by Lauri Giesen
As the price at the pump goes, so goes the automotive industry. And gas prices do not look promising for 2010. Gas prices could spike as much as 20% next year. The question is: Will higher gas prices hurt car sales and spur sales of more fuel-efficient cars?
This fall the Energy Information Administration, the government office that forecasts energy prices, raised its 2010 forecast price of crude oil by $7 per barrel. That increase is expected to result in the average price at the pump hitting $2.81 a gallon for 2010, up 19% from the $2.36 average price in 2009 and virtually identical to the price consumers paid in 2007. The higher price is still considerably below the $3.26 average price paid in 2008.
Other experts are predicting increases in gasoline prices comparable or slightly below the government forecast. Deutsche Bank AG predicts crude oil prices will grow to $65 a barrel next year from $55 a barrel in 2009, an increase of 18%. Meanwhile, Ann Meyers Jaffe, a professor at Houston-based Rice University, expects gasoline prices in 2010 to remain flat compared with 2009 or creep up as high as $2.75 a gallon, a 12% increase.
Most of the projections for higher prices in 2010 are based on geo-political factors. Much of the EIA’s forecast, for example, is based on increasing world demand for oil, particularly in Asia, while Jaffe attributes instability in the Middle East to her forecast for higher prices at the pump.
Higher gas prices would weaken demand for autos. “As gasoline prices climb, consumers have less income to spend on other purchases, such as autos,” says Jeremy Anwyl, chief executive of Santa Monica, Calif.- based Edmunds.com, which provides auto pricing information on its web site.
Still, Anwyl and other auto analysts don’t see car salesfalling as they did when gas prices soared in 2008.
“Most auto dealers have already absorbed the big hit from a few years ago and at the end of the day, other factors, such as the supply of autos in the market and consumers’ need to replace existing vehicles, will be bigger factors than gasoline prices,” Anwyl says.
He expects small vehicles to continue to see greater demand than the big gas guzzlers in 2010. Consumers want the fuel efficiency of the smaller autos, while the need to pay a greater portion out of their disposable income for gas will put pressure on the amount of money they can afford to spend on the auto itself, Anwyl explains. Still, don’t expect to see a dramatic shift in the types of vehicles sold in 2010, says Shawn Hushman, vice president of enterprise analytics for Kelley Blue Book. While KBB does not offer gas price predictions, Hushman believes the government forecast of a 19% increase is on track. The likely result: a slightly lower reluctance by consumers to purchase new autos, and a small shift toward more fuel-efficient vehicles, Hushman says.
“We won’t see the extreme shift that we saw in 2008 where there was a structural change in how consumers bought automobiles,” he says. “If there is an 18% increase [in gas prices], it will definitely affect the disposable income consumers have to make auto purchases and it will affect the mix of cars they choose to buy, but it won’t be a dramatic change.” Still, Rice University’s Jaffe expects the shift toward more fuel-efficient cars to remain strong.
“If you look at history, consumers continued to demand more fuelefficient automobiles throughout the entire 1980s after gasoline prices rose at the beginning of the decade,” Jaffe says. “A bigger question today is how long consumers will hold onto their current cars? Will the higher prices push them into selling their older cars so they can buy smaller, more efficient models, or will they want to save their money and hold on to what they have?”
