Gas prices that hovered around $3.15 per gallon last week, with expectations that they will pass $4 this year, could prompt some painstaking changes in the industry that supports Kokomo’s economy.
The upward creeping prices at the pump will likely lead to a boost in consumer demand for more fuel-efficient vehicles. The question is how American automakers will respond, said economist Michael Hicks, the director of Ball State University’s Center for Business and Economic Research.
Delphi Electronics and Safety in 2010 announced its intentions to invest as much as $89.3 million, plus an equal amount from a matching federal grant, to manufacture components for electric vehicle batteries in Kokomo.
And Chrysler Group last year announced more than $1 billion in planned investments in Kokomo, where it will produce transmissions for more fuel efficient vehicles.
The investments have been part of the companies’ ways to keep up with demands for better gas mileage.
The pressure comes on the manufacturers as they push themselves to meet federal Corporate Average Fuel Economy standards. Companies have until 2020 to average 35 miles per gallon among all the vehicles they make, under CAFE.
But when two vehicles that get 15 miles per gallon in the city or fewer rank in the top 10 for highest auto sales in the U.S. for 2010, there is little incentive for companies to invest in smaller vehicles, Hicks said.
In U.S., bigger sells better
The Ford F-150, averaging about 14 miles per gallon in the city, ranked No. 1 in auto sales last year. The Chevrolet Silverado 1500, at about 15 miles to the gallon, was No. 3.
“The F-150, I say every third Hoosier drives one,” Hicks said. “The problem is domestic companies have had less success with small vehicles. At $4 a gallon, we’re not going to see many Escalades, we’re not going to see Ford Explorers, far fewer F-150s.”
The larger-vehicle sales figures leave little incentive for Chrysler to steer away, for now, from the vehicles it puts its Kokomo transmissions into. Indiana Transmission Plants I and II in Kokomo make transmissions for about a dozen Chrysler vehicles, from Chrysler Sebrings, which get as high as 21 miles per gallon in cities, to Jeep Grand Cherokees, which get as low as 12 miles per gallon.
Hicks said there is no way of knowing whether companies, like Chrysler, will keep investing in the less fuel-efficient vehicles versus trying to compete with smaller cars, like the Toyota Camry, No. 2 in 2010 sales, or the Honda Accord, No. 4.
“I’m scared of gas prices going up now,” Hicks said. “It’s not just for Indiana, Michigan, Illinois and Ohio. It’s going to be tough because we have an industry right on the cusp of recovering. ... The fundamentals are now in place for them to go out and compete with Toyota, Honda and Subaru.”
The gas prices could get high enough that they could force people to greater extremes than simply trading their SUVs for compact hybrids, according to Patrick DeHaan, a senior petroleum analyst for gas price tracker GasBuddy.com.
Like in 2008 when gas surpassed $4 a gallon, consumers are likely to avoid using cars whenever they can, DeHaan said.
“Everyone has short-term memory when it comes to gas prices, and we already see a lot of people getting angry over $3 a gallon,” he said. “It’s not something we’re used to. Four dollars is the psychological barrier. That’s when we hear people start talking about alternate transportation, trading in their trucks.”
Where gas will take us
Automobile manufacturing is far from the only area of the economy that will feel the pinch from gas prices, Hicks said.
In the short-term, he said, low-income households will feel the effects as they try to compensate on the immediate costs. But in six months to a year, higher-income families will see the effects as the stocks they have tied up in industries affected by oil prices will drop in value, he said.
Transportation has already been dealing with the higher gas prices. Other business sectors, such as chemical manufacturing and asphalt or coal production, also are feeling the pressure because they consume large amounts of oil products, Hicks said.
Metal manufacturing revenues are also susceptible because so many of the producers supply to the automotive industry and other customers that will be directly hit by gas and oil prices.
If prices stay high enough for long enough, that’s when the retail industry will take a hit as consumers skip on shopping or dining out to compensate for what they paid at the pump that week, Hicks said.
DeHaan said there is little indication the gas-price climb will halt.
An increased demand for more fuel-efficient vehicles could put downward pressure on oil prices, but rapidly increasing global demand, especially in China, could push demand, and prices, back up.
“Oil demand in the last 10 years has doubled, at least,” DeHaan said. “We’re setting up a situation where it may continue to double, maybe in the next five years again. While [China] is the No. 2 oil consumer, in the next 10 years, they are poised to take over the United States because they are still an emerging country.”