Americans revert to buying gas-guzzlers
With the price of gasoline in steady decline since late 2014 -- now the cheapest in more than 12 years in parts of the country -- the cost of filling up is less of a worry when picking a vehicle to buy. And consumers are using that peace of mind, along with the extra cash they used to spend on gas, to bypass passenger cars in favor of more expensive, more fuel-thirsty trucks.
For the first time since 2004, U.S. drivers are expected in 2016 to pay, on average, less than $2 a gallon for regular grade gasoline, with the more than 70 percent decline in crude since the summer of 2014 the main reason for cheaper gas prices, according to the U.S. Energy Information Administration (EIA).
On Wednesday, the agency's weekly survey found diesel prices already hitting that level, reporting the U.S. average retail price for on-highway diesel fuel was $1.98 a gallon on Feb. 15, the first dip below two bucks in 11 years.
"Cheap gas makes it that much more comfortable to buy the pickup truck and not be as concerned about the operating cost," said Charles Chesbrough, senior principal economist at information provider IHS. "For the U.S. market, it used to be 50 percent trucks, 50 percent cars, but now its 60-40, with the move toward light trucks, and cars flat or down a bit, year-over-year."
Compared to the fourth quarter of 2014, IHS estimates the average U.S. household now spends between $900 and $1,000 less each year putting fuel into their tanks. They're using that money in part to buy more expensive vehicles as Americans flock to generally more costly pickups and SUVs, a trend reflected in record-high transaction prices, Chesbrough added.
The catering to consumer appetites can be seen in the overall gas mileage of new vehicles sold in the U.S.: The average fuel economy steadily slid for the most of last year, according to the University of Michigan's Transportation Research Institute (MTRI).
The preference for trucks and SUVs began before the decline in the cost of crude oil and gas. Even in June 2013, more Americans used the Kelly Blue Book website to research small SUVs than midsize cars or small sedans. "We'd never seen that before," Karl Brauer, senior analyst at Kelley Blue Book, said. "People will research a car at least six months in advance," the analyst noted, adding that the small-SUV category had the highest sales volume by July 2015.
U.S. consumers favor SUVs because they like being able to carry additional people and things, they like the experience of being higher up from the ground and they like the more rugged image projected by the vehicles, according to Brauer. "It's hard to find the demographic where small SUVs don't work."
Whereas consumers are drawn to less fuel-efficient vehicles, manufacturers are committed to increased energy efficiency due to federal regulations requiring them to roughly double the average miles-per-gallon capability of U.S. vehicles by 2025. "The industry is in a difficult situation," Chesbrough said. "Consumer demand isn't skewed toward making them compliant."
Still, improved technology is helping the industry move closer to compliance with government mandates, the economist said, noting that Ford (F) makes its F-150 pickup truck with an aluminum body instead of steel, cutting the vehicle's weight by hundreds of pounds and sharply hiking its fuel efficiency.
A recent report by consulting firm McKinsey & Co. projected by 2030, half of new-vehicle sales could involve electrified models, including gas-electric hybrids.
In accommodating consumer tastes while keeping up with regulatory hurdles on fuel economy, one industry answer has been crossover vehicles, or CUVs, which have the look of an SUV but rest on a car platform. That makes these vehicles smaller and closer to the ground, and less thirsty. "The fuel economy wasn't good with the SUV, so the industry created the CUV, which has car-like fuel economy, but the functionality of an SUV," Chesbrough said, noting that they're still classified as trucks.
The recent trend of falling overall mileage, however, came to a halt in January, when the average fuel economy (window-sticker value) of new vehicles rose for the first time in eight months, said the MTRI researchers.
That figure for all new vehicles sold last month increased to 25.1 mpg from 24.9 mpg in December, which was the first time it had fallen below 25 mpg in nearly two years, the institute said in a release this month. Fuel economy is down 0.7 miles mpg from its August 2014 peak, but still up 5 mpg from October 2007, the first month of tracking by the MTRI researchers.
The January turn toward more fuel-efficient cars would defy logic given the low cost of gas, but it could be "as simple as discounts on big vehicles being dropped," Patrick DeHaan, senior petroleum analyst at GasBuddy, said.
And while the current low cost of fuel makes it an economically viable time to hit the road, prices will likely rise again. As DeHaan put it: "People buying an SUV today are going to be stuck with it when oil prices rebound."
Should gas prices spike, Brauer at Kelley Blue Book questioned whether there would be a rerun of the scenario seen in 2006 and 2007, when consumers made a "mad dash from SUVs," and sellers couldn't get them off their lots. "You're seeing an increase in fuel efficiency in all sizes -- the smallest cars the most -- but all from five to 10 years ago," he said.