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Gas approaching $2 seen helping U.S. auto sales in December

Analysts predict that consumers will begin buying bigger

Analysts predict that consumers will begin buying bigger vehicles through 2015 as gas prices decline. This fuel was getting pumped on Dec. 11, 2013. Photo Credit: Anthony Lanzilote

Automakers are poised for more gains this month as the prospect of $2-a-gallon gasoline prompts consumers to keep spending and moving up to bigger models after the best November for U.S. auto sales in 11 years.

With fuel prices at a four-year low and heading lower, U.S. consumers are opening up their pocketbooks at auto dealerships. U.S. auto sales rose 4.6 percent last month and the annualized selling rate, adjusted for seasonal
trends, reached 17.2 million vehicles, the highest for November since 2003, according to researcher Autodata Corp.

“Psychologically, when people see prices drop below $3, it sends a very, very positive wave across everyone’s mindset,” Fred Diaz, Nissan Motor Co.’s North American sales chief, said in an interview. “Everyone feels like, ‘OK, this is for real. Time to giddy up and go get what I want.’”

What they want are big, expensive models like the Cadillac Escalade, which surged 91 percent last month, and the Lincoln Navigator, up 88 percent. They have less interest in small, economy cars, such as the Ford Fiesta, off 26 percent last month, and hybrids like the Toyota Prius, down 14 percent.

“It’s almost like the manifest destiny for American families, when there’s no significant opposing force, to move into a larger, more comfortable vehicle,” John Krafcik, president of auto-buying website TrueCar Inc. “SUVs
and crossovers are the Conestoga wagons of today.”

Pump Prices

The average pump price for a gallon of gasoline fell to $2.76 yesterday, down 93.6 cents from this year’s peak of $3.696 on April 26 and the lowest since Oct. 5, 2010, data compiled by AAA show. The average has fallen for 62 consecutive days, the longest streak since 2008, according to AAA.

Gasoline will drop to $2 a gallon by the Dec. 25 Christmas holiday in some parts of the U.S., Patrick DeHaan, a senior petroleum analyst at GasBuddy Organization Inc., said in an interview last week.

“That’s not really a prediction at all,” he said. “That’s more like a certainty.”

That is having a profound impact on the family budget, which is leading to more spending and more driving, said Art Wheaton, a senior lecturer at Cornell University.

“People will gauge their monthly budget — and what they will do — based on gas prices,” Wheaton said yesterday in an interview. “If gas is low, they are more willing to spend money on restaurants, vehicles, movies and
other goods. When gas prices are high, they focus more on fuel economy, fewer trips and saving money.”

Money to Spend 

Ford Motor Co., which had a 15 percent rise in SUV sales last month, has computed how much money consumers are saving thanks to lower gas prices.

“By any measure, households are reaping significant disposable income gains each week at current gas prices,” Emily Kolinski Morris, the Dearborn, Michigan-based automaker’s chief economist, said on a conference call with analysts yesterday. “With U.S. gasoline consumption of over 360 million gallons a day, that represents a total savings of about $180 million per day now versus September.”

For automakers, falling fuel prices are mostly good news because they push people into more expensive and profitable vehicles. Pretax profit margins on large, luxury SUVs such as the Escalade can top $10,000, analysts
estimate.

“They make a lot more money off of SUVs and trucks than they do the small economy cars,” Wheaton said.

SUV Gains

U.S. sales of SUVs and crossover utility vehicles rose 12 percent this year through November, while car sales have risen 1.2 percent, excluding luxury models.

Yet automakers have been gearing up for a sea change in sensibility, where mileage matters more than size. They’re also racing to meet U.S. fuel-economy regulations that rise to an average of 54.5 miles per gallon by 2025.

The average fuel economy of vehicles sold in America in September and October fell to 25.3 mpg, down from a record of 25.8 mpg in August, according to the University of Michigan Transportation Research Institute.

“Auto companies have spent billions of dollars on the development and commercialization of electric vehicles,” Adam Jonas, an auto analyst for Morgan Stanley wrote in a note, entitled “$2 Gasoline: Not All Good News for
Autos.”

He added: “A prolonged stint at or near the $2 gallon mark would, in our view, deal a decisive blow to most EV projects.”

Environmental Mindset

Concerns about emissions aren’t what’s driving sales of the Toyota 4Runner SUV, which rose 53 percent last month, or the Jeep Cherokee, which jumped 67 percent. While today’s SUVs are more fuel efficient than those in the 1990s, they still can’t match the mileage of a hybrid or small car.

“Consumers no longer have the fear that gas prices are going to go up to $5 or $6 a gallon, which they had back in 2008,” Wheaton said. “The downside is people are buying larger vehicles, so you become more dependent on
gas and more sensitive to it.”

The fracking boom has driven U.S. oil output to the highest level in three decades, which is contributing to a global surplus that Venezuela last week estimated at 2 million barrels a day. Gasoline futures sank below $2 a gallon
last month for the first time since September 29, 2010.

“Everyone is talking about” gas prices heading for $2 a gallon, which “supports spending in general” and will continue to drive traffic into showrooms this month, said Jeff Schuster, an analyst with LMC Automotive in Troy,
Michigan.

In addition to the lower price of gasoline, sales this month will rise on improving economic fundamentals, such as available credit, falling unemployment and an improved housing market, Krebs said.

“December will be another good month,” said Michelle Krebs, an analyst for AutoTrader.com.

 

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