Gas Prices Must Soar If Public Policy, People's Wants Are To Mesh in Auto Market

Gas Prices Must Soar If Public Policy, People's Wants Are To Mesh in Auto Market

By John O'Dell February 16, 2010

Studies by Edmunds, AutoPacific Find Low Fuel Prices Mean Low Interest in Small Cars

By John O'Dell and Danny King

Americans' interest in small cars and hybrids has never accounted for a sizable segment of the market and may be falling as gas prices stabilize at less than $3 a gallon in most markets.

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Small cars such as upcoming 2012 Ford Focus are big in Europe and Asia but a hard sell in the U.S.

Consumer consideration data parsed by Edmunds.com's own analysts shows that interest levels in small cars, crossovers and pickups has remained about the same over the past two years - allowing for a few peaks and valleys in mid 2008 when gas prices soared to nearly $3.50 a gallon - but is relatively low.

At the same time, a new survey by market consultant AutoPacific shows interest in small cars and hybrids as a future purchase is falling while interest in crossovers and pickups is rising.

The low level of interest in small cars and hybrids right now underscores the gap between government policy - to reduce oil dependency by slashing gasoline consumption - and perceived public taste for larger, less-efficient cars and trucks.

Edmunds' data, for instance, show that only about 7 percent of site users are considering pickups now, while AutoPacific's shows that more than twice that level - 15 percent - say they would considered a pickup for their next purchase.

"There's nothing wrong with the government's policy," said AutoPacific analyst James Hossack. "It's a good idea to consume less fuel. I certainly don't want to be giving more money [for oil] to people who don't like us. The problem with convincing people to embrace the idea is that we keep the price of gasoline so low."

On that topic, Edmunds and AutoPacific sing the same song - gasoline prices in the U.S. need to be higher to encourage people to seek more fuel-efficient vehicles, thus giving automakers incentive to develop and build them.

Edmunds.com CEO Jeremy Anwyl has been a leading proponent of increasing the federal gas tax, and Hossack echoes the idea. "Gas in this country ought to be the same price as gas in Europe" if we want the American auto fleet to mimic Europe's, with small, fuel efficient vehicles in the majority, he said

Edmunds' data is derived from consumers actively researching new vehicles while AutoPacific's is based on responses from 1,000 members of the company's on-line forum - all people interested in cars but not necessarily in the market for a new one right now.

The findings are mutually compatible - Edmunds looking at the now, AutoPacific at the near.

While Edmunds' data doesn't show a lot of change in consumer consideration patterns, the percentages interested in small cars remain fairly small - only 15 percent of site users considering a new vehicle in January, versus 16 percent in January 2009.

During that period, the national average price of a gallon of regular unleaded gasoline rose from $1.79 to $2.72.

Put those numbers on a graph and the relatively flat consideration line contrasted with a steeply climbing fuel price line shows that at prices below $3 a gallon, consumers aren't flocking to the most fuel-efficient offerings in automakers' arsenals.

AutoPacific's findings make for a more dramatic fall-off, but the result is about the same: the company found that 24 percent of survey respondents in January 2009 said they'd consider a small car, versus just 12 percent last month.

The AutoPacific study also asks people whether they'd consider a hybrid as their next car and finds that hybrid intent has dropped from 25% in January 2009 to just 11 percent last month.

Meantime, the low level of interest in small cars highlights the challenge car makers face as they try to gage the return they'll get on their investments in smaller, more fuel-efficient engines as well as conventional hybrids, plug-in hybrids and electric vehicles - all vehicles they are being pushed to build by government policy demanding ever-higher annual fuel efficiency figures for their retail fleets.

General Motors and Nissan, for instance, have collectively spent several billion on new-technology vehicles they are preparing to unveil - the extended-range plug-in hybrid electric Chevrolet Volt and the all-electric Nissan Leaf, and GM, at least, is not sure it will ever see a profit.

Such results support GM Vice Chairman Bob Lutz's statement last year, on Late Night With David Letterman no less, that the "idea of the government mandating strict fuel-economy standards at the same time that we have the world's cheapest gasoline is like combating national obesity by forcing clothing manufacturers to make only small sizes."

Lutz last week said GM will probably always lose money on hybrid vehicles, and he expects that gas-electric cars and trucks will never comprise more than 10 percent of the U.S. auto market.

While Lutz is a bit more negative than many, all but the most exuberant believers in electric cars say it will be decades before gas-electric and battery-electric vehicles come close to rivaling conventional internal combustion engine vehicles in combined market share.

Meanwhile, the House of Representatives late last summer passed a bill authorizing $2.9 billion for the Energy Department to boost government-led research into making cars and trucks more fuel-efficient over a five-year period.

The bill, designed to push the government to team up with companies and universities to conduct research on technologies such as batteries for hybrid vehicles, electric cars, hydrogen fuel cells and infrastructure for the electric grid, also allowed the Energy Department to spend up to $200 million more each year on research and development for advanced-technology vehicles and auto parts.

Now we people in Congress - and the administration - with the courage to speak up for policies that will encourage people to want those kinds of vehicles.

O'Dell is Green Car Advisor Senior Editor, King is a frequent contributor.
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Edmunds.com research by analyst Ivan Drury.

John O'Dell:  is an AutoObserver Senior Editor. Follow @AutoObserver on Twitter.