The prices of oil and gas have been on increase lately with a barrel of oil hitting the all time high of $150 and the gas being pecked at $4 per gallon. These are the ever recorded highest prices since the 2008 recession. According to analysts and economists, there is a pronounced correlation between the consumer confidence, spending habits, and gas prices in the United States (US) automobile industry and the economy of the country as a whole. An increase in the price of gas has been of interest to many people because it affects the backbone of the economy i.e. the transport sector as automobile industry adjusts to the increasing prices. Some executives at Ford Motor, the number of automobile makers in the US have argued that high gas prices have actually led to increase in sales of their vehicles. This paper discusses the effects of high gas prices on the automobile industry and evaluates whether the industry benefits from high prices. It also analyzes future implications on automobile industry.
According to Domansky (2006), automobile industry is very sensitive to changes in fuel prices especially change in the prices of gas. Interestingly high prices of gas have been at the center of study as it has varied implications on the industry. For instance, Domansky (2006) notes that as gas prices continue to increase, executives at Ford Motor notice an upsurge in the sale of motor vehicles which are small in size and utilize modern technology. This is an interesting factor to economists who have been keen to watch how consumers react to increasing prices of complimentary goods.
Similarly, Talbott (2010) observes that there is unprecedented change in the transport sector whereby as prices of gasoline continue to increase people tend to use more public transport vehicles rather than their Sport Utility Vehicles. Miller(2012) notes that this of course impacts on the number of vehicles sold by automobile industry since many people won’t be buying vehicles.
Wimmer (2011) points out that another factor that has been noticed as the prices of gasoline continue to be on an upward trend is the consideration that people put on where to stay. He argues that it is natural for people to move to locations near their work places as the cost of transport increases to benefit from the advantages of proximity. All these factors coupled with the need to reduce carbon emission and competitive technology has had effects on automobile industry which are of interest to economists.
Automobile Industry and Fuel Prices
Talbott (2010) notes that there is a natural correlation between automobile industry and fuel prices that is volatile. This correlation can be detrimental to automobile industry if care is not taken. Fuel prices depend mostly on the political situations across the world. And with the US being involved in bombardment with terrorists in countries such as Iraq and Afghanistan and the nuclear stalemate with Iran, it is almost true that prices of fuel will be swayed upwardly.
Similarly, Talbott (2010) notes that automobile industry has been susceptible to change the technology, making newer and smaller vehicles utilizing electric and even solar energy for mobility. These factors work together to change the way consumers buy vehicles with automobile industry officials pointing to smaller and less gas thirsty vehicles given preference to fuel guzzlers.
Effects of High Gas Prices to Automobile Industry
According to Domansky (2006), high gas prices affect both the number of sale and the type of the vehicles produced. For instance, he notes that high prices of gasoline make customers avoid buying vehicles that consume a lot of fuel. Since technology in motor production has been improving, there has been an increase in the manufacturing of modern vehicles which are efficient in fuel use. Increasing prices of gas have also caused consumers to dump their old vehicles which were of high fuel consumption to buy modern vehicles which utilize less fuel. Domansky (2006) notes that this has the effect of increasing annual sales to many automobile companies which embrace the technology.
For instance, Vitez (2012) writes that top sales have been recorded by Focus, the maker of Focus Hybrid vehicles which are fuel efficient. Vitez (2012) indicates that statistics have shown that over 95,000 Focuses have been sold out since January this year and this represents a 78% increase in the first quarter only. In the same manner, Vitez (2012) indicates that the same records have been registered with Ford Motor and Toyota which manufactures the Prius hybrid
Wimmer (2011) argues that high gas prices also have forced automobile industry to consider manufacturing vehicles which are smaller in size and fuel efficient. Moreover, Wimmer (2011) observes that increasing prices of gas have also forced the industry to venture into hybrid vehicles and electric cars which can travel greater distances before they are charged. Wimmer (2011) writes that this move has been supported by consumer flocking to the stores to buy hybrid vehicles with the overall sales in the US growing at 33.9% higher in 2001 compared to 2010. He adds that this shows that consumers are sensitive to increase in prices of fuel in general and gas in particular and are seeking to support measures that will cushion them against the effects of high gas prices. Wimmer (2011) argues that this points to their resilience in taming the problem of ever increasing gas prices.
On the other hand, Vitez (2012) notes that high gas prices have affected automobile industry in terms of technology used in manufacturing cars. Evidently, Vitez (2012) notes that as fuel prices continue to increase, consumers become sensitive to details about the cars they buy. For instance, he notes that many customers start comparing factors such as fuel consumption and carbon emission while shopping for a car. He further observes that these factors were not considered previously. Consequently, the automobile manufacturers did not put emphasis on them.
However, as gasoline prices increase, automobile industry is forced to invest in research so as to come up with cars which will not only be fuel efficient but also appeal to consumer demands in terms of style and efficiency. Miller (2012) notes that an automobile executive at Ford Motor Mark Fields contents “we're not using a dedicated technology for a dedicated plan”, he says: "We'll be able to be flexible and follow the consumer." Miller (2012) argues that this extra research has the effect of reducing the overall returns to automobile industry.
Similarly, Miller (2012) noted that high prices of gas have led to the scaling down on production of long term popular vehicles such as the Sport Utility Vehicles (SUVs). He observes that some of these popular cars like the SUVs have been in the production line for the last twenty years serving as the mainstay of automobile industry. A sudden change in production therefore means that automobile industry has to change its production lines which may be expensive and time consuming (Miller, 2012). Interestingly, Miller (2012) argues that as the prices increase, many users of SUVs want to dispose off their old energy-thirsty cars for modern efficient ones. This makes the market for SUVs in showroom to be saturated leading to rejection from car dealers. Evidently, this translates to a loss of automobile industry as producers have no markets to sale cars already in their showrooms.
Furthermore, Miller (2012) cites a report in MotorTrend Magazine indicating that fuel-efficient cars such as Honda Civics are registering higher sales than the prestigious Hammer with no imminent shift in preference from customers. He agrees with Jesse Toprak, chief industry analyst for Edmunds, that a reduction in the prices of gas will not likely cause consumers to rush into stores to buy SUVs as the shift seems to be permanent.
On a different level, Vitez (2012) argues that auto industry is affected by high gas prices in a manner that many people now turn to public transport for their movement. Vitez (2012) indicates that this has the effect of reducing demand for new cars since many people can use public transport. He further argues that as prices of gas increase farther, automobile industry is drawn into limbo as producers cannot predict the next market dynamics. The industry is affected especially given the fact that those who opt to use public transport may not go back to personal cars when the prices of fuel are finally reduced.
Implications of High Gas Prices to Automobile Industry
According to Miller(2012), the overall effect of high fuel prices to automobile industry is the increase in sale of new modern cars. This is a benefit to the industry as executives of many automobile companies register booming business with all time record high sales. Domansky (2006) suggests that the benefits of high sales surpass the downfall of stagnation of old vehicles in showroom and investment in technology and research.
Similarly, Domansky (2006) suggests that high gas prices imply that changes are made in the type of vehicles that are purchased. He further suggests that it is evident that increase in gas prices stimulates public debate on the energy sector on how to conserve energy. It also increases the calls of the need for fuel efficient cars. This tends to reinforce the need for improved mileage for small fuel efficient cars thereby boosting the price premium placed on hybrid vehicles by value-conscious consumer. Additionally, high gas prices tend to shift priority of many consumers who prefer the light trucks to SUVs. The purchase of light trucks is a welcome sign as it points to increase in small business and construction sector.
The above discussion has found that volatility of gas prices and other related energy sources is an unavoidable phenomenon in the market. These changes have an impact on the economy and also individual industries. However, it is also almost normal that increase in prices should automatically harm the economy. As has been pointed out, increasing sale can only mean that the government is getting more revenue from the industry and jobs are created for people. If changes in gas prices and especially high prices are well managed, then they are likely to benefit the economy more rather than harm it.