks ago, the previous Lundberg Survey found that the average price was $3.57. A similar $0.19 gain in the coming three weeks would put gasoline prices at $3.95 per gallon. Even so, Trilby Lundberg, the survey’s publisher, noted that even $3.76 is “within striking distance” of the record. Indeed, that’s just 9.3 percent below it.
The last time we went through such a rapid increase in gasoline prices, consumers’ driving habits changed dramatically, as did their buying habits. Trucks and SUVs quickly fell out of favor, and hybrids and compacts won buyers’ hearts instead. At the time, however, there weren’t many hybrid choices aside from the Ford Escape/Mercury Mariner, Toyota Camry Hybrid, Toyota Prius, and Honda Civic Hybrid. And the ranks were thin in the compact – and especially subcompact – segments.
Big players in the subcompact group at the time consisted of the Honda Fit, Toyota Yaris. Today, there is a much-improved Chevrolet Aveo Sonic on the horizon, along with the Ford Fiesta and Mazda2, all of which have improved the breed and captured a growing share of sales. But until the past few weeks, overall consumer interest in subcompacts and even compacts hasn’t been particularly high. Both sales and residual values of pickups, SUVs, and crossovers – basically, of large vehicles – have been particularly strong.
It’s no secret that GM, Ford, and Chrysler are currently overweight on the truck and large-vehicle side of their product mixes. All three companies combine to sell more than a million new full-size pickups per year, with SUVs and crossovers adding another several hundred thousand sales to their tallies. It’s also no secret that automakers reap considerably more profit from large vehicles than they do from small ones, including $10,000 each or more on some highly-optioned pickups and large SUVs. Because the American consumer has a short memory, strong sales of these vehicles are largely contingent upon low gasoline prices.
But with Moammar Gadhafi upsetting any notion of low oil prices, the sales mix has again changed, and in a manner eerily similar to what we saw just under three years ago. Nearly doubling gasoline prices over several months during 2008 turned the US car market – both new and used – upside down, with low-volume, low-dollar economy cars commanding top dollar, and high-volume, high-dollar trucks and SUVs festering on dealers’ lots despite the often five-figure rebate cash slapped on their hoods.
We all know how this turned out the last time. Carmakers couldn’t keep up, the economy collapsed, GM and Chrysler went into bankruptcy, and the US auto industry will never be the same as it was before 2008.
But some of those post-2008, post-reorganization changes are going to help car companies survive this latest oil-price spike. GM and Chrysler shed a lot of debt via bankruptcy, and Ford’s strong financial results have allowed it to significantly pare its liabilities to the point that it has zero net debt (still a lot of debt, but it’s on much more solid footing than before). Round after round of worker layoffs and buyouts resulted in a smaller workforce, and less “mouths to feed.” A new two-tier wage structure is allowing some of GM’s UAW employees in Orion Township, Michigan to assemble the Chevrolet Sonic at a cost that’s competitive with the former Aveo’s Korean assembly.
In 2008, GM didn’t have any vehicle in its lineup with a “40” on the fuel economy portion of its window sticker. Neither did Ford. Neither did Chrysler (and Chrysler still doesn’t, although the Fiat 500’s 38 comes pretty close). But now Ford has the Fiesta, Focus, Fusion Hybrid, MKZ and GM has the Cruze Eco and will shortly have the Sonic, both of which exceed the 40 MPG bogey. Further, the mainstream offerings of basically all automakers have seen serious fuel-economy improvement since 2008. Take the Hyundai Sonata; an automatic, four cylinder 2008 Sonata was rated at 21 city/30 highway; a four cylinder 2011 Sonata is rated at 22 city/35 highway. The new car’s combined mileage is 2 MPG better than the old one, which may not sound like much, but it’s almost a 10 percent improvement. Highway mileage is almost a 17 percent improvement.
The bottom line? We’re likely to see some dramatic shifts in buyer behavior. It’s already started, with March hybrid sales going through the roof, and manufacturers showing some signs of weakness in the truck market. But this time, with lower breakeven volumes, and a product mix skewed a bit more toward cars and efficient vehicles, we’re not likely to see massive $40 billion losses from the likes of GM anytime soon. But expect consumers to continue to demand better gas mileage from their cars, and expect carmakers to continue to focus on maximizing efficiency in the coming years. Another gas shock may just shock buyers into remembering why a guzzler isn’t always the best solution.