Low Gasoline Prices Undermine Efficiency and Alternatives

Gasoline prices have fallen to their lowest levels in years. This is good news for consumers spending, but bad news for efficiency and alternatives, and likely leaves consumers vulnerable once high prices return. In this morning’s National Journal, Jason Plautz explores this dynamic, that low gasoline prices are pushing consumers away from “smaller, greener” cars. There’s no question that, among two critical metrics—average new-vehicle fuel economy weighted by sales and sales of plug-in electric vehicles—falling gas prices are already having a negative impact. Two months ago, we tried to provide some historical context for this shift, analyzing month-over-month changes in gasoline prices and sales performance of electric and efficient vehicles. We found an imperfect but visible relationship between gas prices and both variables. In the words of Michael Svitak of the University of Michigan’s Transportation Research Institute, "Consumers respond very quickly to the changes in the price of gas. Specifically, when the price of gas goes down, so does their interest in fuel-efficient vehicles. This is especially the case if the change in the price of gas is rapid, as was the case this fall." Conversely, electric vehicles saw four months of record-setting sales in summer of this year, when oil prices spiked due to geopolitical volatility from Russia-Ukraine and the spread of ISIS through Iraq. But more recently, consumer aren’t only shying away from fuel-sippers, they’re also buying more light-trucks, SUVs, and other gas guzzlers. According to the Wall Street Journal, November 2014’s sales of light duty cars are down .1 percent from last year, but sales of light-duty trucks (including pickups, SUVs, minivans, and crossovers) are up 8.8 percent year over year. The Washington Post reported last month that, prior to the financial crisis, trucks almost always outsold cars, in some months grabbing as much as 59 percent of the market. During the recession and more recently, the industry has flip-flopped; cars are more popular as gas prices rose and remained high. But not in recent months. In September, the truck market share was 53.5 percent. In October, it was 53.6—the best sustained two-month stretch since 2005. This is one of the ways in which oil price volatility, and temporary lows in oil and fuel costs, hurt consumers. Right now, car buyers feel comfortable indulging their preferences for larger, less fuel-efficient vehicles—and gas prices are likely to stay (mostly) within a comfortable price range for the next few years. According to EIA’s Short Term Energy Outlook, retail gasoline prices will remain generally above $3 per barrel through 2015, only rising above $3 per gallon during the summer months. But few oil market analysts expect oil prices to stay low for long, and current market conditions could be setting us up for much higher prices later in the decade, as well as heightened volatility. People buying gas guzzlers today could come to regret the decision when the next international incident causes an oil price shock, or endemic high prices return in 2015.