Lower Gas Prices No Help to Gas-Guzzlers

As carmakers push a shift to fuel-efficient models, sales of big SUVs and pickups are likely to remain down, even as fuel costs decline

by Matt Vella

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The recent drop in the price of oil isn't necessarily good news for the auto industry. Even though last summer's surge at the pumps caused sales of SUVs and trucks to drop, it is unlikely that there will be an equal sales rise now that prices have swung the other way.

Last week, oil prices dipped toward $50 a barrel, hitting a 20-month low that sent prices at the pump down to a national average of $2.17 for a gallon of regular. That drop, and speculation that prices could remain low, came just as the North American International Auto Show was wrapping up in Detroit, where the spotlight was on efficiency.

The dearth of gas-guzzlers at this year's show, which closed Jan. 21, confirmed that manufacturers' attitudes toward gasoline futures have changed—and their product plans along with them. General Motors (GM) showed a concept electric car, the Chevrolet Volt (see BusinessWeek.com, 1/7/07, "Chevy's Volt Has the Juice"), and DaimlerChrysler (DCX) puttered around in its Smart Fortwo, a Lilliputian, two-seat subcompact bound for U.S. roads early next year. Toyota, Porsche, and Ford showed that big, thirsty vehicles are sorely out of place among smaller, more fuel-efficient neighbors.

Tanks Soar and Sales Tank

At the same time, thanks in part to unseasonably warm weather in the northeastern U.S., oil prices continued marching toward a $40-something price. Government reports released on Jan. 18 of larger-than-expected inventories of crude oil and gasoline didn't help much either. Prices tumbled as predicted in early January by Standard & Poor's Investment Policy Committee, which also projected that a price break below $55 a barrel would only pave the way for a drop to the mid-$40s, possibly lasting for three to six months. (Like BusinessWeek.com, Standard & Poor's is a division of McGraw-Hill (MHP).)

News like that would have been welcomed with open arms last summer when U.S. auto manufacturers were still banking on large vehicles, notably truck-based SUVs like the Ford Explorer and Chevrolet TrailBlazer, to rake in sales with fat margins. But prices at the pump soared to over $3 a gallon and sales tanked. In June, for instance, Ford's (F) bread-and-butter SUV business was off 44.1%. Similar vehicle sales at Chrysler Group were down 40% and 19% for General Motors. Overall declines for the entire year were less severe, down 6.7% for light trucks, 9.8% for SUVs, and 10.2% for pickups according to Automotive News.

But could sustained lower gas prices in early 2007 change the fate of those big trucks and SUVs? Not likely. As far as analysts and auto executives are concerned, the drops are too little, too late.

Permanent Effects

"The fact is the makeup of models available has already changed," says Tom Libby, senior director of industry analysis at J.D. Power's Power Information Network, referring to the lineups of cars and trucks manufacturers are prepping for sale this year. "Regardless of gas prices, we're not going to see Explorer sales go back up to 400,000 annually. Never."

Indeed, the volatility of the oil market seems to have had permanent effects on manufacturers' game plans—and new product offerings reflect that. Ford and GM are both pushing a series of so-called crossovers, vehicles that mix SUV practicality with car-like handling and fuel economy. "The crossover segment is the sweet spot in the market now," says Libby. "We see it flourishing, not diminishing."

Compact cars, meanwhile, continue to grow in popularity. Market share rose from 27.9% in 2005 to 31.2% last year. During the same period, midsize vehicles dropped to 40.4% from 42.8% and large vehicles dropped to 28.5% from 29.3%. Compacts are also spending less time on dealer lots. According to J.D.