Cheaper Oil: Back to Gas Guzzlers?

Crude prices are down more than $30 in a month. But consumers won't be buying big SUVs again, analysts say

By Moira Herbst

Oil prices are on the skids, down nearly $33 per barrel from a July 11 high of $147.27. Meanwhile, the national average of a gallon of gasoline has dipped by 30¢ in the past three weeks, now at $3.81. While analysts don't agree on where prices will go from here, there's a widespread belief that recent behavior changes—from driving fewer miles to buying smaller cars—are here to stay.

"Petroleum consumption won't all of a sudden start growing after 12 straight months of losses," says Tancred Lidderdale, senior economist for the Energy Information Administration of the U.S. Energy Dept. "Consumers have seen the high prices, and they're becoming wary."

There have been big shifts in consumer behavior (BusinessWeek, 7/23/08) in the past year in response to rising energy prices. Americans drove 9.6 billion fewer vehicle-miles in May 2008 than in May 2007, according to the Federal Highway Administration. Americans took 2.6 billion trips on all modes of public transportation in the first quarter of this year, almost 85 million more trips than in the same period last year, according to the American Public Transportation Assn. U.S. consumers are also purchasing compact cars at record numbers; the category accounted for a quarter of auto sales in July, up from 20% in 2003, according to Edmunds, which runs an auto industry Web site for consumers.

Possible Psychological Shift

For Americans to return to their gas-guzzling ways, they'd have to experience a dramatic and sustained oil and gas price drop, says Jesse Toprak, an analyst for Edmunds.com. "Gas prices would need to come down to under $3 a gallon and stay there for at least six months," says Toprak. "Consumers want proof that prices will stay low for a while." Analysts say consumers have been so burned by oil and gas price surges that in their minds, the era of cheap energy is over. "The changes we're seeing are permanent," says Fadel Gheit, senior oil analyst for Oppenheimer Holdings (OPY). "People are not going to rush to the dealer to buy Hummers again. The energy shock was beneficial in the longer term to our psychology."

The picture appears to be more complicated for investment in alternative energies. High oil prices encourage investment in alternatives, but quick up-and-down price movements tend to scare investors away. "Volatility makes the environment for investing a little more difficult," says Craig Jarchow, a partner at Pine Brook Road Partners, a New York private equity firm specializing in energy. "Price certainty over time is a good thing, but I don't see a lot of certainty going forward." Jarchow adds, however, he is confident oil prices will overall remain strong.

Herbst is a reporter for BusinessWeek.com in New York.