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Marginal: What A Difference A Few Years Make

It wasn’t all that long ago that $1.50/gallon was seemingly expensive.

A reader recently drew my attention to something that I had written in a “Driven” review of the 2003 Toyota Corolla Type S regarding fuel efficiency: “and I got more than 40 mpg on the freeway run, which is nothing to sniff at when gas is at a buck and a half a gallon.” Yes, things certainly have changed in a rather short period of time.

A reader recently drew my attention to something that I had written in a “Driven” review of the 2003 Toyota Corolla Type S regarding fuel efficiency: “and I got more than 40 mpg on the freeway run, which is nothing to sniff at when gas is at a buck and a half a gallon.” Yes, things certainly have changed in a rather short period of time. Yesterday (this is being written the first week of January) oil hit $100 per barrel for the first time ever. While there will undoubtedly be fluctuations in the price of petroleum going forward, let’s face it: When I review the 2008 Corolla I certainly will be dealing with gas prices well above $1.50 per gallon.

This is an issue that is having profound effects on the auto industry, particularly the U.S. auto industry, which, for many years, has focused on deriving profits from large personal use vehicles, be they pickup trucks or SUVs. To be sure, there are people who actually require the cargo capacity of an 8-ft. bed on a regular basis, and there are families or groups of friends that need the ability to transport seven or eight people. Yes, there are people who do need these products. But how many could make do with something less goliath-like? How many owners of giant SUVs curse at the pump and long for the day when they’re able to get into something that provides better fuel efficiency? How many owners of pickups are going to figure that they really don’t need to have a vehicle that will be used to haul mulch in the spring and a Christmas tree in the winter?

There is a related issue. While it can be argued with economic certainty (yes, an admitted oxymoron) that the price-adjusted price of gas isn’t all that awful compared with earlier points in time, I’d argue that if you have a vehicle that gets an average 15 mpg and has a 31-gallon fuel tank, when gas is at $3.00/gallon, a $90+ visit to the gas station on an all-too-regular basis would even give members of the Trump family pause. Therefore, the likelihood that people will buy large vehicles as a matter of desire rather than a matter of require is slim—at most. Related to this is the fact that as one spends $90 on gas every couple of weeks or so, that is money that one won’t have to invest in a new vehicle, or if they are going to get into the showroom, then they’ll be checking out a vehicle that is less expensive than the vehicle being replaced was when it was new. Those $90 visits to the pump add up. Therefore, the manufacturers that have predicated much of their business on the ever-upward movement of purchase decisions will find that their plans are not panning out as planned. This has ramifications all the way down the supply chain. This results in one of those systems where small vibrations set into motion an ever-increasing amplitude: People who get laid off because they were involved in the production of large vehicles or components for same are not going to buy large vehicles, which means fewer sales, which can lead to more layoffs . . .

One problem is that there isn’t as much money to be made in small cars. Or at least that seems to be the common wisdom. The argument has it that Americans want big and if they have to go small, then they want accordingly tiny numbers on the sticker. Therefore, vehicle manufacturers can’t make a return on their investments, or they have to source their vehicles from someplace in Asia, which isn’t necessarily helpful vis-à-vis Americans who want to buy a new car (i.e., they don’t have the job in the assembly plant because the assembly plant is 6,600 miles away). One thing that has happened is that those who have the belief that they can’t economically make small cars in the U.S. produce small cars in the U.S. that are, in a word, a word that would be inappropriate to use here, and so customers who see and touch the crummy materials and experience the underpowered performance figure that these cars ought to be cheap . . . which then leads to (a) the belief that Americans will only buy cheap cars and (b) more cheap cars. While some people like to point to the MINI as a car that is small, not inexpensive (the MSRP including destination for the base Cooper is $18,700), and purchased, they fail to note is that there were only some 42,000 MINIs sold in the U.S. in ’07. To put things in perspective: Ford sells more F-Series trucks in a single month—a bad month. However, one assumes that those are 42,000 profitable sales.

By the way: the 2008 Corolla is manufactured in places like California and Canada, and Toyota sells some 50,000 in a couple of months. Corolla was the third best-selling car in the U.S. in ’07 (behind the Camry and the Accord). And I can only imagine that they make money selling them. 

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