Cheap Oil Won't Help Detroit Sell Gas Guzzlers
U.S. auto sales boomed on Black Friday as huge discounts pushed volumes to more than 17 million units on an annualized basis, the highest level in 11 years. But even with big price cuts pumping up deliveries of new cars -- likely at the expense of fourth-quarter profit margins -- the biggest discounts of the holiday weekend were actually on crude oil. With OPEC apparently trying to wage a price war against North America's shale oil boom, U.S. consumers can look forward to cheap motoring for at least the short term. But even a dramatic change in the price of oil is unlikely to undo major trends in the U.S. auto market, and what effects it might have on new vehicle demand could be downright surprising.
The most obvious upshot of oil's Black Friday sale -- that falling prices at the pump will stimulate demand for gas-guzzling pickups -- may well prove to be dead wrong. Demand for large pickups in particular may actually be hurt by OPEC's price war if the North American shale oil boom turns to bust: Dealers in new fracking zones have seen huge increases in sales of heavy-duty and 4x4 pickups and SUVs. And should oil prices fall low enough, it could cause a slowdown in oil construction projects. The broader economic effects of such a slowdown would likely target states -- Texas, Oklahoma and North Dakota in particular -- where the most pickups are sold.
Meanwhile, any oil-price-related boost in sales of larger trucks and SUVs is likely to be muted. Even in an environment of relatively high but stable gas prices, much of the growth in sales in recent years has come from less-efficient crossovers, smaller SUVs and pickups, and premium and luxury cars. Light trucks were already up nearly 10 percent in the year through October, while cars were up a mere 1.4 percent, suggesting that few buyers have been delaying their automotive purchases simply on fears that the price of gas will jump again. Though there may be a short-term holiday boost in SUV and crossover sales, there just doesn't seem to be all that much pent-up demand waiting to be unleashed by lower prices at the pump.
Besides, the U.S. auto market doesn't have the bandwidth for a major cheap-oil-fueled truck- and SUV-buying binge because easy auto credit, not low gas prices, has been fueling demand throughout the recovery. With auto-lending volume at a nine-year high, loan terms at an all-time high, delinquencies edging up and a shocking number of trade-ins coming in underwater, the auto credit boom has clearly seen its best days. And as the rising tide of off-lease vehicles drags down used-car values, trading in a late-model car for a brand-new, highly financed ride is going to become a less attractive option. Cheap gas may push consumers to drive more, boosting vehicle miles traveled to new post-recession heights, but that won't replace the increasingly played-out credit expansion as a major driver of new-car sales growth.
Cheap gas also won't change many automakers' strategic thinking or lead to more new SUVs or trucks hitting the market. Corporate Average Fuel Economy standards will continue to rise regardless of what happens with gas prices, and increasing competition has raised consumer expectations for better fuel economy. At three- to five-year product cycles, automakers can't bet that oil will sell at this year's Black Friday prices when the latest batch of approved products hits dealerships half a decade from now, and with their companies on the line, most auto executives are still predicting long-term increases in gas prices. Even if prices at the pump do stay low through the 2017 "midterm review" of CAFE regulations, automakers will still be fighting it out on fuel efficiency simply because auto technology is so mature, there are few other opportunities for them to compete.
Ultimately, average fuel economy has settled into what the EPA terms "a very favorable trend" since 2005 -- a period of time with markedly different gas prices. The defining experience of that period was the gas-price spikes of 2008, which proved once and for all that it's far better for automakers to overinvest in fuel efficiency when gas is cheap than to fall behind when it becomes expensive. Expect that lesson to resonate, even as oil prices drop further.
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