Rising Gas Prices and Their Effect on the U.S. Auto Market

Rising Gas Prices and their effect on the U.S. Auto Market

Rising Gas Prices and their effect on the U.S. Auto Market

By; Ryan Vrabec

UAnetID# 2605767

Department of Economics The University of Akron Fall 2013

The purpose of this paper is to look at the effects rising gasoline prices have had on the U.S. car market since 2003. This paper looks at what car makers have done to cope with rising gas prices in relation to the American consumers’ willingness to purchase new cars, such as innovation and marketing techniques. In addition this paper offers a small explanation as to why the price of gasoline has risen so quickly, as well as possible directions the Auto market might go in order to continue making sales despite ever rising gas prices.

Over the past decade the U.S. economy has been blasted with skyrocketing prices in healthcare and education to resources that people consume every day of their lives. One example of a resource that has experienced this drastic climb in price is gasoline. Gasoline is among the most important resources that the average American will use in their daily existence and in many ways can be seen as essential to their survival. However, whilegasoline has been on the incline over the past decade (with the exception of the year(s) 2008-9 where a recession led to a decline in prices),many Americans have not seen their incomes rise tomeet the needs that these exceedingly high prices demand.

While all this is by some, considered common knowledge, many do not look into the effects that these rising prices can have on certain markets such as the American car market. The subject of this paper will be to analyze what effects rising gas prices have had over the past decade on the sale of cars. More specifically what types of cars have been produced by these changes in fuel price. By analyzing the rise of the price of gasoline in comparison to the changes in automobiles it will become possible to gain a basic understanding on how fluctuation within the fuel market can come to effect the sales of cars within the United States.

The crude oil market throughout the world is an extremely dynamic and ever changing field. Crude oil, as a rule, is typically not an easy thing to get to, being either underground or underwater. As more and more humans throughout the world continue to begin to use crude oil in the form of diesel or gasoline fuel, the need to produce more and more oil rises, which leads the producers of oil to drill for oil in places that are more dangerous and more expensive. This increase in the cost of production can be measured under the term marginal production cost, which shows that as the cost of producing the oil (getting it out of the ground) goes up, the prices at the local gas pump follow suit. The importance of this as far as this study goes, is that while the U.S. itself has had low interest rates over the past decade, the demand for oil within the same time period has continued to grow resulting in the need for oil producers to drill deeper into the earth and farther away from their refineries, which has translated into a higher marginal production cost. In fact according to Chen Rui of the CNPC Research Institute of Economics and Technologythe marginal production cost of petroleum more than doubled between the years 2003 and 2007 rising from 30 dollars a barrel to 74 dollars a barrel respectively[i]. This surge in the production costs of oil may have been caused by factors such as war or natural disasters, but what it translated into was higher gas prices for the American consumer. Being that cars are fueled by gasoline, the price of gasoline has an effect on what type of cars are driven, where they are driven and how they are driven.

Over the past decade car sales have seen huge dips which led to the near failure of many major American automakers. The U.S. car market has also seen periods of growth and expansion in which it began building new vehicles with innovative designs. But how the price of gasoline has affected the sales of these cars still has yet to be explored. Being that the car market and the fuel market are mutually necessary to each other, it would be expected that a sharp rise in the cost of fuel over a short period of time would have an effect on the car market, andaccording to research done at the Energy Institute at Haas, this statement holds water, when gas prices go up quickly, the purchasing of some low fuel economy vehicles goes down[ii]. However, In the short term people historically do not respond to an increase in gas price by running to the nearest car dealership to try to trade in their Ford f-250 for a Honda civic, they instead try to drive more conservatively, drive less, or carpool with a friend in an attempt to outlast the sudden rise in gas price until prices drop back down to what they used to be able to afford to drive their vehicles at[iii].

While these measures can be beneficial in the short term, the past decade has not only witnessed short periods of surging gas prices, but as shown below in figure one, has also seen gas prices rise nearly constantly to more than two times what they were ten years ago.(Figure 1)[iv].(Figure 2)[v]

As gas prices have continued to climb, as the graph above shows, incomes for the overwhelming majority of Americans have not, leading to a scarcity of money in which Americans have had to begin choosing between the gasoline or food. This decision has led even some of the most stubborn Americans to change what they drive, leading to an effect on the U.S. car market.

Due to this scarcity of money the U.S. car market has seen a shift from the production and purchase of trucks and Sport utility vehicles (SUV’S) to the production of small cars, crossovers and hybrids. For instance, according to Bill Vlasic of the New York Times,2008 saw small car sales increase from one out of every eight to one out of every five. He also mentioned that 2008 saw the first time that six cylinder vehicles were outsold by four cylinder models[vi].These changes were undoubtedly in response to the markets demand for more fuel efficient cars due to the decades rising gas prices.

(Figure 3.[vii])

As can be seen from the graph above, Light trucks had their highest share in the markets in the year 2004, interestingly enough 2004 also happened to be the first year of the decade to see gas prices rise above two dollars a gallon, (reference figure 1) after which truck sales began to on the decline. Then in 2007, trucks saw their share in the market drop drastically to be replaced by car sales. 2007-2008 also happened to be the period of the decade in which gas prices reached their highest, just before the recession of 2008. While these changes may not be wholly related to each other, it is interesting to see that as gas prices rose, truck sales as a part of the market share dropped and car sales as a percentage of the market share rose, perhaps showing that consumers were choosing to buy more fuel efficient vehicles due to higher gas prices.

One way one can think about how much the market has changed over the last decade is to simply turn on the television and look at car infomercials. Many of the vehicles that are advertised today, are small four cylinder sedans. Within these advertisements each car company is also careful to make sure to mention the vehicles fuel economy, this careful focus is also not limited to small cars. Pickup and work truck commercials are now seen mentioning the fuel economy of their trucks. This obsession over fuel economy has come as a result of higher gas prices, people now no longer only brag to their friends about how fast their car is, but are also bragging about how efficient their vehicles are. One may also notice that people are no longer focusing on the amenities that are included with the vehicle they are buying (such as leather seats or a plethora of leg room) so long as they get improved gas mileage. Although Jessica Caldwell of Edmunds.com says that the “newer models of smaller cars are now coming equipped with more of these amenities to make people feel like they are not giving up all the good things when choosing a smaller car”[viii]. In addition,According to Consumer Reports’ Jeff Barlett,people are now willing to compromise on both “comfort and performance” in order to get improved fuel economy. Barlett also mentions that despite a lowered economy, people are willing to spend more money on their new vehicle in order to cut down on the prices they are paying at the pump[ix].

Auto producers also responded to the rise in gas price by innovating the vehicles that they were shifting away from, but not getting rid of. A good example of this is the growth of the six cylinder truck as well as trucks that now provide the ability to use alternative fuel sources such as compressed natural gas or CNG. While Ford motor company is among other major truck manufacturers in the six cylinder truck market, (which have come from demand for more efficient trucks) according to USA Today’s Chris Woodyard; Ford is at the moment the only car company that will offer a full size pickup that can run on the cleaner and cheaper compressed natural gas (2.11$ a gallon on average) directly from the factory[x].

While car companies are responding to the markets wants for newer more fuel efficient cars and trucks due to the ever rising price of gas, there are still other companies that are producing vehicles that will be able to travel without using the fuel source whatsoever. While the idea of an all-electric car has been around for decades, American car companies had no need to create and innovate stronger battery types to make it possible because the markets for gas guzzling vehicles had been anything but on the decline until the late 90’s. But over the last ten years people have been moving towards compacts and hybrids such as the Toyota Prius which use electricity to supplement gas usage, and are now looking for cars that can run purely on electricity. Perhaps the most well-known American all electric model on the market at the moment is the Chevrolet Volt (although there are many other models such as the Nissan leaf or the Tesla model S). Chevy’s website declares that the Volt is an all-electric car that only uses gasoline should the driver use the car beyond its full electric charge range of an EPA estimated 38 miles (range is dependent of driving environment ranging from 25-50 miles )[xi]. While the minimum range of 25 miles on all electric power seems miniscule when compared to cars that can get over fifty mile per gallon of gasoline, the fact that the Volt was invested in and designed and can now run on only electricity says a lot about how much the price of gasoline has truly affected the development of the car market and where it believes it can make its money. It is likely that as gas prices continue to rise car companies are going to continue to try to make larger strides in alternate fuel types(whether it be CNG or electricity) to run their vehicles on so as to be able to survive and continue making money.

The past decade has seen a sharp rise in the price of gasoline. Over the course of ten years, Americans have seen the price of gasoline more than double. This price change has forced Americans in a failing economy to begin choosing between what they want and what they need. While each man may want a huge truck or extremely fast sports car, they cannot escape the fact that they need a roof over their head and food in their stomachs. This decision coming as a result of increased costs not being matched by increased income left many people wanting more efficient vehicles to allow them to make their daily commute for less money. This increased demand for fuel efficiency has led the car industry to make many changes in how and what it creates. Today the car industry focuses its sales on smaller more efficient vehicles, instead of the huge over horse powered vehicles of the 1990’s. In addition to their focus on more fuel efficient vehicles, car makers are now keying in on the American consumers hatred for paying high prices at the local gas station and have begun manufacturing all electric cars to allow people to avoid the gas pump and its prices altogether. Rising prices in gasoline have led to an overhaul of the auto industry, creating smaller more efficient cars, prioritization in car specialties and new ideas on what fuel source is going to be used to keep those cars moving.

[i]Rui, Chen. "Analysis on “New Fundamentals” and Range of Oil Price Trend in the Long Run." Analysis on “New Fundamentals” and Range of Oil Price Trend in the Long Run. Beijing: 2010. <

[ii]Busse, Meghan R., Christopher Knittel, and Florian Zettelmeyer. "Are Consumers Myopic? Evidence from New and Used Car Purchases." Energy Institute at Haas. Berkeley: 2013. <

[iii] Busse, Meghan R. Are Consumers Myopic? 2013.

[iv]"This Years Gasoline Price Increase Not Unusual." Weekly U.S. Regular Retail Gasoline Price. Washington D.C.: 2013. <

[v]Rampell, Catherine. "Household Income Stagnates, Again." Household Income Stagnates, Again. New York: 2012. <

[vi]Vlasic, B.. N.p.. Web. 12 Sep 2013. <

[vii]Cain, Timothy. "U.S. Auto Market Size: 2001 - 2010." Good Car Bad Car; Passionate Tracking of Auto Sales Data. N.p., 11 Jan 2011. Web. 12 Sep 2013. < 2010 Sales>.

[viii]Weisbaum, Herb. N.p.. Web. 13 Sep 2013. <

[ix]Weisbaum, Herb. N.p.. Web. 13 Sep 2013

[x]Woodyard, Chris. "Ford adds F-150 pickup to natural gas lineup." USAToday.com. N.p., 31 Jul 2013. Web. 13 Sep 2013. <

[xi]"Have Questions About the Volt? Get plugged into the facts here." Chevrolet.com. N.p., n.d. Web. 14 Sep 2013.

Bibliography;

Busse, Meghan R., Christopher Knittel, and Florian Zettelmeyer. "Are Consumers Myopic? Evidence from New and Used Car Purchases." Are Consumers Myopic? Evidence from New and Used Car Purchases. Berkeley: 2013.

Cain, Timothy. "U.S. Auto Market Size: 2001 - 2010." Good Car Bad Car; Passionate Tracking of Auto Sales Data.

"Have Questions About the Volt? Get plugged into the facts here." Chevrolet.com. N.p., n.d. Web. 14 Sep 2013.

Rampell, Catherine. "Household Income Stagnates, Again." Household Income Stagnates, Again. New York: 2012. <

Rui, Chen. "Analysis on “New Fundamentals” and Range of Oil Price Trend in the Long Run ." Analysis on “New Fundamentals” and Range of Oil Price Trend in the Long Run. Beijing: 2010.

This Years Gasoline Price Increase Not Unusual." Weekly U.S. Regular Retail Gasoline Price. Washington D.C.: 2013. <

Vlasic, B.. N.p.. Web. 12 Sep 2013. <

Weisbaum, Herb. N.p.. Web. 13 Sep 2013. <

Woodyard, Chris. "Ford adds F-150 pickup to natural gas lineup." USAToday.com. N.p., 31 Jul 2013. Web. 13 Sep 2013. <