For automakers, falling oil prices could prove a blessing -- or a curse
The slumping price of oil has given carmakers a real head scratcher: Is this good or bad news?
“It’s a tough question,” said Aaron Bragman, auto industry analyst at Global Insight. “Do you hope for gas prices to go down so you can sell a lot of trucks again, or do you hope for them to remain high so you can justify your investment in fuel economy?”
Costly gasoline has pummeled vehicle sales in the U.S. this year and forced automakers to dramatically rejigger their lineups. They are closing truck factories, racing out small cars and investing in expensive alternative-fuel vehicles like hybrids and electric cars.
Much of that planning was based on projections that gas would cost $5 to $6 a gallon for the foreseeable future. Those forecasts were made in the spring, when gas soared past $4. But in the last three months, oil prices have bucked automakers’ expectations and steadily gone south. Now, auto company executives and experts are wondering whether carmakers will profit off the situation or take it in the teeth.
Some fear that a prolonged downturn in gas prices could cause the industry to abandon plans to develop fuel-efficient vehicles.
“We may hate high fuel prices, but they’ve been driving us in the right direction when it comes to fuel economy,” said General Motors Corp. Vice Chairman Bob Lutz, the company’s leading cheerleader for its $500-million program to develop an electric car, the Chevy Volt. “If we suddenly went to $1 or $1.50 a gallon, that would be really bad.”
On Monday, crude oil fell to $87.81 a barrel, its lowest since Feb. 6, when it closed at $87.14. Unleaded gasoline, which reached a peak of $4.11 nationwide in early July, has since fallen to $3.48 as of Monday, according to the Energy Information Administration. By comparison, unleaded cost $2.98 on average in early February, suggesting that the current price still has room to fall.
Historically, rising gas prices have led consumers to purchase small cars, and falling prices lead them to large ones. That held true in 1980, when a collapse in gas prices after the energy shock of the 1970s led to a resurgence of big American cars.
Decades later, falling prices would seem like music to the industry’s tired ears. Expensive gasoline has been murder on trucks and sport utility vehicles; their sales are down 21% this year compared with the first nine months of 2007, while small-car sales have gone up 6%. That’s pushed companies including Ford Motor Co., Toyota Motor Corp., Nissan Motor Co. and GM to radically cut production of trucks, long their most profitable vehicles.
“If consumers start demanding trucks, we think we can still make as many Tundra pickups as they need,” said Toyota spokesman John Hanson. Toyota, like its American rivals, has dramatically cut truck production, and it recently said it would use a new factory in Mississippi to make the hybrid Prius sedan rather than the Highlander SUV.
But if the industry starts pumping out trucks again to meet increased appetite, it could be caught naked again in the case of another oil price hike.
A major problem is that developing a new car or truck can take as much as five years, yet economists get fits trying to predict what the price of petroleum will be in a few weeks.
A case in point: the decision by GM, Ford and Chrysler to build diesel engines for big trucks. Just a few years ago, diesel was considerably less expensive than gasoline, making an investment in the rugged, more efficient engines a logical choice. But what was once a 20- or 30-cents-per-gallon price advantage for diesel has evaporated. As of Monday, diesel cost 29 cents more than gasoline on average nationwide, hardly an ideal environment in which to introduce diesel engines.
“It’s going to be awfully difficult to sell those diesels,” said Jim Hossack of consulting firm AutoPacific. “But it takes so long to develop those things, it’s impossible to know.”
For now, carmakers are taking a cautious approach to falling gas prices, claiming that it would take a lot more than $3 gas to get them to abandon their plans to build gas-saving cars that appeal not only to American buyers but also to those in Europe and the developing world.
“Things have changed,” said George Pipas, lead sales analyst at Ford. “You can’t grow selling trucks and SUVs any longer. If you want to grow today, you have to have faith in the smaller end of the market.”