Fuel prices and used cars

A growing number of articles are predicting that fuel prices will hit $4/gallon this summer. CNN/Money has recently joined the speculation with an article pointing out that according to one source a new nationwide record had been set last Sunday, exceeding previous $3.05 spike following Hurricane Katrina. It can only get worse from here: refining capacity is still  at historic lows. Meanwhile demand will increase over the summer as more families hit the road, in search of the perfect vacation.

It remains to be seen whether the higher prices will have any affect on the purchasing patterns in the automative industry. In the past, the price of gasoline defied economic theory: demand for driving and for that matter, gas-guzzling SUVs showed no elasticity based on oil prices. “People respond to incentives” goes the theory but during the late 1990s and early years of this decade, it was hard to see any evidence of that. That may be changing now. New York Times reported that in April GM sales are down 2% and Ford down 7%.

“Rick Wagoner, the chief executive of G.M., said during an interview on CNBC, the financial news cable network, citing gas prices that have topped $3 a gallon in many parts of the country as one reason.”

This excuse is slightly more credible than Krispy Kreme blaming Atkins diet for its lack-luster quarterly results. While Detroit can not control fuel prices directly, they should have felt free to adjust their own product line and manufacturing numbers based on projected trends. In the 1990s SUVs were the right business investment, as consumers paid hefty premium for the appearance of a vehicle ready to conquer the wilderness. But once global warming, talk of carbon taxes and higher fuel prices started, focus would have logically shifted to smaller, efficient passenger vehicles and disruptive technologies such as hybrids. (A well managed company is supposed to look ahead  and invest part of the SUV windfall in the next thing.)

A better indication of economic sanity restored to the markets may be in used cars. If fuel prices affect behavior, one would expect to see greater demand in efficient cars and by contrast, a shift away from the gas guzzlers. This is similar to the inverse correlation between interest rates and bond prices. Once hybrids start trading well above their blue-book price, there is an argument that cost of fuel is impacting purchasing decision.


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