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Falling Gas Prices a Boon And Bane For Auto Industry

Consumers might be celebrating, but the downward trend in fuel prices is creating some serious worries within the auto industry.
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/ Source: The Detroit Bureau

When a new gas station in Oklahoma City dropped its price to $1.99 a gallon this past week, it was only a matter of time before nearby rivals slashed their own prices. After years of watching gas pump prices climb ever higher, U.S. motorists have been in for a pleasant surprise in recent weeks. Even where gas wars haven’t broken out, the AAA notes that American motorists are now paying an average of less than $3 a gallon for unleaded regular, with the figure falling as low as $2.443 in Missouri.

The impact was readily apparent in car sales numbers: The auto industry had its best November in a decade. A closer look reveals the surge in demand was buoyed by pickups, SUVs and even muscle cars, like the new 2015 Ford Mustang, which nearly doubled its sales, year-over-year.

That’s good news for the auto industry, which makes far more profits on vehicles like the Mustang and the full-size Ram pickup than on the subcompacts, hybrids and battery-electric vehicles that were gaining ground a year ago, when $4 a gallon seemed the new norm.

“It becomes a market distortion if regulatory requirements don’t match consumer demand.”

Yet, while consumers might be celebrating, the downward trend in fuel prices is creating some serious worries within the auto industry.

“It becomes a market distortion if regulatory requirements don’t match consumer demand,” warned Raj Nair, the global product development director at Ford Motor Co.

The problem, he explained, is that automakers like Ford have based their planning on a combination of higher fuel prices and tightened mileage and emissions standards. The combined Corporate Average Fuel Economy, or CAFE, standard hits 34.1 mpg for cars and trucks in 2016, and jumps to 54.5 mpg in 2025.

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Tough targets

Even before the current fuel price slide, those were considered tough targets. But they’ll likely become even more difficult to meet, industry insiders warn, if petroleum prices continue to decline over the longer-term.

Indeed, the EPA-rated gas mileage of new vehicles sold in the U.S. last month was 25.3 mpg, a full half mile a gallon less than in August, according to the latest in an ongoing series of reports from the University of Michigan Transportation Research Institute. That’s all the more concerning, experts note, considering the way mileage had steadily increased to record levels in recent years.

“Certainly, low fuel prices make it hard to sell (alternate-power) vehicles like hybrids and electrics,” said Ford’s Nair.

The Detroit maker sold just 5,584 of its various hybrid and plug-in models last month, down from 6,889 a year earlier – a comparison made all the worse by the overall 2014 surge in U.S. car sales. Demand for the Ford Focus Electric, a pure battery-electric vehicle, has been stagnant despite a $10,000 price cut since the vehicle’s introduction.

Ford isn’t alone. Sales of the Toyota Prius, the mainstay of the Japanese automaker's fleet of hybrids, dropped 13.5 percent in November and are down 11 percent for the first 11 months of 2014.

Meanwhile, the recent surge in demand for high-mileage diesels may also be fading. "We were selling about 23 percent diesel across the entire fleet,” said Volkswagen of America spokesman Mark Gillies, referring to both the VW and Audi brands. “But in the last couple of months that has dropped to about 16 percent as gasoline prices have dropped."

Diesel prices

It hasn’t helped that diesel fuel prices have failed to match the downward trend of gasoline.

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In the short-term, automakers will adapt to changing market demand by shifting production plans, said David Sullivan, a senior analyst with consulting firm AutoPacific, Inc. “They’ve become much more flexible” at matching market trends since emerging from the Great Recession, he said.

Volkswagen, for example, can offer buyers a whole “family” of powertrain alternatives for the newly redesigned Golf model, including a diesel, a mileage-minded gas engine, a pure battery-electric option, and the high-performance GTI version.

But the big concern is what will happen if gas prices remain low for the longer-term. “We’ve decided to wait and see,” said Fred Diaz, senior vice president of sales and marketing for Nissan North America. “If this continues, we’ll have to address it.”

The “problem,” as Diaz puts it, is that delivering what consumers might demand at $3 a gallon might make it difficult to meet upcoming CAFE requirements. And if sales of alternative vehicles tumble, it could put carmakers like Nissan in a bind with California regulators. They’ve set minimum targets for zero-emissions models, such as the Nissan Leaf. Automakers who fail to comply could be barred from the country’s most populous state.

“I don’t buy the argument that everyone will switch back to trucks just because gas is below $3,” cautions analyst Sullivan. And he points to the new 2015 Ford F-150, which is delivering as much as 20 percent better mileage than the outgoing pickup, as an example of how mileage can improve even with cheap fuel.

But there’s little doubt that if OPEC and other oil producers keep the spigot open and prices down, it will raise serious challenges for automotive planners and regulators alike – even while giving consumers a reason to celebrate.

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