Auto Outlook: Gas prices, car sales to take a fall

By AL SWANSON  |  July 1, 2012 at 5:30 AM
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What happened?

If you bought into the hype, gasoline should be costing around $5 a gallon for the Fourth of July holiday and sales of fuel-efficient cars should be peaking about now.

Reality check: Gas is around $3.40 a gallon nationally and could be $3 by the fall; sales of those electric and hybrid vehicles have stalled.

Regular unleaded was selling for a few pennies more than $3 a gallon in much of the state of Georgia at the end of June; the pump price was $2.90 at one filling station in Macon.

How did the "experts" get it so wrong.

Like everything else, blame the economy.

Demand for oil is down, production and inventories up and crude oil prices are falling. Add to that the luck of no major calamities or supply disruptions -- yet -- and you get cheaper gasoline.

"The market is suggesting gas below $3 [per gallon] by Halloween, and certainly by Thanksgiving," Tom Kloza of the Oil Price Information Service told USA Today recently.

That prediction was echoed by the American Automobile Association in Atlanta which sees pump prices trending lower.

"I think prices will continue to trend as they have," AAA spokeswoman Jessica Brady told The Atlanta Journal-Constitution. "I think we could dip below $3 in some areas. [But] I don't think we are going to see a below $3 average across the board."

With more money in consumers' pockets, potential auto buyers may be considering larger vehicles again, but car sales face more headwinds than prices of the vehicles and the fuel to operate them.

AlixPartners LLP, a Southfield, Mich., advisory firm, warns continued high unemployment and a disinterested younger generation of millennials and other young people will be a drag on vehicle sales for years.

The firm's 2012 Automotive Outlook estimates there 5 million fewer potential car-buyers today than in 2007 and that vehicle sales in the United States and Canada are unlikely to top 16 million annually until after 2015.

John Hoffecker, managing director and head of AlixPartners Automotive Practice, blames a generational shift that indicates -- unlike their baby boomer and generation X grandparents and parents -- there are "new drivers who are not even interested in getting a [driver's] license. The firm calls them "generation N" for "neutral about driving."

"It's long been a truism that if people don't have a job, they don't buy cars," he said. "Given lingering low employment in this country, plus the fact we estimate that in the last decade incentives 'pulled ahead' more than 18 million units of sales, we see true, underlying demand being a big issue for the industry going forward.

"Successful companies will be those that stop the old bad habits of yesteryear from creeping back into their systems while making aggressive, well-informed investments in product -- all the while recognizing that they're unlikely to get a whole lot of help from the economy."

The AlixPartners study, which analyzed data from 38 automakers and 233 automotive suppliers, found although the industry has boosted production, median profitability of vehicle and parts makers has been practically flat in North America. That means for every sales winner like Chrysler, GM and Ford this year, there has been a laggard.

"The last few years of steadily increasing volumes have benefited virtually all in North America, after a difficult period of restructuring. However, with possible contagion from Europe further weakening the U.S. economy, fast-changing consumer demographics further skewing underlying demand and the challenge of efficiency implementing global mega-platforms facing it, the North American auto industry, despite its current success, has its work cut out for it in coming years."

A bigger hybrid

Toyota is hoping to find a "sweet spot" in hybrid sales with the introduction of a 40 mile-per-gallon midsize Avalon sedan.

The front-wheel drive hybrid version of the Avalon is slightly smaller than the current Avalon, built on the same assembly line in Georgetown, Ky.

Toyota hopes it will appeal to eco-conscious buyers who may want a hybrid but need a family car.

The Avalon hybrid is powered by a 2.5-liter four-cylinder gasoline engine assisted by two electric motors that produce a combined 200 horsepower.

The nickel-metal hydride batteries can take the car up to 25 miles before the gas engine kicks on -- good for an EPA rating of 40 mph in the city, 39 on the highway and 40 mpg in combined driving. That's a major improvement over the base Avalon's 268-horsepower V6 rated at 21 mpg city/31 highway and a combined 25 mpg.

The Avalon hybrid weighs 97 pounds more than a standard Avalon and the batteries reduce the trunk space by about 10 percent from 16.1 cubic feet to 14.3 cubic feet.

Appeals court upholds EPA standards

The Obama administration scored a major victory last week when a three-judge federal appeals court upheld its 2012-16 fuel economy standards.

The 82-page ruling by the U.S. Court of Appeals panel in Washington rejected arguments by the state of Texas, the U.S. Chamber of Commerce and mining, agriculture, utility, energy and chemical industry interests, including the National Association of Manufacturers, that opposed the proposed rules to hike vehicle fuel-efficiency to 54.5 mpg by 2025.

Environmentalists hailed the upholding of a clean tailpipe carbon emission rule which they contend will help combat global climate change by reducing greenhouse gas emissions from motor vehicles. The ruling also upheld EPA's power to regulate emissions from smokestacks and other sources.

"Today's ruling by the court confirms the EPA's common sense solutions to address climate pollution are firmly anchored in science and law," said Environmental Defense Fund President Fred Krupp. "This landmark decision will help secure a healthier and more prosperous future for Americans. Today is a good day for climate progress in America and for the thin layer of atmosphere that sustains life on Earth."

Detroit's Big Three automakers and nine other car companies, including Toyota and Volkswagen, support the government-mandated corporate average fuel economy standards.

"We supported upholding 2012-16, since we are already building more fuel-efficient autos to meet these standards," a spokeswoman for the trade group The Alliance of Automobile Manufacturers told The Detroit News.

The new standards will limit tailpipe emissions and boost fleet-wide fuel economy to 34.1 mpg by 2016.

"EPA simply did here what it and other decision makers often must do to make a science-based judgment: It sought out and reviewed existing scientific evidence to determine whether a particular finding was warranted," the court said. "This is how science works: EPA is not required to re-prove the existence of the atom every time it approaches a scientific question."

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