Cheaper Gas Is Letting Detroit Ride in Luxury

It seemed like a press release that had been lost for 20 years, only to be dusted off in a different era. In fact, last week’s announcement by Cadillac that it will keep making its battleship on wheels, the Fleetwood Brougham, seemed straight out of 1966, not 1986.

The rear-wheel-drive, five-liter V-8 Fleetwood Brougham is for “luxury car enthusiasts who Think Big,” Cadillac proclaimed. The auto maker crowed that the Fleetwood, which Cadillac had planned to stop making until falling oil prices and the economic recovery sparked a surge in big car sales, “remains the longest, tallest and heaviest production luxury car in America.”

Not to mention that, at a base price of $21,265, it is one of the most profitable cars made by General Motors.

For the American car companies and the industrial Midwest they call home, the decline in oil prices over the last few years--which became a price collapse in recent weeks--has been a mammoth economic windfall that has rapidly helped to rebuild the industry after the worst depression in half a century.

In fact, it’s almost as if the Midwestern “Rust Belt” and the Southwestern “Oil Patch” have traded places; the Midwest, which suffered the most from the oil shocks of the 1970s and early 1980s, is now watching gleefully as energy prices plunge, while Texas, Oklahoma and other oil-producing states feel the pinch.

Helped the Most

“There’s no question that the auto-producing region of the Midwest is being helped more than any other area of the country by falling oil prices,” notes John Hammond, an analyst with Data Resources, a Lexington, Mass., economic forecasting firm. Lower energy prices “will keep economic activity in the region from eroding, and provide real stability in auto sales for at least another year,” he says.

Not only have total domestic car sales soared 42.5% since the depths of the industry’s slump in 1982, but consumers, no longer worried about the price or availability of gasoline, are buying luxury cars, which carry fat profit margins for Detroit, as fast as the industry can make them. Sales of Ford’s huge Lincoln Town Car, for instance, have soared nearly 250% since 1982, while Buick Electra volume has surged 71% and Chrysler New Yorker sales have risen 74%.

Between 1981, when gas prices peaked, and 1984, the percentage of the car market held by mid-size and large models rose from about 39% to about 46%, according to Ford analyst Jacques Maroni.

Now, with gasoline pump prices expected to keep dropping for at least several months, “all of the major domestic firms will be producing their large cars at maximum capacity for the foreseeable future,” Maroni predicts.

“The American people are not ready to give up the kind of cars they have hung onto so desperately, and the automotive marketers are trying to respond to that,” adds John Grettenberger, Cadillac’s general manager.

Industry Was Surprised

But American auto executives were just as surprised as everyone else when consumers returned to big cars. In the gas-conscious days from 1979 to 1982, “downsizing” was the order of the day, and all of the major domestic auto makers were planning to dump their largest rear-wheel-drive cars in favor of much smaller and more fuel efficient front-wheel-drive models.

But the explosive revival in the sales of full-size and luxury sedans has prompted Detroit to keep producing its older models alongside its newest, and the domestic auto makers are racking up huge profits as a result. In fact, the Big Three have just reported earnings of $8.13 billion for 1985, a profit level surpassed only by the industry’s record $9.8 billion performance in 1984.

It’s difficult to measure exactly how much of the auto industry’s recovery in recent years is directly related to falling oil prices. The domestic car companies have also been aided by quotas on Japanese imports, as well as by declining interest rates, lower inflation, and the general economic recovery.

But many of the favorable trends in the economy have been augmented by the rapid decline in energy prices since 1981. Similarly, the latest downward spiral in fuel prices should increase consumers’ disposable income, reduce inflation, and further diminish concerns about buying bigger cars.

Boost Domestic Sales

Jack Kirnan, an analyst with Merrill Lynch Economics, believes that the latest collapse in energy prices--which could send average crude oil prices down to $20 per barrel by the end of the year, compared with an average of $26.25 at the end of 1985--should add 300,000 units to total domestic car sales in 1986, while doing little to spur sales of Japanese or European imports.

The return of the big American car has also meant that tens of thousands of laid-off auto workers have been called back to their jobs, and thousands more who expected to lose theirs have continued to work.

The United Auto Workers reports that 34,354 of its members remain on indefinite layoff from the five unionized domestic auto makers--GM, Ford, Chrysler, American Motors and Volkswagen of America--compared with a staggering 245,963 at the peak of auto layoffs in July, 1980. Jobless auto workers, who migrated to Texas in the early 1980s, are even returning to the Midwest now that there is work in the North once again.

Cities and towns throughout the upper Midwest which were hard hit during the recession have averted further economic woes because their local assembly plants have not shut down, as once feared. In Pontiac, Mich., for example, GM reopened an aging big car assembly plant in 1984, which had been closed for two years, to build Buick Regal and Oldsmobile Cutlass models. The move created 1,900 jobs in Pontiac, and saved another 4,023 jobs in Flint, Mich., where an an old plant targeted for closure was kept open to build outer bodies for the Pontiac facility.

Workers Rehired

In Wixom, Mich., Ford rehired 1,000 workers in May, 1983 to resume second-shift production at its luxury car plant that builds Lincolns, and Ford officials are now studying whether to expand production capacity at the plant even further. “We’re building every Lincoln we can today,” says Thomas Wagner, general manager of Ford’s Lincoln-Mercury division.

Chrysler reopened a plant in St. Louis and rehired 3,400 workers to build the last of its large rear-wheel-drive cars in late 1983, and has continued to produce them long after they were initially scheduled to be phased out.

In Detroit, meanwhile, GM had planned to close its rear-wheel-drive Cadillac plant when its new front-wheel-drive luxury car plant opened across town last year, but now will keep the older plant running through at least 1989. To staff both plants at the same time, GM has added 3,700 workers to its payroll in the inner city.

Although the central city’s economic woes are far from over, the Detroit metropolitan area--including the suburbs where many of the region’s auto plants are located--has made an impressive recovery since the recession ended. Between December, 1982, and last December, 249,000 jobs were created in the Detroit area, while the unemployment rate dropped from 17.9% to 6.8% in the same period. Statewide, the unemployment rate in Michigan, where about 30% of all domestic cars are produced, stood at 8.5% in December, down from a recession peak of 17.2%.

Significantly, an index monitored by Detroit-based Manufacturers Bank shows that economic activity in the Detroit area has now returned to the levels posted before the recession in 1978 and 1979.

Powerful Economic Effect

“Falling oil prices, to the extent they are translated at the pump into lower gasoline prices, has a very powerful economic effect in Michigan’s favor,” says David Littman, an economist at Manufacturers. “It works like a tax cut on the production of our chief export.”

Littman adds that falling fuel prices also help the domestic industry in its battle against imports, since cheaper gas gives car buyers an incentive to switch from small Japanese cars to bigger Detroit products.

But the rest of the industrial Midwest, including the states that have large numbers of auto plants or firms that supply the auto industry, has been enjoying a similar revival. Indiana’s unemployment rate plunged from 13% in December, 1982 to 7.4% last December, while Illinois’ rate dropped from a peak of 13.2% in November, 1982 to 7.7% last month. At 9%, Ohio’s jobless rate remains high, but it is still well below its peak of 14.2%.

Today, with their large car plants running at full tilt and car buyers demanding still more, the only real limits on luxury car sales are the federal fuel economy standards, which were designed in the mid-1970s to force Detroit to build more fuel-efficient cars. Although the Reagan Administration has been relaxing the rules, which now require that the average Environmental Protection Agency mileage rating of all of the cars sold by an auto maker be above 26 miles per gallon, GM and Ford are still having trouble complying because they have been selling so many big cars and so few subcompacts.

With the threat of huge federal fines hanging over them if they continue to violate the fuel economy standards, Detroit auto makers insist they are not abandoning their earlier plans to develop more fuel-efficient cars just because of the latest break in oil prices. Anyway, new car lines can take up to six years to develop, and so plans for smaller models can’t be turned around overnight.

Won’t Change Plans

“I don’t think we would drop our plans (for fuel-efficient cars) just because gas prices are coming down 15 cents a gallon,” Maroni of Ford says.

A separate federal “gas-guzzler” tax--which is slapped on individual car lines that fail to meet certain minimum mileage standards--is also limiting Detroit’s willingness to bring back the huge cars of the 1970s.

“Our intention is to stay out of the ranks of the gas-guzzler taxpayers,” says Cadillac’s Grettenberger.

But that hasn’t stopped GM and Ford from lobbying to have the federal regulations eased further or even dropped, and the continuing boom in big car sales is likely to put more and more pressure on Washington to give in.

“The current oil price decline is another argument in favor of reappraising CAFE (the fuel economy regulations),” Grettenberger says. “There are a lot of people who would like a six-cylinder engine rather than a four cylinder, or a V-8 instead of a six, and that is putting the manufacturers in a difficult position.”