Rising Fuel Prices And Its Effect On The Automobile Industry
Many People May Opt to Buy a Car Instead of an SUV
When buying a car, potential buyers must consider the initial cost of buying a car and the ongoing costs of operating the car because cars are durable goods. These ongoing costs include fuel, insurance, repair, maintenance, depreciation, and financing. While these costs will differ across car owners, fuel costs will play a big part for most.
Prices of fuel will likewise differ across vehicles. The larger and heavier a vehicle and the greater its horsepower, the greater is its rate of fuel consumption. When gasoline prices increase, we expect that for a lot of buyers size and power will become less important features of a vehicle relative to fuel efficiency. Eventually, we would expect to see changes in the balance mix of models purchased. A family that is planning to purchase an SUV might just opt to buy a smaller, more fuel-efficient vehicle. You can use the CarPaymentCalculator.net to calculate your fuel budget and check how much you can save if you are buying a car instead of an SUV.
According to the Organization of Petroleum Exporting Countries (OPEC), the rise in the prices of fuel comes on the back of rising international prices as well as the fluctuations in the exchange rate of currencies for trading oil. Besides the high increase in crude prices, the fuel retail is also hurting the ordinary person after many state governments have increased Value Added Tax (VAT) to bolster earnings. The war in Ukraine has also contributed immensely in the rise of fuel prices all over the world.
Expensive fuel is making potential customers wary of buying new vehicles as slow demand is already playing absentee with the market. Now, many people are curious as to how gas prices affect new vehicle sales or market shares. There are studies that show that there is a shift from large sport utility vehicles (SUVs) to smaller crossovers. There is also evidence that new vehicle sales respond more to rising prices rather than falling prices.
Fuel economy standards tend to decrease the sensitivity of market shares to gas prices. A manufacturer can add technology to improve the fuel economy of the vehicles it sells and it can also adjust vehicle prices to encourage consumers to purchase vehicles with relatively high fuel economy. If the manufacturer does not change vehicle prices when gas prices drop, the lower gas prices would make vehicles with low fuel economy more attractive to buyers, thus increasing their sales.
Furthermore, a drop in gas prices could decrease the overall level of fuel economy required by the standards. Smaller vehicles have to achieve a higher level of fuel economy than do larger vehicles. This structure says that each manufacturer faces a different fuel economy standard that depends on the variety of vehicles it sells. Manufacturers selling large vehicles have a lower standard than manufacturers selling small vehicles.
The structure also hints that if low gas prices persuade a shift in sales to larger vehicles, the fuel economy standard each manufacturer faces will go down. As a result, we would expect low gas prices to suggest lower fuel economy standards and lower fuel savings caused by the overall program.
Now, is it advisable to buy a new vehicle in the midst of rising fuel prices? Well, everything cannot be decided based on the math. You will have to consider factors like what time of the day you drive or your need of the vehicle. If you have a marketing career, you would definitely need a car. The decision should always be based on usage.
