Fuelling problems

By P.E.

CAN the price of oil fall below $80? With a barrel of Brent crude dropping below this level last week for the first time since 2010, it is no longer a rhetorical question. Although this trend has already harmed the profitablility of some oil firms, nowhere has the impact of cheaper oil been more apparent than in the American car market. While petrol in America cost at least $4 per US gallon at the start of 2014, drivers in much of the country are now paying less than $3, and in some states less than $2.60.

This has resulted in a shift in buying patterns among American motorists over the past year. Since the financial crisis, smaller and greener cars, such as the Toyota Prius, a hybrid, had been rising in popularity. But in recent months, industry statistics show that the sales of larger pickup trucks and sport-utility vehicles (SUVs) have been starting to rise again. Carmakers have been busying themselves re-launching classic cars, such as the Dodge Challenger and the Ford Mustang, to meet renewed demand for gas-guzzling vehicles.

Most industry experts credit the plunge in fuel prices for this change. American car buyers have “short memories,” and base purchases on today’s fuel prices rather than future trends, says Stephanie Brinley at IHS, a research firm. American motorists also remain sceptical of hybrids, plug-ins and battery-electric vehicles, despite ever-larger numbers of these types of car going on sale. Although more than 100,000 plug-in vehicles are likely to be sold in America this year, sales in that sector are not growing as fast as the car market as a whole.

For carmakers, that is not entirely a bad thing. They generally make very low margins on small cars and losses on electric vehicles. For instance, Fiat Chrysler, an Italian-American firm, reportedly makes a loss of $14,000 every time it sells one of its new Fiat 500e battery cars. On the other hand, larger cars, such as full-size pickup trucks and SUVs, are among the industry’s biggest profit-makers.

Although the shift back towards gas guzzlers is producing higher profits now, carmakers are starting to worry that it will set them on a collision course with regulators in the future. At the start of this year, the fuel economy of new vehicles on American roads had hit a record high, but the trend has since reversed, according to research by the University of Michigan's Transportation Research Institute. If fuel prices continue to fall, the industry could face problems meeting the tough new fuel-economy standards due to take effect in 2016—never mind the federal government target for new cars to travel at least 54.5 miles per US gallon of petrol they use by 2025. If carmakers fail to keep the average fuel-efficiency of the cars they sell below these levels, they could find themselves facing heavy fines and depressed profits in the future. Although falling fuel prices may be good news for carmarkers today, the trend will eventually create headaches for them.