Oil Prices and Car Choices
Posted October 27, 2009 at 9:28 am 
Filed in: Economic Security, Electrification, Gas Prices, Oil Dependence, Oil Prices Oil prices may have fallen yesterday, after weeks of steadily creeping upwards to $80 per barrel. Yet some experts believe that during 2010 they will make a serious comeback as economic growth and oil demand rebound from the recession. According to Francisco Blanch, head of global commodities research at Bank of America-Merrill Lynch, oil “is lagging behind most other real and financial assets in the recovery.” He forecasts $100 per barrel prices in late 2010. New demand will be driven by emerging markets like China, and higher oil prices will make it more difficult for the United States to recover.
By far the most threatening problem is the uncertainty of oil prices. Without being able to plan ahead, companies try – often unsuccessfully – to hedge and consumers tend to base long-term decisions – such as where to live and what car to purchase – on today’s prices.
President Obama has given car companies over $8 billion to develop electric vehicles, and today is announcing another $3.4 billion to build a “smart grid” that can accommodate and exploit the storage potential of grid-enabled, or plug-in, vehicles. Yet the actual potential for plug-in hybrid vehicle (PHEV) market penetration depends in large part on the price of oil. One recent report from Lux Research found that light-duty PHEV sales won’t get going until oil reaches $140 per barrel, and in order get 3 million vehicles on the road by 2020, oil will have to approach a staggering $200. For heavy PHEVs, $200 oil only gets us to 520,000. This may be somewhat pessimistic. But the importance of fuel prices is supported by another recent study from Michigan’s Center for Automotive Research, which found that $6 per gallon gasoline in 2015 would allow grid-enabled vehicles (GEVs) to reach sales of 518,000, compared to only 169,400 at $2.50 per gallon. Today prices are around $2.67.
In Europe, high fuel taxes not only make efficient vehicles more competitive, but they create more certainty for companies and consumers. European gas prices haven’t fallen below around 4 US$ per gallon since 2000. High, stable taxes ensure a certain bottom price regardless of the vagaries of OPEC and China. So selling PHEVs or super-efficient ICEs in Europe is a much less risky gamble than in the United States, where no amount of federal subsidy to auto manufacturers will make up for $2 gasoline. As American consumers are lulled back into the “low oil” mindset and choose the Silverado over the Camry, however, they may find themselves bitten in 2011 when suddenly they’re paying close to $4 again. And then their disposable income goes down, debt goes up and/or spending goes down, and the cycle renews…
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