Gasoline Prices and Used Car Supply Might Spell Trouble for SUVs

·        Gasoline prices are rising. Historical analysis shows that rapid gas price escalation tempers buyer enthusiasm for large vehicles.

·        The RVI Used Vehicle Price Index segment analysis shows that wholesale prices of sedans are increasing while SUVs are decreasing.

·        Higher fuel prices coincide with the rising supply of late model trucks and SUVs.

·        The used vehicle market predicts the financial performance of many automotive-related companies.

Just over two years ago, the national average price of regular gasoline was below $2 per gallon, but prices have risen dramatically in 2018, with regular gasoline inching closer to $3 per gallon, more than 50 cents higher than a year ago and 17 cents higher than March 2018.

Energy industry prognosticators forecast that the price of regular gasoline will rise 25 to 30 cents per gallon, putting it above a $3 per gallon national average during the summer driving season that begins on Memorial Day weekend. The cause? Geopolitical forces and production cuts by Saudi Arabia and Russia, coupled with rising global demands for crude oil that have altered the balance between supply and demand, allowing gasoline prices to increase.

The Connection

The used car market, through movements in wholesale prices among vehicle segments, has always provided early insight into changing consumer behavior. During the beginning of the Great Recession, vehicle values collapsed, especially for large trucks and SUVs, as gasoline prices soared and the credit crisis simultaneously crippled vehicle demand.

General Motors and Chrysler were caught flat-footed when soaring gasoline prices highlighted their lack of appealing small cars and over-dependence on the profits from large trucks. Former President Obama’s Auto Task Force negotiators were convinced that this would be a permanent fact of life for the auto industry and that $5 per gallon gasoline was on the horizon. So, they made General Motors and Chrysler ‘right size’ their capacity of large trucks and include more small and medium size passenger vehicles in their post bankruptcy strategies. The jettison of GM’s gas-guzzling Hummer brand, in particular, became the epitome of the Task Force’s mandates.

Stability, Recovery, Correction

As the wholesale market stabilized and began to recover in mid-2009, the stronger performers were traditional passenger sedans and small CUVs. Well into 2011, small late model sedans held their value, while large truck-based models depreciated more rapidly. In looking at the fleets of rental car companies during this same period, fleets were skewed to sedans, so they benefitted from low depreciation from 2009 through 2012. As gasoline prices fell and demand shifted to larger vehicles, though, the average monthly depreciation for rental cars more than doubled. Rental companies are now replacing sedans with larger truck-like models in their quest for lower depreciation. But the switch might be coming at the wrong time if the combination of higher fuel costs and greater large model supply accelerates depreciation.

History Often Repeats Itself

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.

Over the last four years, the small cars that were supposed to save the U.S. auto industry have languished on dealer lots as shoppers returned to bigger, more comfortable, lower mileage trucks. The shift to truck-like models has been so pronounced that Chrysler, Ford, and General Motors have all terminated one or more sedans from their line-ups. Most automakers have reduced current output of their remaining sedans to reduce dealer inventory as well. It wouldn’t be surprising to see these cuts being made just as gasoline prices are creeping up to a possible point where buyer preferences may again lean in favor of vehicles that offer lower operating costs, especially smaller CUVs and even sedans. 

Although we are early into a period of higher gasoline prices, it is happening at a time when a record supply of late model SUVs are coming off lease while the number of sedans running through auction lanes is declining due to falling sales since 2014.

While a month or so of data is too limited to declare a new trend, it is interesting to note that in April the wholesale values of almost all categories of sedans attracted active auction bidding and higher values compared to March 2018 and one year ago. In comparison, large SUVs and even pickup trucks saw a decline in wholesale values.

The Result

A combination of rising gasoline prices coupled with the rising supply of off lease vehicles could influence more shoppers to consider small SUVs or sedans, resulting in downward pressure on the values of big trucks and the opposite for smaller vehicles, including sedans. Keep an eye on this trend because the used car market has an excellent record of predicting the future, and that, in turn, impacts the financial performance of every business that buys, sells, finances, or operates a fleet of vehicles.

Maryann Keller is principal of Maryann Keller & Associates, a New York area automotive consultancy. Maryann Keller is also a former member of the two National Research Council studies on fuel economy and was a reviewer of the study of the same subject published in 2013.