I'll admit it. I'm a sissy. I like small cars. When I was in college in the late '80s, I drove a 1981 Chevy Chevette. Perhaps not the most reliable car I've owned, but when you're 18 and have your own set of wheels, you don't complain. Under ideal conditions, the Chevette's fuel economy would approach 40 miles per gallon, and even though gas prices were less than $1 a gallon, the savings were still mighty welcome, given my student's budget.
The Chevette was a product of the oil shock of the 1970s. From 1977 to 1981, manufacturers filled showrooms with small cars, and the average fuel economy of a new vehicle rocketed 41% in four short years. As a result, gasoline demand dropped, OPEC couldn't hold the cartel together, oil from the North Sea and Alaska flooded the market, and prices at the pump plummeted. For the next 25 years, SUVs and trucks took over the roads, and consumption of that cheap gasoline rose at an annual rate of 2.5%. You can guess what happened next: From 1988 to 2005, the average fuel economy of U.S. passenger vehicles actually fell from 22.1 mpg to 21 mpg.
Whenever I write about peak oil or the lack of refining capacity, I get a few reader responses that say, essentially, "You are underestimating the power of markets. High prices will cause people to conserve, thereby reducing demand." While I believe in the power of markets, I doubt that a fundamental shift in demand, like that of 25 years ago, is taking place -- at least not now, not at current prices.
A look ahead
To see the vehicles people will be driving in the next few years, I'm looking with great interest at the new cars coming out of the Detroit Auto Show. Do the automakers have entire fleets of hybrid vehicles rolling into the showrooms? Is General Motors (NYSE:GM) going to reintroduce a retro-cool Chevette to compete with BMW's Mini Cooper? Are the automakers going to tell consumers it's OK to have less than 240 horsepower in the family sedan?
Nope on all counts. For both the 2007 new models and concept vehicles, economy cars are in short supply. Vehicles with average fuel economy (again, currently around 21 mpg) outnumber vehicles with good fuel economy (more than 30 mpg) by about 2-to-1. Furthermore, there are very few extremely high-mpg vehicles on the drawing boards. For the next couple of years, it looks as though folks who want to save the planet will be limited to Toyota's (NYSE:TM) Prius or Honda's (NYSE:HMC) Civic Hybrid.
Muscle-car redux
Instead, the concept cars making big headlines this year are GM's reintroduction of the Camaro and Daimler Chrysler's (NYSE:DCX) Dodge Challenger. Both cars are obvious attempts to copy the raging success of Ford's (NYSE:F) new retro Mustang.
I think the return of the muscle car provides good reason to believe that 2006 is not the same as 1977. Back then, Baby Boomers were young and poor. Masses of small, fuel-sipping cars hit the mark. Now, the Boomers are older and richer. They want their cars to have comfort, safety, cargo space, and power. Boomer men want to remember that hot ride of their youth, whether it was a Mustang, Camaro, or Challenger. Boomer women, meanwhile, want to have space to carry the entire little-league team. Gas prices are no concern.
Conclusions
Thirty years ago, the auto industry proved that it could stop on a dime and change direction to meet market demands. Some folks might think the industry is being short-sighted by focusing on new SUVs and muscle cars. But I think the industry is building exactly what consumers are demanding -- large and powerful cars and trucks. Smaller, fuel-efficient, cleaner cars are available, but they remain the exception, not the rule.
Meanwhile, with the high gasoline prices caused by last year's hurricanes now forgotten, gasoline demand has returned and is trending higher than a year ago. Furthermore, the Energy Information Administration projects energy consumption in the transportation sector to increase by 1.8% a year through 2025. I don't doubt it.
Eventually, if peak oil comes to pass and gas prices really do reach $4 a gallon, the tide will eventually turn. However, until I see a new-vehicle lineup that could cause the average fuel economy U.S. cars to jump by 40% in a few short years, I will be content to keep my money invested in the oil patch.
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Fool contributor Robert Aronen owns shares of none of the companies mentioned, still drives a small car, and thinks that a retro Chevette would be a big flop. Please feel free to share your comments with him at [email protected].
