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.

Author: Chris Haak

Chris is Autosavant's Managing Editor. He has a lifelong love of everything automotive, having grown up as the son of a car dealer. A married father of two sons, Chris is also in the process of indoctrinating them into the world of cars and trucks.

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10 Comments

  1. Between panic trading in, Cash for Clunkers, and the soft economy, there are far fewer people driving the old fashioned huge SUVs and trucks as there were 3 years ago. I am starting to see buys coming that want to trade out of their V6 sedans, but no huge rush to tiny subcompacts, no panic. Also, I haven’t seen many people slow down on the highway, people in my area are still flying along at 80-85 mph.

  2. High gas prices will hurt a nation that has not over the last oil spike in 2008!!!!!

    Peoples finances are worse than in 2008 and I dont believe you will see much trading because of better fuel milieage! They will just accept it!

    I have yet to see high gas prices help our economy infact it cause economic chaos!

    Until our government reigns in the electronic speculators trading that is the cause especially the 2008 and this year run up in oil prices then they will disrupt our economy at will!

    Tired of hearing run caused by China demand on Ghadfi, remember last year, oil spill in gulf of Mexico! went through Memorial Day and July 4th, gasoline price stayed the same!
    China didnt just turn on a valve and say we need 40% more crude than in Oct of last year!
    There growth should only factor a couple of cents a gallon a year!

    Now spill is fixed and cost are in, oil companies start fueling the commodies market and thus the run up in gasoline!!

  3. Very interesting perspective yet as gas nears 4 dollars a gallon …I don’t see the same effect as we had in 2008.

    The gloom and doom is just not part of the equation this time around.

    Dollar wise…I think if gas goes from 3.30 a gallon to 5 bucks…the average consumer whose car gets an average of 20 mpg….in combined driving….and they drive an average 12k miles per year…all it adds to fuel costs is a grand.

    Not earthshattering…by any stretch.

  4. Personally, I am trying to conserve gas and make a tank last alot longer. If I were in the market for a new car, gas mileage would be a big factor in the purchase.

  5. About a month before gas prices started escalating again, I switched from a 5 cyl VW to a V-6, losing several MPG. What amazing timing.

  6. Quite possibly the biggest problem that the North American arms of the motor companies are going to face is the relatively small volumes of efficient cars that they currently either manufacture or simply assemble locally.

    Most small and medium cars are manufactured in low cost countries…..

    If NA’s start buying these cars in bulk at the expense of locally sourced models then much of the local manufacturing capacity may go idle.

    Same thing happened in Oz over the last twenty years. Local volume is now tiny compared to what we bring in. These days our mob are mostly component manufacturers and even their days are numbered…

    Still…..the cars (and the pricing) are much improved over what we had twenty years ago.

    Win some, lose some…..but fear nothing.

  7. Oh and the average Oz price for gas at the mo is roughly equivalent to US$5.70 a gallon

  8. I will take the glass half full approach. I have a car that gets pretty solid gas mileage. I am actually in the market for a full size pickup truck. I hope the rise in gas prices scare the dealers into cutting prices.

  9. Gas prices have an effect on everything. Higher gas prices trickle down to higher food, auto parts, just about anything that needs transported to your town. You would have less money out of your paycheck after you provide transportation for yourself to work. This is not as devastating as 2008 but it will hurt the progress that we have been seeing. Those businesses that are hanging on by a thread may not be able to weather anymore hardships.

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