The $2 Gas Trap: Drivers Want SUVs, Detroit Must Sell Hybrids

Where are the Hummers when we need them? With gas prices expected to drop as low as $2 per gallon in some parts of the U.S., the market seems primed for a Costco (COST)-ready tank. The last Hummer rolled off GM’s (GM) assembly line in May 2010, with gas at an inflation-adjusted $3.04 per gallon. Gasoline sells for just $2.77 today, a 15 percent drop from a year ago.

Moving a giant chunk of metal from point A to point B hasn’t been this cheap in years, as global oil prices sink to $65 per barrel. Drivers have noticed: From August to September, the aggregate fuel economy of purchased cars dropped from 25.8 to 25.3 miles per gallon, according to the University of Michigan’s Transportation Research Institute. That metric didn’t budge in October, even though dealerships started selling next year’s models, which are generally more efficient—a sign that drivers have been choosing SUVs over small sedans. “Consumers react very quickly to changes in gas prices, especially if those changes are relatively rapid,” said Michael Sivak, director of sustainable worldwide transportation at the University of Michigan.

These days, however, auto executives have to worry about more than just what drivers want. Detroit needs to meet increasingly stringent federal mileage thresholds that are calculated on a fleet-wide basis called Corporate Average Fuel Economy (CAFE, for short). That means for every Cadillac Escalade, GM should sell a Chevy Volt—or three of them—in order to avoid steep fines.

The big hurdle will come in 2025, when each company’s fleet of cars and light trucks sold in the U.S. will need to post an aggregate fuel economy of about 54.5 miles per gallon. If gas prices don’t steer customers to smaller, more efficient cars by that time, automakers will have to give them a nudge via the sticker prices they slap on the window. “The regulatory structure wants to force people into vehicles that consumers don’t rationally want to buy,” said Steven Szakaly, chief economist at the National Automobile Dealers Association. “That’s a problem.”

Hybrids, at this moment, are heavily subsidized by federal and state incentives. It’s not unusual for carmakers to go a step farther and sell those models at a loss so they can balance out the carbon footprint of high-margin pickup trucks. If drivers still don’t bite on discounted hybrids, car executives might resort to raising prices on gas guzzlers. A price hike on giant SUVs and trucks might not drive customers to hybrids, but at least the sales revenue will help cover federal fines triggered by missing efficiency standards.

The alternative to selling tiny cars that can be plugged in like cell phones is simply to make big cars much more efficient. Carmakers have been making huge progress on this front, thanks to lightweight metals and engineering feats such as continuously variable transmissions and idling cylinders. Ford’s (F) new F-150 pickup, for example, gets 26 miles for every gallon of gas burned on the highway, largely because its body panels are cast in aluminum, rather than steel.

Auto executives are also much more willing to throw electric engines into an SUV or a sports car. Porsche’s (PAH3:GR) largest model, the Cayenne SUV, now comes in a hybrid. The company’s $845,000 super-car, the 918, has two electric engines. And just this week, BMW (BMW:GR) said it would offer hybrid versions of all its major models, including its popular 3-series sports car.

With this kind of product tweaking, automakers are raising the floor on their efficiency range, with the changes evident in the market at large. Though the average efficiency for purchased cars dipped in recent months, it is still 14 percent higher than it was five years ago.

In the age of cheap gas and strict fuel-efficiency standards, a kinder and gentler Hummer may yet find its way back onto the road—with a place to plug in a power cord.

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2 December 2014 | 5:03 pm – Source:


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