Recent price trends have shown the U.S. average gas prices climbing to their highest level in two years.
If you’ve had to fill up recently, you may have noticed that it hit your wallet a bit harder than a few months ago. Gas prices are indeed rising again, nearly topping $3.00 per gallon on average. That’s a far cry from the average price of around $1.75 per gallon at the beginning of 2016. In just the past two months, gas prices have risen dramatically, and with the summer driving season set to begin, it’s unlikely they’ll fall again anytime soon.
So why is this happening? Maryann Keller, an industry analyst with New York firm Maryann Keller and Associates, points to recent production cuts and rising demand. Saudi Arabia and Russia, in particular, have cut production, and greater need for crude oil has shifted the balance of supply and demand. As a result, fuel prices are rapidly increasing, and that’s a problem. Here in the U.S., cheap fuel prices has led to a proliferation of larger, less fuel efficient trucks and SUVs.
This also follows in the wake of recent decisions by Ford, General Motors and Fiat-Chrysler to shift away from small cars toward larger SUVs. Ford, for instance, is killing nearly all its car models except the Mustang. General Motors is poised to kill the Spark and the Sonic, and FCA jettisoned the Dodge Dart and Chrysler 200 in favor of focusing on SUVs, primarily those within the Jeep lineup. Currently, that makes fiscal sense, as crossovers have enjoyed a sales renaissance and economy cars have languished.
Dealer inventory may also affect customer buying habits
The question at play here is whether such rapid fluctuation in gas prices will chill customers’ interest in big SUVs and trucks. However, it’s not just gas prices that may affect that decision. Keller writes, “The used car market, through movements in wholesale prices among vehicle segments, has always provided early insight into changing consumer behavior.”
During the Great Recession, the used car market was flooded with large, inefficient SUVs as people scrambled to downsize in the wake of rising gas prices. Now, we also have a record supply of SUVs going “off-lease” – low mileage vehicles that people are trading in at the end of three years or so. Having so many used SUVs on the market affects the depreciation of new ones as well. If people shop for new SUVs knowing that their values will tank in one or two years, they may lean back toward smaller crossovers and maybe sedans.
Naturally, it’s too early to say whether the recent trend in prices will hold through the end of this year, or whether it will have a profound effect on the type of cars we buy. However, Keller points out that we have been here before, and not that long ago:
“This wouldn’t be the first time that dramatic changes in gasoline prices were quickly reflected in car buyer behavior. It also happened in the mid-to-late 1970s after the oil embargo when small cars were in high demand. Yet, by the end of the 1980s, the U.S. had an oil glut that underpinned the popularity of minivans and encouraged Chrysler to acquire American Motors for its Jeep division early into the SUV’s revolution.”
Sedan wholesale values rose while SUV values fell
In April 2018, Keller points out that sedan wholesale values actually attracted higher values than their SUV counterparts. On the whole, SUV wholesale and residual values fell. Will that spell trouble for SUVs in the not-too-distant future? The fact that SUV sales are sensitive to fuel prices is nothing now. Although, given the recent spike, our summer romance with huge SUVs may be coming to an end. As large and imposing as they are, taking a Toyota Land Cruiser and its 13 combined MPG to the local gas station to fill up may have some reconsidering their purchase decision.