About a year and a half ago, I saw the writing on the wall. OPEC had been pumping out millions of barrels of oil a day at a significant loss in order to drive supply higher than demand and drive down prices. They did this to drive down profit margins on already low margin U.S. producers, effectively putting them out of business. At the time, I warned readers that low gas prices were a trap and to not take the tantalizing, yet short-sighted bait.
Whether you took the bait or not, Americans as a whole have decisively done so.
It didn’t take long at all for those sinking gas prices to lead to a significant decline in the purchase of fuel-efficient vehicles (namely electric vehicles) and well as many of the smallest and cheapest new vehicles. And it was only a matter of time before massively inefficient large trucks and SUV’s once again dominated the roadways.
That came to fruition. For the first 6 months of the year, a disgusting 58% of all autos sold in the U.S. market were either trucks or SUV’s. =(
Financial, environmental, and health concerns aside, this presents a significant roadblock for the increased U.S. fuel economy standard of 54.5 mpg by 2025. If consumers aren’t buying fuel-efficient vehicles, it limits innovation and investment in new high-efficiency models.
Meanwhile, the average price of gas is now expected to start rising again because oil demand is once again outpacing production, cutting into inventories.
This shouldn’t surprise anyone. The historical average price of gasoline is anything but consistent, and within just the past decade, we’ve seen gas prices almost double and cut in half on 2 separate occasions already.
Of course, with all of these new behemoths on the roads for the next 10+ years and increased demand for vehicles in emerging economies, there will be even more upward pressure on oil prices.
With U.S. competition out of the market (many U.S. providers have now entirely shut down operations), it’s only a matter of time before OPEC and other low-cost oil sands producers decide to cut production and drive prices even higher.
And when that happens – good luck on the resale value as you compete with thousands locally to unload your cash-burning 5,000 pound grocery transporter.
The lesson for all of us to take away from this (and hopefully it’s not too late for you to learn the easy way through the folly of others) is that you should not make massive purchase decisions based off of short-term trends like a temporary decline in gas prices.
The same is true outside of vehicle purchases as well – trendy destination weddings, hot new electronic devices, continuously revamping your wardrobe to keep up with the latest fashion trends, overpriced degrees, jumping in to the low or no money down mortgage trends in an overheated market, etc. The list goes on and on.
Impulsive flavor-of-the-day consumption trends usually leave you burned. Consistent frugal consumption behavior always wins in the prosperity game.
I realize a lot of people did, but I don’t understand the mentality behind getting a less fuel-efficient vehicle since gas prices are presumably lower. The math just doesn’t make sense to me. Let’s say you drive 15,000 miles per year and your SUV gets you 21 MPG. If gas averages out to $3/gallon, you’ll pay about $2140 over a year filling up your vehicle. If it drops to $2/gallon, you’ll pay about $1430 doing the same – a yearly savings of about $700.
Now, that seven hundred dollars isn’t insignificant. But, SUVs and trucks are generally far more expensive than mid-sized sedans. What’s going through somebody’s head that he’ll spend thousands, possibly even tens of thousands, more to save $700/year? In order for that decision to make financial sense, gas prices would have to stay that low, and he’d have to drive that same vehicle, for at least a decade, probably more!
I don’t think most people crunch the numbers. It hurts to fill a huge tank when gas is $4/gallon. It doesn’t (as much) when it’s $2/gallon. I think that’s all the thought that goes into it for most people.
Vehicles will aways be a consumable, yet a smart person doesn’t lease or buy new because the depreciation is staggering. I’m 48 yrs old and have never owned a new vehicle, though I have the means to do so. My last purchase a year ago was a 2008 full size Toyota Tundra, bought well below blue book and I paid cash for it. I’m a good driver and avoid accidents so my insurance is as low as it gets and I pay only liability. I do my own regular maintenance and I tend to drive a vehicle well over 200,000 miles. That’s the better use of money and I’m sitting in first class instead of economy back by lavatories.
How do you avoid accidents? Isn’t the idea of an accident something that’s unavoidable? :-)
Not for nothing, it should be mentioned that’s ev’s don’t have the safety ratings that other vehicles have. For whatever reason manufacturer’s DON’T bring them to be tested ( thinking of BMW).
For the market that considers large grocery transporters (as you put it) using gas, or ev equivalent safety ratings matter. And large SUVs at less pretend to be safe….
I normally enjoy your blog posts, but there are certain issues that I have with today’s:
1. Understanding the automotive market would go a long way. If you notice the categories, there is “Cross-over” paired with “SUV.” Basically, Cross-overs are the evolution of the SUV, being based on car chassis (or unibodies, unlike the traditional body-on-fame build of trucks) with 4- or 6-cylinder engines. Most are FWD with an AWD option.
These vehicles are the heir apparent of the station wagon, which was practically wiped off the face of America by the minivan. SUVs eventually pushed minivans out of the way, and they evolved into Cross-overs because drivers were demanding a more car-like experience.
My point? SUV sales (as a blanket statement) are not disgusting at all because you make the assumption that they’re all gas-guzzlers.
(FWIW, Not sure where you got your 58% either. Am I missing something?)
2. I consider CAFE detrimental to the American auto industry because it encourages Detroit to sell cars at a loss to help meet MPG requirements. This puts Detroit at a distinct disadvantage when compared to other auto industries that support different driving needs. Dare I say it renders Detroit un-competitive?
It wasn’t too long ago that SUVs were not included in CAFE requirements, meaning that all these the-sky-is-falling SUVs were not holding back manufacturers in their averages. And, today, with increased requirements for active and passive safety devices, cars are heaver than ever for their respective sizes. How do you think that affects MPG? Its saving grace is that computers have improved engines by leaps and bounds over the past 15 years, so now we have mid-size sedans like the Honda Accord V6 getting good MPG (don’t forget, the measurement of fuel efficiency has changed over the years!) while accelerating as fast as many bread and butter V8 muscle cars from the 1960s. Win/win, right?
The truth is that automobiles are more than just a vehicle (pun not intended) to go from Point A to Point B. When automotive manufacturing primarily becomes based on government mandates, everyone will eventually lose. (Reference “The Homer” for good effect!)
Alas, we switched to a small SUV last fall. We bought it used and paid cash. It’s a reliable car with decent gas mileage so I feel good about the expense. Unfortunately you can’t transport a dog and baby at the same time in a regular sedan, so we needed to get something bigger… Even without the dog, it was difficult to fit everything into the sedan when we traveled. The car seat was another reason to get the SUV. The whole posture of getting a baby into a rear-facing car seat in the middle seat of a sedan is super awkward and was exacerbating my back pain. It’s a lot easier now that I don’t have to bend over.
Though we chose to buy an SUV, I do agree with your general conclusions – a temporary decline in gas prices is no reason to buy a “gas-guzzler” :)
Autos are one thing, but you only hinted at another large market, and that’s the latest gadgets. Think about how many people go out and upgrade to the latest Apple tech every year when they announce it. The marketers of this country are great at their job. They are awesome at making us feel like what we have isn’t good enough. Part of what we need is for people to actually start thinking for themselves and stop watching TV and other media to tell them what to buy. Thanks for the great reminder post.
Just for completeness sake, my wife and I drive a 2004 PT Cruiser and a 2010 Chevy Impala and love them both and are hoping to get at least another 5-10 years from each of them. Plus, they are paid for, so no monthly payment! We buy used each time and don’t like the consumer cycle where people are trying to upgrade cars every 3-4 years… there’s no point…