DETROIT (April 18, 2011) — Few issues are creating more of a love-hate relationship for the automobile industry than the current rise in gasoline prices in the U.S.
Consumers hate the rising prices. As gasoline approaches and passes $4 a gallon, they have to decide whether to change their driving habits or downsize to smaller vehicles that get more miles per gallon.
When consumers buy less gasoline, state and federal governments will have less revenue from fuel taxes to maintain roads across the country. As fewer miles are driven, there will be fewer crashes, so the number of deaths and injuries on our highways will drop dramatically.
Manufacturers realize that if they have any chance of meeting the new federally mandated corporate average fuel economy (CAFE) standards they need to develop smaller, more fuel-efficient vehicles. They have developed some of those vehicles, but now auto makers have to persuade customers to buy them instead of the larger, less efficient vehicles they have been driving, such as pickups and SUVs.
For manufacturers, switching from large to small vehicles also will mean a switch in profitability as per-vehicle profit plummets along with the shift from trucks to cars.
It will be a tremendous challenge for manufacturers to switch production facilities from body-on-chassis trucks to smaller, unitized bodies for small cars. Another challenge might be switching from V-8s to four- and six-cylinder engines.
Suppliers will have similar challenges ramping down large-vehicle parts and replacing them with small-car parts overnight.
Dealers will need to keep a close eye on inventories so they don't get caught with an overabundance of large vehicles when consumers want small ones. Managing used-car inventory will require an equally delicate touch.
But the real question is whether this sudden surge in gasoline prices is permanent or just a spike because of the unrest in the Middle East and Libya. If this is permanent, higher gasoline prices will affect the entire U.S. economy, which runs on petroleum.
If this is a temporary increase in the price of fuel, there will be a different set of challenges for the automobile industry.
What the future holds in store for the auto industry is anyone's guess. No one seems to have a crystal ball that is working very well.
Keith Crain, chairman of Crain Communications Inc., is editor-in-chief of Detroit-based Automotive News, where this piece appeared. It is a sister publication of Tire Business.