THE WALL STREET JOURNAL

Gas Prices Take a Backseat for Auto Makers

 

Car companies play down concerns over rising pump prices as they
launch more profit-driving SUVs, pickups


By CHESTER DAWSON / Jan. 10, 2017 5:30 a.m. ET


Auto makers, betting that rising gasoline prices won’t spoil America’s love affair with pickups and SUVs, are
increasing their exposure to a light-truck segment that let the industry down a decade ago.


Executives say it’s different this time. Today’s sport utilities and pickup trucks are lighter and carry smaller engines,
helping achieve better fuel economy than the gas guzzlers that once jammed American dealer lots.


“There’s some major differences,” Ford Motor Co. Chief Executive Mark Fields said in a recent interview, referring
to the current vehicle model mix. “We’re much better prepared as a company and in our product lineup to handle
that.”


 

Analysts expect pump prices to potentially rise to near $3 a gallon in 2017, a trend that could reduce spending power
for American buyers who increasingly opted for heavier vehicles in recent years. Key vehicles being launched at the
Detroit auto show this week, including an updated version of General Motors Co.’s Chevrolet Traverse SUV, are
responsible for a disproportionate portion of auto makers’ profits.


About 60% of the 17.5 million light-vehicles sold in 2016 were considered light trucks, according to Autodata Corp.
Pickups and SUVs make up more than half of Ford’s pretax operating profit in North America and two-thirds of
GM’s pretax operating profit in the region, according to a Citigroup Inc. research note in June.


Growing reliance on bigger vehicles mirrors a trend that stung domestic auto makers a decade ago. Ignoring
warnings that gasoline prices were creeping up, car companies were caught flat-footed when prices eclipsed $4 a
gallon, triggering a collapse in truck demand that drained cash reserves.


Gasoline prices averaged $2.14 a gallon last year, the lowest level since 2004, according to the U.S. Energy
Information Administration. The drop in gasoline prices over the past two years coincided with slump in crude-oil
prices after Saudi Arabia said in late 2014 that it would no longer curb output.


But in November the Saudis and other members of the Organization of Petroleum Exporting Countries reached a
deal to cut production, stabilizing crude prices above $50 a barrel. Since then, gasoline prices have risen steadily to
an average of $2.38 a gallon in the U.S.


“Prices this year are going to be considerably higher than in 2016,” said Tom Kloza, global head of energy analysis
at OPIS, a petroleum pricing consultancy. “They’re going to get to the point that people start talking about them
again,” he said, estimating the average U.S. price of gasoline will peak this year above $2.80 a gallon.


“If we see a spike in prices, there’ll be an immediate drawback in demand” for light trucks, said Ivan Drury, a Santa
Monica, Calif.-based senior analyst at Edmunds.com.


Auto makers aren’t buying it.


Ford on Monday said it will revive the Bronco SUV and Ranger small pickup trucks, a nod to a broader industry
expectation that the U.S. market has undergone a structural shift. While some auto makers are investing heavily to
revamp popular sedans—including Toyota Motor Corp.’s iconic Camry—most are scrambling to add light-truck
production capacity while paring back passenger-car production.


“It appears to me that it’s a permanent trend,” Fiat Chrysler Automobiles NV Chief Executive Sergio
Marchionne said Monday. The company has killed off its Chrysler and Dodge brand small cars and will sell a lineup
almost entirely of SUVs and trucks.


“People have abandoned the sedan as being a traditional mode of transportation,” Mr. Marchionne said. “If you can
afford something, you much prefer a SUV.”


Daimler AG Chief Executive Dieter Zetsche, who oversaw Chrysler’s operations in the U.S. until the unit was sold,
said there is a correlation between lower gasoline prices and higher truck sales. A spike at the pump could reverse
the trend, but Daimler doesn’t expect to see a near-term increase in fuel costs.


John Mendel, a high-ranking Honda Motor Co. executive, has worked to increase availability of popular crossovers,
including the CR-V, and the company’s Ridgeline pickup even as the compact Civic continues to sell well and
smaller cars are still more efficient for many buyers.


“We’re basically a nation of irrational truck users,” Mr. Mendel said.


—Adrienne Roberts and Mike Colias contributed to this article.


FUTURES AND OPTIONS TRADING INVOLVE SIGNIFICANT RISK OF LOSS AND
MAY NOT BE SUITABLE FOR EVERYONE. OPTIONS, CASH AND FUTURES
MARKETS ARE SEPARATE AND DISTINCT AND DO NOT NECESSARILY
RESPOND IN THE SAME WAY TO SIMILAR MARKETS STIMULUS. A MOVEMENT
IN THE CASH MARKET WOULD NOT NECESSARILY MOVE IN TANDEM WITH THE
RELATED FUTURES & OPTIONS CONTRACT BEING OFFERED. SEASONAL
DEMAND AND CURRENT NEWS IN COMMODITIES ARE ALREADY REFLECTED
IN THE PRICE OF THE UNDERLYING FUTURES.