Both Ford and GM claim Americans are rushing to buy their new small cars, but history suggests the trend won't last
Environmentalists and auto gurus have a maxim: When gas prices go up, car sizes should go down. The statistics I've seen tell another story: Americans don't like small cars as much as the media wants us to.
Last week, Ford reported its best first-quarter earnings in over a decade. The company claims that "higher fuel prices [are] causing a shift in U.S. segmentation toward small cars," like the Ford Focus. Cross-town rival General Motors also reported that "consumers are beginning to trade in larger vehicles for smaller, more fuel efficient ones."
If Americans have finally decided to go small, good for them. But recent history suggests the trend won't last. Although fleet-wide fuel efficiency has increased in the last few years, consumer preferences have shifted away from cars toward SUVs in the last 20 years. As this chart* shows, small car sales have declined much faster (minus 39%) than the relatively slow decline across all types of cars (minus 7%). Over this time, gas prices have shot up to $4.00/gallon, fallen to $2, and climbed back to nearly $4 again.
Higher gas prices are supposed to encourage people to buy more fuel-efficient cars, and all things being equal, the laws of physics dictate smaller cars are more efficient (same engine + less weight = higher fuel efficiency). But this graph shows the correlation between gas prices and small car sales is actually losing strength. In other words, even with gas prices rising steadily over the last ten years, people are actually buying fewer small cars.
This sounds unbelievable, but there's a simple explanation. Over the years, medium-sized cars (like the Nissan Altima and Toyota Camry) and large cars have gotten much more efficient than, and have significantly closed the efficiency gap with, smaller vehicles. Since 1990, small car efficiency (measured by miles per gallon) has increased 9.4%, compared to 21% for medium cars and 16% for large ones. Medium cars are now so relatively efficient that they lag small cars by only 2.8% in miles per gallon. Large cars went from being 20.5% less efficient in 1990 to 15.5% in 2009.
It should come as no surprise that large and small car sales declined in popularity while medium-size cars became even more popular, as this nifty chart shows (you'll have to click it to read it):
As SUVs have become more popular, the fuel efficiency of both medium- and large-size SUVs has increased about 33% from 1990-2009, and closer to 100% if you look at the period from 1975-2009 in the next chart. This is one reason why hulking SUV's like the Chevy Tahoe and Ford Excursion have become so popular while gas became more and more expensive.
Because of these relative gains in fuel efficiency, shifting consumer preference, manufacturer profit margins (e.g. SUVs have increasingly tended to be better-optioned than the average car, and options such as leather seats and navigation systems are often high-margin upgrades), SUVs have become more and more popular over the past 20 years, despite steadily-rising gas prices.
One more chart to drill the point home: In 1990, there were 74,000 large SUVs sold in the US. By 2009, that number was almost 2.5 million. Between 1990 and 2009, car sales decreased 7% while light truck sales increased 110%, but fleet-wide fuel efficiency actually increased slightly, about 2-3%, and the average low-end fuel efficiency number increased over 33%, despite the shift away from cars toward SUVs.
As recently as this week, Ford reported its best first-quarter earnings in over a decade, wherein they claim - presumably based on internal metrics - that "higher fuel prices [are] causing a shift in U.S. segmentation toward small cars." Ford also claimed that consumers are adding more options to smaller cars than ever before, which helps increase margins. If this is the case, perhaps we will finally see the beginning of the end of The SUV Era and America will finally turn European and embrace the small car.
* This chart shows total car (including wagon) sales and small car sales versus regular conventional gas prices over the past 20 years. Gas price data (via the Energy Information Administration) goes through early 2011, while the vehicle sales data unfortunately only goes through 2009. EIA uses a mid-year (6/30, apparently) measurement of gas price, but since crude prices - which account for ~70% of the price of gas - this year appear to be influenced by idiosyncratic factors such as widespread unrest in Libya, Syria, and Egypt, I used a simple average of monthly gas prices for the first four months of 2011 instead of the most recent number available. If I had used the April, 2011 data, the yellowish curve (and orange-ish regression thereof) would be shifted up to about $3.75.