High Gas Prices Help Automakers
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Deepa Seetharaman
March 15, 2012

Fire marshal Karen Alward thought of her 2008 Chevrolet Tahoe as a "resort on wheels" until gasoline prices changed her attitude toward the hulking SUV.

Tired of paying $80 to $100 to fill the tank, the 34-year-old Connecticut resident traded in the SUV this month for a gas-sipping Toyota Prius.

"I loved the Tahoe, but not the gas prices that came with it," she said.

The rising cost of gasoline coupled with maintenance on aging cars and trucks is pushing consumers to a place many of them have avoided for five years: a new car dealership.

Being helped by higher gas prices is a twist for an industry that was pummeled by a spike in fuel prices in the summer of 2008.

And while greater confidence in the U.S. economic recovery is helping to spur demand for new cars and trucks, analysts, dealers and auto industry executives point to another factor: Americans' need to swap older vehicles for more fuel-efficient ones.

"For folks who are kind of on the fence, it probably tilts them more to buy," Citi analyst Itay Michaeli said of higher gas prices.

Auto sales have outpaced even the most optimistic estimates, gaining 16 percent in February in their best showing in four years.

So far this year, fuel prices have risen about 17.5 percent to a national average of $3.83. In February 2011, it cost about $84 to fill the tank of a Ford Motor Co F-150 pickup truck, the best-selling vehicle in the United States. This week, it cost almost $100.

But big vehicles are not the only gas guzzlers. Older cars have big thirsts for gasoline, and the average age of vehicles on the road is up to a record 10.8 years, according to Polk Automotive.

Morgan Stanley analysts estimate that these vehicles get an average 18 miles per gallon. At around 14 miles per gallon in the city, the economics of the Tahoe did not make sense for Alward, who drives more than 350 miles a week for her daughter's softball practice.

While not everyone would want to trade an SUV, car or truck for a hybrid like the Prius, replacing it with a new or newer vehicle could mean big fuel savings.

From 2002 to 2011, the average fuel economy of vehicles sold in the United States improved 20 percent to 23.2 mpg from 19.4, according to consumer research firm Edmunds.com. In that time, average fuel prices more than doubled to $3.52 a gallon, government statistics show.

The fuel economy of 2012 models is more than 16 percent higher than in 2008, Edmunds.com said.

A 2012 Chevrolet Equinox crossover now gets 25.1 miles per gallon, up from 19 in 2008, according to Edmunds.com. At $4 a gallon, shifting to the 2012 Equinox could save a consumer driving 13,500 miles a year nearly $700.

(For a graphic on the possible savings from more fuel efficient models, see http://link.reuters.com/bex96s)

"After a while, especially if you have no warranty on the vehicle, the old car is practically nickel-and-diming you every day," said Jesse Toprak, an analyst with automotive research firm Truecar.com.

Better Mileage but Politics, Seasons Weigh

U.S. vehicle sales crumbled in 2008 when fuel prices shot past $4 a gallon and the economy sank deeper into the financial crisis. Average retail gasoline prices peaked at $4.11 in July 2008. At the time, General Motors Co, Ford Motor Co and Chrysler Group LLC relied heavily on SUVs and pickup trucks to bolster sales and profits.

Sales fell to 13.2 million in 2008 from 16.1 million in 2007. In 2009, they were 10.4 million, the lowest since World War Two after adjusting for population growth.

Morgan Stanley analysts noted that automakers now offer more than three times as many vehicles that get 35 miles per gallon or better than they did in 2008, among them the Ford Focus, Chevrolet Cruze Eco and Hyundai Motor Co's Elantra.

Thirty-five miles per gallon is apt to coax more U.S. motorists into buying new vehicles as spring and summer approach, bringing seasonally higher gasoline use and prices. It could become even more enticing if tensions persist in the Middle East, threatening production and exports and pushing prices higher.

"Gasoline prices are likely to strengthen further over the next month or two, and reach a national average of around $4 a gallon or higher in certain regions," said energy analyst Jim Ritterbusch at Ritterbusch & Associates in Illinois.

Analysts said that although fuel prices have less impact on auto sales than consumer confidence and jobs, they still factor into vehicle choices. During nearly every spike in fuel prices since 2003, dealers have sold more small cars and fewer pickup trucks, Barclays Capital analysts noted in a research note.

In addition to trading in the Tahoe, Alward's family bought a new Chevy Silverado pickup truck for towing and shopping. She expects to save at least $2,000 a year compared with the Tahoe.

"If gas prices go up, we'll realize even more and more savings," Alward said, adding jokingly, "My daughter will probably figure out a way to spend it."