A Hurricane's Indirect Target: Motor City
http://online.wsj.com/article/0,,SB112554358424828788,00.html?mod=home_whats_news_us
Detroit's greatest fear is that drivers -- spooked by rising pump prices -- will shift their auto-buying habits, perhaps turning a cold shoulder to the SUVs and pickup trucks that have accounted for the bulk of the industry's recent profits.
The problem for the auto industry is that it can't switch its product lineup on a dime. It takes almost three years to develop a new vehicle. And in recent years, auto makers have put most of their technological advances into horsepower instead of fuel economy. The upshot: The fuel economy of the average U.S. vehicle has remained flat.
By JEFFREY BALL and NEAL E. BOUDETTE
Staff Reporters of THE WALL STREET JOURNAL
September 1, 2005; Page B1
Hurricane Katrina battered the Gulf Coast, but it could also slam another, inland spot: Detroit.
Even as the natural disaster sends gasoline prices soaring, the auto industry still is banking on the same sorts of products that have sustained it over the last decade, when fuel prices were relatively low: gas-guzzling sport-utility vehicles and pickup trucks. As a result, everyone from beleaguered General Motors Corp., which is rolling out a slew of new big trucks in hopes of restoring profits, to vaunted Japanese competitors like Toyota Motor Corp., is under threat.
The hurricane shut down about 10% of the nation's oil refining capacity. In response, the wholesale price of a gallon of unleaded gasoline for September delivery shot up yesterday to $2.65 on the New York Mercantile Exchange. That one-day rise of about 18 cents per gallon came on top of a 41-cent rise Tuesday. It may take a few days for the brunt of that increase to hit consumers at the pump, but typically the retail price of gasoline runs about 65 cents above the wholesale price. Taxes account for the bulk of the difference.
• Updated photos | Graphics: Hotspots | New Orleans Map
• Prioritizing: If you had to flee your home, what would you take? Join the discussion.
• U.S. Releases Oil From Reserve
• Question of the Day: How much impact will the hurricane have on the U.S. economy in the upcoming year?
• See complete coverage.
Already, pump prices had risen as much as 20 cents a gallon between Tuesday night and Wednesday morning in some places. According to AAA, the travel club, hot spots include New York, Denver and the auto industry's hometown, Detroit. At one station in the Motor City, a gallon of regular unleaded cost $3.49 yesterday evening.
For the auto industry, Katrina couldn't have come at a worse time. Well before the hurricane pounded the South, creeping gas prices had caused consumers to cite fuel economy as a mounting concern. Detroit's greatest fear is that drivers -- spooked by rising pump prices -- will shift their auto-buying habits, perhaps turning a cold shoulder to the SUVs and pickup trucks that have accounted for the bulk of the industry's recent profits.
GM, for one, has been counting on a new generation of full-size pickup trucks and SUVs, due out next year, to boost sales and return the company to the black. It is betting so much on these models, dubbed the "GMT-900," that earlier this year the company halted work on several new front-wheel-drive cars, which get better mileage, to speed up the launch of the new SUVs.
But on Tuesday, as the extent of Katrina's damage became clearer, GM executives began edging back from earlier optimistic forecasts about the GMT-900 trucks and SUVs. Now, they don't expect the new vehicles to beat the sales peaks of a few years ago because of the impact of rising gas prices.
"What we need to learn from what's happening right now is that we're fragile," says Lawrence D. Burns, GM's vice president in charge of research and development and strategic planning. Mr. Burns says oil prices could stabilize at prices lower than the current levels. "What concerns us is the volatility," he says. "We can't change things immediately."
Katrina is bad news for Japanese auto makers, too. To be sure, Toyota, Honda Motor Co. and Nissan Motor Co. already sell fuel-efficient small cars that are quite profitable -- unlike the Big Three, which typically have lost money or made very little on small cars. Yet Japanese auto makers, just like the Big Three, are relying more and more on large trucks.
For all the buzz that Toyota's gasoline-and-electric hybrid Prius has generated, the fuel-efficient car accounts for less than 5% of Toyota's U.S. sales. In July, the most recent month for which sales figures are available, Toyota sold more Tundra pickup trucks than it did Priuses, according to Autodata Corp., an industry research firm. And Toyota is spending millions of dollars to build a new plant to make full-sized pickup trucks in San Antonio, Texas.
Consumers already are getting spooked by rising gas prices. Barry Pitluk, a fund-raiser for a public television station in Sacramento, Calif., was planning to buy an FX45, a large SUV made by Nissan's Infiniti division. But after paying $3.04 a gallon Wednesday morning, he decided to keep his two-seat BMW Z3 a while longer. "I just don't think it's a good time to buy a new car with gas at this price," Mr. Pitluk, 47 years old, says. "Two dollars a gallon seemed really high, so this was sticker shock."
Mr. Pitluk isn't alone. Rising gasoline prices are approaching a "tipping point" in U.S. consumer behavior, Paul Sankey, a Deutsche Bank oil analyst, said in a research note published Monday. That's likely to induce consumers to drive less or use public transportation more. Over the longer term, he predicted, drivers will demand more efficient vehicles.
The problem for the auto industry is that it can't switch its product lineup on a dime. It takes almost three years to develop a new vehicle. And in recent years, auto makers have put most of their technological advances into horsepower instead of fuel economy. The upshot: The fuel economy of the average U.S. vehicle has remained flat.
Some auto makers say they're now trying to alter their mix of models and engines to emphasize fuel economy. DaimlerChrysler AG's Chrysler division, for example, has begun offering pickup trucks with its V-8 Hemi engines that are capable of shutting off four cylinders to save gas while cruising on the highway. Previously this feature was available only in cars like the Chrysler 300. Chrysler's Jeep Liberty is now available with a diesel engine that gets about 30% better mileage than gasoline-powered models.
Despite all the hand-wringing, there's no immediate indication that consumers will curb their fuel habits. Indeed, as Americans grow increasingly dependent on their cars, demand for gas is rising -- prices notwithstanding. Over the last four weeks, gasoline demand averaged more than 9.4 million barrels per day, or 1.2% above the same period last year, the U.S. Energy Information Agency reported yesterday. In 2003, the average U.S. vehicle traveled 12,210 miles, according to Federal statistics. That was up from 9,760 miles in 1983 -- a 25% jump over the two-decade period.
Even with the latest spike, gasoline accounts for a relatively minor chunk of consumer spending. As of Friday, the average American was spending 4.2% of his post-tax income on gasoline. That's still far below the peak of more than 7% reached during the early 1980s. Still, it was the highest percentage since the mid-1980s, Mr. Sankey noted.
Yesterday morning, Mary Saraco rushed out to top off her Subaru Outback at a low-cost gas station near her Bedminster, N.J., home. "I figured I better fill up before prices go up," the retired school teacher said. The small, independent station was selling gas for $2.61 a gallon. By the time she filled up, several cars were lined up to get to the pumps. "It was almost like back in the '70s," Ms. Saraco said.
--Joseph B. White contributed to this article.
Detroit's greatest fear is that drivers -- spooked by rising pump prices -- will shift their auto-buying habits, perhaps turning a cold shoulder to the SUVs and pickup trucks that have accounted for the bulk of the industry's recent profits.
The problem for the auto industry is that it can't switch its product lineup on a dime. It takes almost three years to develop a new vehicle. And in recent years, auto makers have put most of their technological advances into horsepower instead of fuel economy. The upshot: The fuel economy of the average U.S. vehicle has remained flat.
By JEFFREY BALL and NEAL E. BOUDETTE
Staff Reporters of THE WALL STREET JOURNAL
September 1, 2005; Page B1
Hurricane Katrina battered the Gulf Coast, but it could also slam another, inland spot: Detroit.
Even as the natural disaster sends gasoline prices soaring, the auto industry still is banking on the same sorts of products that have sustained it over the last decade, when fuel prices were relatively low: gas-guzzling sport-utility vehicles and pickup trucks. As a result, everyone from beleaguered General Motors Corp., which is rolling out a slew of new big trucks in hopes of restoring profits, to vaunted Japanese competitors like Toyota Motor Corp., is under threat.
The hurricane shut down about 10% of the nation's oil refining capacity. In response, the wholesale price of a gallon of unleaded gasoline for September delivery shot up yesterday to $2.65 on the New York Mercantile Exchange. That one-day rise of about 18 cents per gallon came on top of a 41-cent rise Tuesday. It may take a few days for the brunt of that increase to hit consumers at the pump, but typically the retail price of gasoline runs about 65 cents above the wholesale price. Taxes account for the bulk of the difference.
• Updated photos | Graphics: Hotspots | New Orleans Map
• Prioritizing: If you had to flee your home, what would you take? Join the discussion.
• U.S. Releases Oil From Reserve
• Question of the Day: How much impact will the hurricane have on the U.S. economy in the upcoming year?
• See complete coverage.
Already, pump prices had risen as much as 20 cents a gallon between Tuesday night and Wednesday morning in some places. According to AAA, the travel club, hot spots include New York, Denver and the auto industry's hometown, Detroit. At one station in the Motor City, a gallon of regular unleaded cost $3.49 yesterday evening.
For the auto industry, Katrina couldn't have come at a worse time. Well before the hurricane pounded the South, creeping gas prices had caused consumers to cite fuel economy as a mounting concern. Detroit's greatest fear is that drivers -- spooked by rising pump prices -- will shift their auto-buying habits, perhaps turning a cold shoulder to the SUVs and pickup trucks that have accounted for the bulk of the industry's recent profits.
GM, for one, has been counting on a new generation of full-size pickup trucks and SUVs, due out next year, to boost sales and return the company to the black. It is betting so much on these models, dubbed the "GMT-900," that earlier this year the company halted work on several new front-wheel-drive cars, which get better mileage, to speed up the launch of the new SUVs.
But on Tuesday, as the extent of Katrina's damage became clearer, GM executives began edging back from earlier optimistic forecasts about the GMT-900 trucks and SUVs. Now, they don't expect the new vehicles to beat the sales peaks of a few years ago because of the impact of rising gas prices.
"What we need to learn from what's happening right now is that we're fragile," says Lawrence D. Burns, GM's vice president in charge of research and development and strategic planning. Mr. Burns says oil prices could stabilize at prices lower than the current levels. "What concerns us is the volatility," he says. "We can't change things immediately."
Katrina is bad news for Japanese auto makers, too. To be sure, Toyota, Honda Motor Co. and Nissan Motor Co. already sell fuel-efficient small cars that are quite profitable -- unlike the Big Three, which typically have lost money or made very little on small cars. Yet Japanese auto makers, just like the Big Three, are relying more and more on large trucks.
For all the buzz that Toyota's gasoline-and-electric hybrid Prius has generated, the fuel-efficient car accounts for less than 5% of Toyota's U.S. sales. In July, the most recent month for which sales figures are available, Toyota sold more Tundra pickup trucks than it did Priuses, according to Autodata Corp., an industry research firm. And Toyota is spending millions of dollars to build a new plant to make full-sized pickup trucks in San Antonio, Texas.
Consumers already are getting spooked by rising gas prices. Barry Pitluk, a fund-raiser for a public television station in Sacramento, Calif., was planning to buy an FX45, a large SUV made by Nissan's Infiniti division. But after paying $3.04 a gallon Wednesday morning, he decided to keep his two-seat BMW Z3 a while longer. "I just don't think it's a good time to buy a new car with gas at this price," Mr. Pitluk, 47 years old, says. "Two dollars a gallon seemed really high, so this was sticker shock."
Mr. Pitluk isn't alone. Rising gasoline prices are approaching a "tipping point" in U.S. consumer behavior, Paul Sankey, a Deutsche Bank oil analyst, said in a research note published Monday. That's likely to induce consumers to drive less or use public transportation more. Over the longer term, he predicted, drivers will demand more efficient vehicles.
The problem for the auto industry is that it can't switch its product lineup on a dime. It takes almost three years to develop a new vehicle. And in recent years, auto makers have put most of their technological advances into horsepower instead of fuel economy. The upshot: The fuel economy of the average U.S. vehicle has remained flat.
Some auto makers say they're now trying to alter their mix of models and engines to emphasize fuel economy. DaimlerChrysler AG's Chrysler division, for example, has begun offering pickup trucks with its V-8 Hemi engines that are capable of shutting off four cylinders to save gas while cruising on the highway. Previously this feature was available only in cars like the Chrysler 300. Chrysler's Jeep Liberty is now available with a diesel engine that gets about 30% better mileage than gasoline-powered models.
Despite all the hand-wringing, there's no immediate indication that consumers will curb their fuel habits. Indeed, as Americans grow increasingly dependent on their cars, demand for gas is rising -- prices notwithstanding. Over the last four weeks, gasoline demand averaged more than 9.4 million barrels per day, or 1.2% above the same period last year, the U.S. Energy Information Agency reported yesterday. In 2003, the average U.S. vehicle traveled 12,210 miles, according to Federal statistics. That was up from 9,760 miles in 1983 -- a 25% jump over the two-decade period.
Even with the latest spike, gasoline accounts for a relatively minor chunk of consumer spending. As of Friday, the average American was spending 4.2% of his post-tax income on gasoline. That's still far below the peak of more than 7% reached during the early 1980s. Still, it was the highest percentage since the mid-1980s, Mr. Sankey noted.
Yesterday morning, Mary Saraco rushed out to top off her Subaru Outback at a low-cost gas station near her Bedminster, N.J., home. "I figured I better fill up before prices go up," the retired school teacher said. The small, independent station was selling gas for $2.61 a gallon. By the time she filled up, several cars were lined up to get to the pumps. "It was almost like back in the '70s," Ms. Saraco said.
--Joseph B. White contributed to this article.
posted by Marcel at 2:18 AM
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