Why $4 gas will cause less pain this time

This post comes from Rick Newman at partner site US News & World Report.

When gas prices hit $4 per gallon back in the summer of 2008, America's drivers had a collective breakdown. No other single item affects the American psyche like gas prices, which are advertised on every street corner and magnified by the media every time they hit an uncomfortable threshold. No wonder car sales stalled, consumer confidence collapsed, and some motorists even mothballed their cars, switching to buses or bicycles to get around.

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Gas prices retreated during the recession, plunging all the way to $1.60 by the end of 2008 -- a much-needed break for consumers at a time when many other things were going wrong. But a recovering economy has once again lifted the price of gas above $3, an unusual spike during the winter months, when motorists typically drive less. With the global economy heating up -- especially in oil-thirsty China -- many forecasters expect oil prices to keep rising, bringing gas prices along with them.

The price of oil and all of its byproducts is notoriously hard to predict, especially since it depends on variables like currency-exchange rates and the activity of speculators making bets on the future. But many analysts expect oil prices to consistently drift higher as global demand rises, millions of new drivers take to the road in developing nations, and drillers exhaust cheap, easy-to-reach oil deposits.

U.S. pump prices may not soar toward European levels any time soon, but they could easily rise by 25 percent or more over the next several months, since they usually rise as driving picks up during the spring and summer. Executives at General Motors say they're prepared for $4 gas. Others think prices could go higher. On top of that, there are serious proposals in Washington to raise the federal tax on gas, to help pay down the mushrooming national debt.

The next gas-price spike, however, won't be quite as painful as the last one. Here's why:

Drivers have downsized. Before the 2008 spike, drivers had gotten lazy about fuel economy. Gas prices had barely crested $3 before 2008, with typical prices closer to $2 per gallon. Cavernous sedans and camper-sized SUVs had regained popularity. In 2008, according to J.D. Power & Associates, mid-sized and large cars accounted for 65 percent of all sales, with compacts and subcompacts making up just 35 percent.

Sixty-dollar fillups began to change buying habits. By the end of 2010, the share of mid-sized and large cars had fallen to 61 percent of sales, with smaller cars rising to 39 percent of sales. That might not seem like a huge change, but it's the most abrupt shift in car-buying habits since at least the 1980s. And it came during a time when there were some huge discounts on weak-selling SUVs like the Jeep Commander and soon-to-be-retired versions of the Dodge Durango and Ford Explorer. So some buyers probably figured they were getting such a good deal on a big car that it would offset the higher cost of fueling, even if gas prices were to spike.

Cars have smaller engines. Another trend has been the downsizing of engines, even in some redesigned vehicles that have stayed about the same size. That's happening thanks to turbochargers, direct-injection systems, and other under-the-hood technology that basically gets more pop out of a gallon of gas. The base engine on the new Toyota Sienna minivan, for instance, is a four-cylinder that averages 21 mpg and is cheaper than a more conventional V-6 option that gets lower mileage. The new Ford Explorer crossover won't even come with a V-8 option, like the old one did, and the V-6 mileage is 25 percent higher than on the old model. Data from J.D. Power shows that sales of cars with 4-cylinder engines has risen from 39 percent of all sales at the beginning of 2008 to 44 percent today, while sales of 6- and 8-cylinder cars have fallen.

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The same technology is making economy cars more appealing, too. Small cars like the Ford Fiesta, Mazda2, and Chevy Cruze have become hits not because they're cheap and get good mileage. Lots of cars do that. These diminutive standouts have earned praise because they're also fun and sporty, with surprising pickup for high-mileage cars. The arrival of fun economy cars is breathing new life into the small-car segment, which Americans tend to ignore except when they're worried about finances. And more gas-sipping technology is on the way, a good sign for small cars.

Hybrids have gathered steam. Electric cars like the Nissan Leaf and Chevy Volt (2011 North American Car of the Year) are getting all the attention these days, but hybrids averaging well over 30 mpg are far more practical and affordable for most drivers. There are nearly two dozen mainstream hybrids available, including the Honda CR-Z sports car, luxury makes like the Lexus HS 250h and RX 450h, and family vehicles like the Ford Fusion sedan and Toyota Highlander crossover. Overall, hybrids account for a respectable 2.4 percent of total sales, a share that has continually gone upward. With many more hybrids on the way, that trend is likely to continue. Toyota, for instance, plans a whole family of vehicles under its Prius nameplate, including a wagon coming later this year and a plug-in model due in 2012 that will take part of its power from a household outlet.

People are driving less. One phenomenon of the 2007-2009 recession was a sharp drop in the total number of miles driven by Americans. During prior recessions, driver miles flattened out briefly, but from 2007 to 2009 they dropped by an unprecedented 2.5 percent. Driving has picked up a bit since then, but driver miles are still well below the 2007 peak. Some of that is due to higher unemployment, fewer commuters, and less overall economic activity. But some families are getting by with fewer cars, and drivers have learned to combine trips and curtail their driving, to save money. For people who have learned thriftier driving habits, higher gas prices won't take quite the same bite out of disposable income.

The government has mandated better mileage. It's no accident that cars are getting more efficient, and it's not entirely because of consumer demand, either. Automakers might still be fomenting horsepower wars and boasting about size, except for tough government rules requiring a sharp increase in overall mileage by 2015. Those rules, issued under President Bush and then strengthened under President Obama, basically require aggressive new efforts to improve mileage much more than the ordinary evolution of technology would allow. So a big part of the reason that sexier compacts and thriftier haulers are even available is the automakers' need to field more efficient offerings throughout their entire fleets.

Some drivers, in fact, keep inching back toward gas guzzlers, as if the 2008 spike in gas prices is a distant memory. Despite the shift in car-buying habits, there's still a clear correlation between falling gas prices and sales of larger cars, and vice versa. To some extent, new technology is allowing drivers to think small while driving big, and sparing them from some of the tradeoffs that used to come with buying a thriftier car. But if gas prices rise much above $4 per gallon, some drivers may experience buyers' remorse all over again. And this time, if we're lucky, there won't be a nasty recession to drive prices back down.

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