With gasoline prices surging across the nation in the wake of Hurricane Katrina’s path of destruction in the Gulf of Mexico, the cost of running a car appears to be heading for what some auto experts say is a tipping point for American drivers.
The price of gas is now well above $3 a gallon in some parts of the country, and the storm-related price surge comes on top of already record-high pump costs. But despite the persistent rise in gas prices this summer, U.S. motorists continued to buy up gas-guzzling light trucks and SUVs as the big U.S. auto companies offered deep discount programs to whittle down swollen inventories.
All that now appears to be changing. According to an unscientific poll of automotive industry experts, a sustained gasoline price above $3 is likely to push American car consumers away from buying large gas-guzzling SUVs and light trucks and toward smaller, more fuel-efficient SUVs and cars.
“Three is the magic number,” said Mike Chung, automotive market analyst at auto research Web site Edmunds.com. “It’s not about gas prices moving briefly above $3; the cost of gas will have to move above $3 and stay there for a few months for people to realize this is hitting their pocketbook hard — that’s where we’ll see a shift in attitudes.”
American drivers have remained relatively unmoved by rising gas prices in recent years. In 2004, Hurricane Ivan tore through underwater oil pipelines in the Gulf, cutting output from oil refineries and driving gasoline prices above $2 a gallon. Yet consumers continued to buy gas-guzzlers, responding to Detroit’s incentive programs.
Chung says that, while SUV owners may have been willing to pay $50 to fill a 20-gallon gas tank when a gallon cost $2.50, at $3 a gallon a fill-up costs a SUV owner $60, and as the cost edges closer to $100 it will start to make smaller cars look more attractive.
“With every major shift in gas prices over the last year we have not seen a major shift in consumer buying practices, but there’s definitely a breaking point where people will consider smaller vehicles, and $60 for a tank of gas is where we think people will sit up and take notice,” Chung said.
Certainly, Thursday’s auto industry sales data for the month of August appear to show gas prices are biting into SUV sales. The data show a slowdown in vehicle sales — a drift due in small part to high gas prices, but also because of a series of heavily-publicized discount programs over the summer that thinned car dealer lots.
General Motors, the first of the big three U.S. automakers to let all customers pay employee prices for its cars, reported a sharp decline in auto sales, with new car and truck sales down 16 percent in August from the same month a year ago. Car sales declined 15 percent and truck sales were off 17 percent. Ford and Chrysler reported only modest sales gains for August.
Ford and GM have both extended their employee-pricing discount programs, which offer big discounts on trucks and SUVs, through Sept. 30.
Devon Cohen, vice president of automotive services at LiveDeal.com, a Web site for classified advertising, says employee discounts have led to a glut of big, fuel-inefficient cars like SUVs. Nationwide, car dealerships are reporting a significant increase in customers trading in their SUV’s for smaller, more fuel-efficient SUVs and cars, he notes.
“I’ve spoken to a number of auto dealers and they are saying people are coming into their dealerships with large SUVs, like the Escalade or Yukon, and want to trade them in, but some of the dealerships are not bidding on those cars because they already have too many,” he said. “They know they will hold those cars on their lots for a long time, and as gas prices go up the value of those cars will go down — it’s a risk to their inventories.”
Yet Americans’ love affair with SUVs remains intact, according to Brian Chee, an analyst with Autobytel, one of the most popular Web sites for car buyers. Chee says Autobytel’s mid-year Consumer Choice report, which provides a snapshot of online car shoppers’ vehicle choices during the first half of 2005, shows a significant increase in the popularity of smaller SUVs with decent gas mileage like the Toyota Highlander.
“It’s safe to say that buyers’ choices are changing as result of fuel prices within in SUV segment,” Chee said. “We are not seeing a massive exodus from SUVs; even though gas prices are sky high, you can’t stuff a family of five into a compact car and go shopping for groceries. But cars with more space and fuel economy are definitely going to benefit from higher fuel costs.”
Indeed, as gas prices have moved higher this year consumers have shied away from large SUVs. Sales of have declined 8.7 percent year to date according to research firm AutoData, while sales of car-based crossover vehicles, or CUVs, have risen 17.8 percent. At the same time, sales of small or luxury cars are up 4.9 percent.
The shift in consumers’ attitudes looks set to continue, at least in the short term. Hurricane Katrina at least temporarily knocked out almost all of the oil production in the Gulf of Mexico — a key source of oil for the United States.
Gasoline supplies in the U.S. are now tightening, as floods and power outages have made it impossible for some major Gulf Coast energy companies, which were already struggling to meet rising demand before Katrina plowed through the region, to produce and distribute fuel. Gasoline lines — a feature of the 1973 oil shock — are now appearing at some service stations, while some customers are complaining of price gouging.
American drivers have historically responded to the psychological shock of higher gas prices by seeking out more fuel-efficient vehicles, notes Lester Lave, a professor of economics at the Tepper School of Business at Carnegie Mellon University.
From the 1973 oil shock until 1981, when retail gasoline prices surged to a nationwide average of about $3 in today’s dollars after the Iranian revolution of 1979 and the country's war with Iraq, the average fuel efficiency of new U.S. vehicles doubled from about 14 miles per gallon to 28 miles per gallon. New regulations passed following the energy shocks of the early 1970s recommended that automakers make more efficient vehicles, but those regulations were not binding and the shift was due primarily to consumers demanding cars that could run further on a gallon of gas, according to Lave.
After 1981, however, as gasoline prices eased, car consumers gravitated toward bigger cars again with poorer fuel efficiency — light trucks and SUVs. Lave expects a confluence of factors — strong demand for oil from Asia and tight world supplies — to keep gas prices high for a sustained period of time, keeping consumers looking for better fuel efficiency.
“This short-term blip from Katrina will not last, but it’s unlikely we’ll see a serious decline in gas prices from where they were a week ago at $2.50, certainly over the next three to five years,” Lave said. “The main thing that will bring that price down is whether there’s some alternative to petroleum; there are some alternatives out there, but unless Americans drive less and reduce demand for gas, we’ll continue to see higher prices.”
For now, the question is how long it will take the Gulf of Mexico’s oil platforms, refineries and pipelines to come back online, notes Therese Langer, transportation program director at the American Council for an Energy-Efficient Economy.
“There’s little question that the situation in the Gulf, if it keeps gas prices high, will have an impact on consumers’ car choices, but will this period of higher gas prices be sustained long enough to see people make major shifts in their purchasing decisions?” Langer said. “Is the dramatic drop in SUV sales temporary, or the start of a major trend?”
Another question is how the big car companies will react adds Langer.
“The big auto companies have found themselves in a bind — they already several years behind in creating hybrids, but they also have so many resources tied up in these vehicles it is hard to for them to make the shift and give consumers what they want in the face of high gas prices. They are stuck in a mindset that is hard for them to respond,” she said.