Not Enough Pain from $3 Gas

Gas prices still aren't high enough to spur the needed transformation of the U.S. auto fleet to much higher average fuel economy

by David Kiley

Aretha Mullins has been driving her 2002 Ford Explorer from her home in Ann Arbor, Mich., to her job as a bookkeeper at an insurance office in Southfield some 35 miles away for the past five years. That's a minimum of 70 miles a day, at least 350 miles a week, depending on what else she does.

Her SUV gets about 16 mpg, and she is spending about $3.30 per gallon these days. Her last fill-up cost her almost $75. If gas creeps up to $4 per gallon, her price at the pump for a full tank will be $90. If and when it hits that level, her daily commute will cost her in excess of $18.

"We bought the Explorer when discounts were really high and gas prices were still relatively low," says Mullins. "I like my Explorer, but I'm getting to where I want a new car and I'm going to be making a serious change."

What is the 48-year-old looking at in the car magazines? "Ford Focus, Honda Fit, Scion xB, which all get into the mid-30s [mpg] on the highway," she says.

This kind of deliberation over a new car purchase is taking place all over the country as gas prices again climb above $3. While White House and Presidential candidates are debating carbon taxes and other regulations that will compel automakers to build more fuel-sipping vehicles and improve the fuel economy, consumers like Mullins are already voting on which car to buy next.

The Shrinking SUV

Gasoline prices have surged more than 20 cents in recent weeks to a record nationwide average of $3.10 per gallon, surpassing the previous record of $3.07 per gallon set in September, 2005, according to the Energy Information Administration. As gas prices rise, owner loyalty in the large pickup and midsize and large utility vehicle segments drops, according to data gathered between February and April of this year by Power Information Network (PIN), an affiliate of J.D. Power & Associates.

Owner loyalty is measured by the percentage of owners in any given segment who trade for another vehicle in the same segment. [J.D. Power is a division of McGraw Hill (MHP), as is BusinessWeek.]

"We're seeing a broad, long-term—but gradual—movement to smaller vehicles," says Tom Libby, senior director of industry analysis at PIN. "For example, during periods of high gas prices over the past two years, we've seen movement from larger to smaller SUVs. However, the total SUV pie remains largely intact." Total SUV sales are still strong in large part because of the influx of car-based "crossover" SUVs that get better gas mileage and drive more like cars.

Additionally, sales of small vehicles, including cars and light trucks, as a percentage of total new vehicle retail sales, have risen from 26.3% in the first quarter of 2004 to 31.8% in the first quarter of 2007. That trend is due to consumer demand, which has prompted some automakers to enliven their small car offerings.

That's a start. But most consumers won't trade in their Ford Expeditions, Toyota Sequoias, and Chevy Tahoes until gasoline moves permanently north of $4 per gallon.

Costs to the Consumer

So how do we achieve higher fuel economy? President Bush said this week that he intends to issue an executive order of some kind forcing government regulators to impose higher fuel economy standards on the auto industry by the end of 2008—just as he is getting ready to leave office.

Previously the President said he wanted to see a 4% average annual fuel economy increase. GM executives estimated that move would cost the industry $114 billion between 2010 and 2017, including $40 billion for GM alone.

The aim of the Bush proposal is to reduce the country's gasoline usage 20% a year by 2017.