Why aren't Americans using less gas?
Consumers are of two minds about the run-up in gas prices, says Fortune's Alex Taylor.
New York (Fortune) -- With the usual summer spike in gasoline prices coming sooner and moving faster than anyone expected, the subject of energy is on everyone's mind. Just this week, presidential candidate Barack Obama went to Detroit to bash the auto industry on mileage, and a Senate committee reported out a bill that would boost corporate fuel economy standards 40 percent in the next 13 years. CO2 emissions and dependence on foreign oil have replaced real estate and the stock market as the staples of online blogs and water cooler chats.
But car buyers are reacting in an unpredictable way. Some are taking heed of the prevailing social currents and changing their driving habits by moving out of large cars and trucks and into smaller ones. Tiny fuel-sipping vehicles like the Honda (Charts) Fit are in short supply. With gasoline up nearly a dollar a gallon from a few months ago - and talk that $4 a gallon gas is just around the corner - the decision seems sensible.
Other buyers are standing firm. They still want their V-8 powered Chrysler 300s, Mercedes S 550s and Cadillac Escalades regardless of the prevailing political atmosphere. And they have enough money that paying another $5-$10 to fill up the tank isn't a big issue.
The gulf between the two groups has been widening. You can see the evidence in data collected by J.D. Power and Associates.
Since 2000, the market share of small cars and compact trucks that use less fuel has climbed from 21.5 percent to 31.8 percent today, a startling run-up. But the increase has come entirely at the expense of midsize cars and trucks, like the Toyota (Charts) Camry, Chevy Malibu and Chrysler Sebring. Their market share has sunk from 51.3 percent seven years ago to 40.1 percent today.
Large vehicles, meanwhile, have tenaciously kept their hold on the buying public. They accounted for 27.2 percent of sales at the beginning of the decade, and managed to add to that in the first quarter of 2007, when they notched a 28.1 percent share. Sales of large luxury SUVs in this category have been doing even better. Purchases of all those Land Rovers and Lexus's shot up 13 percent in 2007's first quarter.
Does this mean gas prices don't count? For these folks, they clearly don't. And for the rest of the market, their impact is slower and weaker than generally thought. "Prices by themselves have to go higher than they are now and stay there for a longer time for customers to change their minds in a significant way," says Tom Libby, senior analyst at J.D. Power. In other words, don't expect a big shift like we saw during the gas crises of the 1970s, when fuel availability - not fuel prices - was the issue.
Even if customers don't change their mind, automakers may be forced to change it for them. They are under increasing pressure to make vehicles that use less gas. The Senate is considering a bill that would force automakers to boost their fleet's average fuel economy from 27.5 mpg to 35 mpg by 2020. After that, they would be required to increase it 4 percent a year - a standard auto engineers consider preposterous.
Reading the handwriting on the wall, manufacturers are gradually reshaping the fuel-consumption profile of their fleets. The most visible sign is the changeover from body-on-frame SUVs like the Ford (Charts, Fortune 500) Explorer to so-called crossovers - SUV bodies on passenger car frames - like the Ford Freestyle. A decade ago, the Explorer was one of the best-selling vehicles in the business and helped lift Ford to record profits. Today, Ford is losing billions and slumping Explorer sales are one of the reasons why. Observers figure that Ford will discontinue the current design at the end of its model run.
Less visible but no less significant has been the shift to smaller, more fuel-efficient engines. J.D. Power figures that the percent of retail sales for vehicles with four-cylinder engines grew from 27.1 percent in March 2004 to 35.7 percent in April 2007. Four-cylinders used to be synonymous with "cheap," but they are gaining respectability as technology boosts their output.
What all this means is that the typical American motor vehicle, which once stood out like a giant among pygmies, is downsizing to become more like those from Europe and Asia. Motorists in Great Britain, for instance, are paying $6 for a gallon of gasoline. At those prices, a four-cylinder compares favorably to a V-8.