The US Improved Economy: Fuel Prices and Gas-Guzzle Sales | Free Essay Example

The US Improved Economy: Fuel Prices and Gas-Guzzle Sales

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Topic: Business & Economics
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Introduction

The United States is the nation with the highest number of vehicle ownership per driver. The country with the second largest number of personal vehicles is China, which has 69 vehicles for every 1,000 citizens, compared to 820 registered vehicles for every 1,000 US residents (World Bank, 2014). One unique trend in US car ownership is the preference for SUVs and pickup trucks. Sallee (2011) documents that since the 1980s, minivans and SUVs began supplanting station wagons and sedans as the modal family car.

Over the 1990s, SUVs displaced higher-end sedans as the favorite personal vehicle for Americans and today they account for about 50% of the personal vehicle market. This increase in market share has occurred in spite of these vehicles being huge gas-guzzlers since they give less than 22 miles per gallon. However, the auto industry has been experiencing a decline in the sale of gas-guzzlers since 2005.

The decline has been blamed on the economic problems experienced by the US as well as the rise in fuel prices. Isidore (2014) notes that the auto-industry in the US has recently witnessed a significant rise in the sale of gas-guzzlers while there has been a marked drop in the price of fuel and an improvement in the US economy during the same period. This paper will set out to assess which of these two factors has led to the reigniting of America’s love affair with the gas-guzzlers.

Fuel Prices and Gas-Guzzle Sales

A report by the CNN reveals that there has been a spike in SUV sales since October following a decline in fuel prices (Isidore, 2014). During this period, fuel prices all over the US moved to below the $3 per gallon mark. At the same time, the sale in SUVs and pick-up trucks increased dramatically. The Fiat Chrysler experienced a 52% sales increase while the Jeep SUV gained 36% in the same month.

Isidore (2014) attributes this rises to the decline in fuel prices. This observation is supported by an analysis of vehicle purchase trends in the US. According to Newman (2008), the car-buying patterns and driving habits of Americans are affected by the fuel prices. When the gas prices reached $4 per gallon in 2008, the sales of the biggest vehicles fell by over 20%.

According to Newman (2008), even the big three carmakers in the US acknowledge the impact that fuel prices have on the sales of SUVs and pickup trucks. While gas-guzzlers are by their very nature not fuel efficient, Americans are willing to overlook this fact as long as the fuel prices are considerable. However, when the fuel prices increase beyond a certain threshold, consumers look for fuel-efficient alternative.

Halliday (2008) noted that the inability by the US motor giant GM to enjoy high sales of its Hummer brand between 2006 and 2008 was connected to oil prices. As the price per gallon rose, most buyers crossed this huge guzzler off their list of prospective cars to buy. Inversely, when the fuel price moves below the threshold, American consumers are willing to purchase their gas-guzzlers. Flint (2009) admits that sales of the fuel-efficient vehicles slow when fuel prices dip.

A look at the vehicle advertisement trends over the last decade highlights the importance of fuel prices. Automakers in the US invest a lot of effort in the development of different SUV brands. This focus on gas-guzzlers is because the big carmakers in the US derive most of their profits from the sale of large sport-utility vehicles and pickup trucks. New SUV models are therefore being produced each year to entice consumers to buy these vehicles. To gain a competitive edge in the auto-market, carmakers have been working on increasing fuel efficiency even for the SUVs. Naughton and Crowley (2010) note that most advertisements tout gas mileage as the major selling point. Due to the high gas prices, consumers are attracted to cars that consume less fuel. Without fuel price limitations, Americans would certainly choose to drive SUVs and pickup trucks.

Gas-guzzlers are the vehicle of choice of many American drivers. The fact that the government has to engage in policies aimed at encouraging its citizens to purchase fuel-efficient vehicles underscores the great love that Americans have for huge fuel-guzzlers. These vehicles offer many advantages that American drivers enjoy. The huge size and great horsepower provide the speed and stability desired by many drivers.

Flint (2009) confirms that many Americans desire to drive gas-guzzlers. The only reason why most do not drive these cars is the government disincentives aimed at steering consumers into making fuel-efficient choices. For example, high fuel taxes and high taxes on big engines increase the purchase cost and operating cost of the gas-guzzles. Flint (2009) reveals that the government sometimes imposes higher taxes on gasoline to push up the price and therefore dissuade consumers from buying these cars. However, when the gasoline prices are low, there is no disincentive and the Americans to purchase these vehicles.

Improved Economy

The performance of the US economy has an effect on the car purchasing trends of Americans. Newman (2008) observes that a failing US economy results in a decline in vehicle sales. This decline is not limited to gas-guzzlers but all kinds of vehicles. Auto sales during the recession declined so dramatically that some of the major US carmakers were forced so seek government bailout or face total collapse. The past year has seen the US economy strengthen significantly. When the US economy is performing well, consumers have more money to spend on commodities such as vehicles. People are able to afford the expensive gas-guzzlers available on the market.

As such, the current rise in SUV sales observed by Isidore (2014) can be attributed to the good performance of the US economy. Undoubtedly, there is a relationship between the US economy and the ability of Americans to buy the expensive gas-guzzlers. However, this does not explain why the spike in SUV sales has only been observed following the marked decline of fuel prices. Elwell (2013) reports that the US economy has recovered significantly from the severe economic recession of 2007-2009. However, the increase in SUV sales did not improve dramatically to reflect this economic performance.

The economic performance of the country also affects how much people are willing to dedicate to fuel expenditure. When the country has a strong economy, people enjoy higher incomes and they can afford to use more money on their fuel. However, during the recession, the expendable income of individual is lower and in such situations, cars that consume less fuel might be preferred to gas-guzzlers. This argument is supported by the fact that auto sales were at their lowest during the 2008 financial crisis. While there was a decline in sales for all cars, the luxury cars and gas-guzzlers were worst hit.

Newman (2008) admits that as Americans struggled with the financial crisis, there was little incentive to buy cars that consume a lot of fuel. Instead, most people moved to fuel-efficient vehicles that could give more miles per gallon. However, when the economy is doing well, fuel efficiency is not a primary consideration for many Americans. While it is true that people are less likely to consider fuel prices when the economy is good, Americans are conscious of their fuel expenditure. When fuel prices are low, a consumer can justify purchasing a vehicle that is not fuel-efficient. However, with high fuel prices the same purchase is unjustifiable.

Conclusion

The SUV and pickup trucks market has been shrinking in the US over the past 6 years. However, the market has experienced growth in the last few months. This paper set out to argue that fuel prices are the cause of this growth. It began by highlighting America’s love affair with gas-guzzlers. It then moved on to show the relationship between the sale of large SUVs and fuel prices. From the paper, it is clear that oil rises have contributed to the rejection of guzzlers by Americans. The high fuel prices have created an incentive for Americans to switch to more fuel-efficient models over the decade. However, the decline in gas prices over the recent months has led to resurgence in the interest in gas-guzzlers by many Americans.

References

Elwell, C.K. (2013). Economic Recovery: Sustaining U.S. Economic Growth in a Post-Crisis Economy. Washington, DC: Congressional Research Service.

Flint, J. (2009). Low Gas Prices Dream and Nightmare. Ward’s Auto World, 45(1), 40-41.

Halliday, J. (2008). Hummer bummer: GM wants out of guzzler game. Advertising Age, 79(23), 1-2.

Isidore, C. (2014). Cheap gas reignites America’s love affair with gas-guzzlers. Web.

Naughton, K., & Crowley, P. (2010). Newsweek, 143(26), 38-39.

Newman, R. (2008). Toyota’s Next Turn. U.S. News & World Report, 144(17), 40-42.

Sallee, J. (2011). The Taxation of Fuel Economy. Tax Policy & the Economy, 25(1), 1-37.

World Bank (2014). Motor vehicles per 1,000 people. Web.