4 Ways Rising Fuel Costs Influence The Auto Industry

By Jean Folger | May 18, 2011 AAA
4 Ways Rising Fuel Costs Influence The Auto Industry

The national average in the United States for a gallon of regular gas is close to $4, up more than a dollar from the $2.91 average from one year ago. While some analysts are predicting $6 gas by the end of summer, others have concluded prices will drop as oil falls below $100 per barrel for the first time in months. Regardless of where prices go in the near-term, the auto industry has been forced to adapt to both rising and volatile fuel costs, and to new federal Corporate Average Fuel Economy (CAFE) requirements that automakers' vehicle fleets get an average of 35.5 miles per gallon by the 2016 model year. Here are four ways that rising fuel costs have shaped the automobile industry.
TUTORIAL: The Industry Handbook: Automobiles

1. Good-bye Guzzlers.
General Motors announced in early 2010 that it would discontinue its Hummer brand which had become synonymous with the term gas guzzler. According to Motortrend, the Hummer got a measly 10 miles per gallon. Hummer's roots go back to the 1992 military Humvees, and had fallen under increasing scrutiny as customers became more conscious about vehicle gas mileage. The demise of the Hummer proved to be a good lesson to the auto industry that consumers were no longer interested in driving heavy cars with terrible mileage - even if they looked cool. (Giving up the gas guzzler may not be as cost-efficient as you think. For more, see Reduce Your Carbon Tire Print.)

2. Hello Smaller Cars
Rising gas prices and a growing trend to be more "green" have sparked an increased interest in smaller, more fuel efficient vehicles. While much of the rest of the world has been driving small cars all along, the auto industry in the United States has in the last several years tapped into this demand. Small, fuel efficient cars, which now account for 25% of all auto sales, are selling so well in the United States, in fact, that many automakers are unable to keep up with demand. Tighter inventories have led to fewer dealer and manufacturer incentives, and consequently higher vehicle prices, which consumers are willing to pay in exchange for fewer fill-ups. (Big oil companies aren't to blame for high prices. For more, see Why You Can't Influence Gas Prices.)

3. Hybrids and Electric Cars
Small cars aren't the only fuel efficient vehicles in the spotlight. Sales of hybrids in the United States grew by 33.9% during the first quarter of 2011, over the same quarter 2010. March 2011 sales increased 46.4% over last March, showing a definite increase in demand for more fuel efficient vehicles coinciding with the recent run-up in fuel prices. While the consumer demand is growing for electric cars, like the Chevy Volt and Nissan Leaf, range anxiety - concerns about running out power in the middle of nowhere - is likely to challenge sales in the near future. Businesses with large fleets that run on regular routes, however, may be prime candidates for electric cars since they can operate without range anxiety, and will be able to significantly reduce operating costs. (For more, see Hybrids: Financial Friends or Foes?)

4. Manufacturer's Fleet Restrictions
In response to the 1973-74 Arab oil embargo, the United States enacted the Energy Policy Conservation Act in 1975, establishing Corporate Average Fuel Economy (CAFE) standards. Under CAFE, a manufacturer's fleet of passenger cars and light trucks (with a gross vehicle weight of 8,500 pounds or less) must meet certain minimum requirements for sales weighted average fuel economy. These fleets were required to reach 27.5 miles per gallon by 1985; current standards stipulate that the average miles per gallon must be 35.5 (37.8 for cars and 28.8 for light trucks) by model year 2016.

TUTORIAL: The Oil Services Industry Handbook

The Bottom Line
While $4 per gallon takes its toll at the pump, it remains relatively inexpensive compared to elsewhere in the world. Many Europeans, for example, are shelling out more than $8 per gallon, and have been paying these high prices for years. Rising gas prices are especially difficult to swallow when combined with high unemployment, expensive food costs, and a struggling economic recovery. Though many of the more fuel efficient cars will cost more upfront, they are expected to significantly reduce the amount of money that drivers spend each year on gas.

Automakers are expected to spend $51.5 billion over the next five years to comply with CAFE standards, adding a projected $985 to the average price of a new car by 2016. This upfront expense should be tempered, however, with an estimated $3,000 savings in fuel over the life of the vehicle. Volatile fuel costs will likely continue to shape both consumer habits and auto industry decisions. (For more, see What Determines Gas Prices?)

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