Gerry Malloy

Jul 26, 2008

History, it seems, does repeat itself. What's happening in the auto industry today closely parallels what happened during the first oil crisis in 1973.

The precipitating factors then were a gasoline supply shortage accompanied by unprecedented high prices. Today, there is no lack of supply at the retail level – at least not yet – but increasing demand by developing economies like China and India have stoked fuel prices, and an uncertain economy here at home are having a similar effect.

That effect, to put it bluntly, is panic. And that panic is being felt in auto sales and the rush of some to dump their gas-guzzlers in favour of a fuel-sipping alternative.

But does such a move make sound economic sense?

While Canadians have always been disposed to more economical vehicles than our American cousins, that predisposition has been tilted even further in recent months.

Sales of fuel-efficient vehicles are skyrocketing, while those of once-dominant pickup trucks and their big SUV siblings have tanked.

The Honda Civic has surpassed the perennially bestselling Ford F-Series pickup truck as the nation's top seller. And according to automotive analyst Dennis DesRosiers, of DesRosiers Automotive Consultants, all 10 of the bestselling cars in June were compacts or sub-compacts – for the first time ever.

DesRosiers says the sales of those vehicles might have been even higher if their supply wasn't constrained by the sudden increase in demand for them south of the border, where the switch in consumer preference has been even more dramatic than here.

Furthermore, almost every manufacturer that builds any kind of hybrid vehicle has a backlog of orders that in some cases will take months to fill – a situation exacerbated by insufficient battery supply capacity to meet the sudden surge in demand.

In a recent survey of U.S. consumers conducted by J.D. Power and Associates, fully 72 per cent of the respondents said they were "definitely" or "probably" interested in a hybrid for their next vehicle purchase. That is, until they were told that the typical price premium for a hybrid is $5,000!

Even after hearing that figure, fully 46 per cent confirmed their hybrid preference.

At the other end of the spectrum, people are abandoning gas-guzzling big SUVs and pickups. "You can't give away a large sport utility vehicle," says DesRosiers.

That is something people who already own such vehicles are quickly learning, to their chagrin. The media have been full of reports of people trying to dump their gas-guzzlers, and advice on doingso.

All of which is a clear reflection of the panic that is overwhelming rational analysis of the situation.

The fact that people are faced with a consistently increasing bill every time they visit the gas pump seems to have a far greater impact than any long-term economic consideration.

The fact is, just as it may take consumers five years – or even much more – to recoup the cost premium for purchasing some hybrids, as we discussed in an earlier column, it may not make economic sense for people to precipitously dispose of sport-utes or pickups.

Even with gasoline at $1.50 a litre, it is likely to take them a very long time to make up what they may lose in trading a gas-guzzler for something more fuel-efficient, given the current depressed prices of such large vehicles.

For example, consider someone who sells or trades in a two- or three-year-old SUV at a $5,000 lossover and above what they might expect from normal depreciation, which is probably a conservative figure. Assume that gas is $1.50 a litre and they drive the accepted average of 20,000 km a year.

Even if they reduce their average fuel consumption from 15 to 10 L/100 km, which would be a tall order if they stick with something remotely close in terms of room and utility, it would take more than three years to recoup that loss from fuel savings.

So would they be further ahead to stick with what they have?

Every situation is different, so that's a decision people have to make for themselves. In addition to pure economic factors, there are also environmental impacts you may want to consider, as well as personal needs.

The point is that such decisions are best made on the basis of sound analysis, not in a reactionary panic.

For example, consider someone who sells or trades in a two- or three-year-old SUV at a $5,000 lossover and above what they might expect from normal depreciation, which is probably a conservative figure. Assume that gas is $1.50 a litre and they drive the accepted average of 20,000 km a year.

Even if they reduce their average fuel consumption from 15 to 10 L/100 km, which would be a tall order if they stick with something remotely close in terms of room and utility, it would take more than three years to recoup that loss from fuel savings.

So would they be further ahead to stick with what they have?