SUVs: Down for the count?

Posted on Sunday, August 10th, 2008 at 12:49 pm by JTE

This is a story of market failure and the need, at times, for strong government intervention. As most everyone knows, the large increase in gasoline prices lately have sent sales of the worst gas guzzlers dropping like rocks in the last few months,wreaking havoc with the business model GM, Ford, and Chrysler had established for themselves. Sales are way down for trucks, minivans, SUVs and other less-efficient vehicles, and once-invincible corporate giants have been brought to their knees.

Have American consumers seen the light? Are miles-per-gallon now going to take a seat alongside Mom, baseball, and apple pie in the American cultural pantheon? Maybe. But we’ve been there, done that before, and nothing can be declared for certain.

Let’s look back at some history. The chart below shows auto sales in the U.S. (both cars and light trucks/SUVs/minivans) and also the inflation adjusted price of regular gasoline. The black line shows the percentage of all sales that are from U.S. automakers. The blue line shows the percentage from foreign automakers. The red line shows the inflation-adjusted price of gas. That data isn’t available for as far back in time, so it makes interpretation of the left-most area of the chart a little difficult. Nonetheless, the basic message here is that, as the price of gas rose in the 1970s, foreign (mostly Japanese) automakers were able to gain ground with U.S. consumers. Then as the price of gas fell back down through the 80s and leveled off in the cheap zone in the 90s, U.S. automakers were able to gain back a lot of those customers. The latest wave of rising gas prices, which have been going on for pretty much all of the current decade, puts the foreign automakers back into play.
[Source data: auto_sales_gas_prices.xls]

Notice that it took several years of gas price declines before consumers started really moving back away from foreign automakers. Now, some of that has to do with changes in consumer tastes, as Detroit discovered the SUV and figured out how to market it really well. But gas prices are largely what made that possible in the first place. As you can see, as soon as gas prices started coming down from their early-80s peak, foreign car sales, as a percentage of all car sales, level off. But they hold that level for almost the full decade before the U.S. automaker resurgence in the 90s.

What does that tell us? Consumers, as a whole, seem to remember the pain of high gas prices for a while, but not for all that long in the grand scheme of things. A few years of low gas prices, some shiny new ads for boss, rough-and-tumble trucks, and voila! Off-roading in your SUV is the new “green” transportation.

Now today almost everyone is saying, “the era of cheap gas is over! Prices may fall and rise a little, but a barrel of gas won’t ever go down below $100, and a gallon of gas won’t ever go down below $2.50,” or something like that. Maybe, and maybe not. One good recession in China, and oil prices will tank. One impressive oil field discovery, and prices will tank. Neither of these is especially likely, but they’re not impossible. Yes, yes, in the long run, the price of oil is absolutely going to go up and stay up. But year to year fluctuations? Completely unpredictable. Is it possible that we might have three or four years of back-to-relatively-cheap-gas in the near future—long enough for some noticeable fraction of U.S. auto consumers to forget the importance of fuel efficiency? You bet yer behunkus.

And that, my friends, is why we need the government to act now to institutionalize mandatory fuel efficiency standards that are strong and get stronger over time. (I’d also love to see lots of fuel-efficiency “feebate” programs established at the state level for auto registration fees. That would be a big help as well.) If we leave things to the “market,” we’re asking for bone-headed failure.

But what about the promised explosion in the production and purchase of electric vehicles? Won’t that solve our auto problem? More on that later…

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