Rising fuel prices generally lead customers to look for smaller cars. If prices rise more dramatically, they might consider cars that use alternate fuels. But if fuel prices shoot up, demand for new cars could drop at double-digit rates. This is a prospect that no vehicle manufacturer wants to consider.
The U.S. auto market could shrink 18% if gas prices hit $6 a gallon, according to TechnoMetrica's latest wave of the Alternate Fuel Tracker.
The first line of defense by consumers to higher gas prices would be to downsize from their current size vehicle. Exploring alternate fuels is only the second alternative.
Before the onset of the last recession, automakers sold about 16-million units each year.
The average volume for the past three years is approximately 12-million units per year. Higher gas prices could drive down demand and add to the financial troubles of the already vulnerable auto industry.
TechnoMetrica studied consumer reaction to two hypothetical price points for gasoline, $5 a gallon and $6 a gallon. The study was conducted in August.
The impact of $6 a gallon is dramatic — it would seriously affect nearly 60% of Americans. Over one-third (36%) said they would downsize to a smaller auto; nearly one in five (18%) wouldn't buy a vehicle; another 6% said they aren't sure.
The biggest beneficiaries? Subcompacts, which would see their share of market jump from 4% now to 13% at $6 a gallon, and compacts whose share surges from 15% to 25%.
The biggest losers would be SUVs, whose share would plunge from 23% to 9%. Pickups would also lose share (from 13% to 5%).
Five dollars a gallon hits nearly half (48%) of all Americans. As at the $6 level, over a third (36%) would downsize to a smaller auto; nearly one in 10 (9%) wouldn't buy a car if gas hit $5 a gallon; 3% aren't sure.
The demand grows substantially for subcompacts (4% to 11%) and compacts (15% to 29%). SUV demand takes an 11-point hit (23% to 12%) and demand for pickups drops eight points (13% to 5%).
At today's $3.70 a gallon, 84% would consider a traditional gas vehicle, 41% a hybrid like the Toyota Prius, 32% a natural gas powered vehicle like the Honda GSX, 21% a plug-in hybrid like the Chevy Volt, 17% a diesel vehicle, and 15% a pure electric vehicle like the Nissan Leaf.
The preference for traditional gasoline vehicles plunges from 84% at $3.70 to 64% at $5 a gallon. It falls further to 47% at $6 a gallon.
The demand stays relatively stable for the other alternate fuels at different price levels.
For example, 15% of Americans would consider an electric car at $3.70, 21% at $5, and 23% at $6.00. The desire for hybrid is also flat — 41% at $3.70, 47% at $5, and 42% at $6.
So what do all these data mean?
Consumers will "downsize" rather than buy vehicles that run on alternate fuel, if per-gallon gasoline prices were to climb sharply.
The vast majority of new car buyers do not want to try new fuels or power-train technologies. Cars remain the second-largest expenditures most consumers make and they don't like to take risks.
Smaller they understand perfectly. Hybrids, electrics, and diesels, less so.
Despite much publicity and incentives, GM has sold only 5,000 Volts so far. Gasoline prices have yet to reach the level where such alternative fuel vehicles are viable.
The upshot is a rational, coherent, and long-term energy policy would go a long way to stabilizing the price of oil, letting customers and carmakers alike plan future investments, product needs and purchases
• Mayur is president of TechnoMetrica Market Intelligence, which directs the IBD/TIPP poll that was the most accurate in the last two presidential elections.