High Gas Prices Are Here To Stay
Joann Muller, 05.17.04, 6:00 AM ET
DETROIT - Americans have grown accustomed to short-term spikes in gasoline prices (usually right before the summer's peak driving season begins, it would seem). They shrug it off, fill up their big sport utility vehicles at $2 per gallon and then drive away from the pump comforted in the knowledge that gas prices will come back down eventually
But with global demand for crude oil rising, there's reason to argue that higher gas prices are here to stay.
Global demand is up 3.5% this year, driven by explosive economic growth in China and other emerging markets, and a surprising surge in demand in the United States. Coupled with volatility in the Middle East caused by the war in Iraq, crude oil prices have soared above $41 a gallon. For U.S. automakers, there's a touch of irony in all this. General Motors (nyse: GM - news - people ), Ford Motor (nyse: F - news - people ) and DaimlerChrysler (nyse: DCX - news - people ) are happily rushing into China to take advantage of that country's economic boom and get on the ground floor of its burgeoning auto industry.
But the faster they grow in China, the tougher it is to make a buck back home. Consider what will happen to sales of those big, profitable SUVs in the United States, for instance, if Chinese auto sales, currently at about four million units, hit ten million as expected, driving up oil prices even higher. "China is importing so much crude oil, we'll never see $20 a barrel again," says longtime auto industry analyst Maryann Keller.
Although there are other, more immediate reasons for today's higher gas prices, John H. Lichtblau, chief executive of the Petroleum Industry Research Foundation in New York, agrees that Chinese demand is helping to drive up the price of crude oil worldwide. "Their growth rate in oil consumption is rising very rapidly, and their domestic oil production has leveled off. So the entire increase has to come from abroad. It's already a factor," he says.
Indeed, sales of big SUVs fell in April, a sign that higher gas prices might be hurting automakers' sales of high-profit trucks. And inventories are rising. Automakers had about 100 days' supply of unsold big SUVs in April--about 30 days above normal. And full-size SUVs sat on dealer lots an average of 68 days last month compared with just 50 days a year ago, according to Power Information Network, an affiliate of J.D. Power and Associates.
One month doesn't make a trend, of course, but the executive editor of Kelley Blue Book, a vehicle information guide for consumers, thinks buyers' attitudes are changing. "Many new car buyers are opting for vehicles that are more fuel-efficient than what they originally intended on buying," says Charlie Vogelheim. "We are seeing this manifest in cars with smaller engines, with buyers choosing a two-wheel drive vehicle instead of four-wheel drive and just a smaller class of car altogether." Other surveys show growing consumer awareness of hybrid electric vehicles and clean diesels.
(Ford Chief Executive Bill Ford Jr. acknowledged the growing interest in fuel-efficient cars last week; we have a review of his new hybrid SUV today.)
Still, while rising demand for oil should be a cause of concern long-term, economists say the current spike in U.S. gas prices is just that--a spike caused by unusually tight supply.
Gas prices have risen about twice as much as crude oil prices, says Ronald Gold, who works with Lichtblau at the Petroleum Industry Research Foundation. That's partly due to changes in environmental regulations for gasoline in some states, which have limited imports. Also, like most industries, refineries are trying to keep their own inventories tight to boost efficiency. "When you have unhappy surprises," Gold says, "there's not much of a cushion to absorb that, other than price."
http://www.forbes.com/business/2004/...m_0517gas.html