Why $4 gas will cause less pain this time

Were you swearing under your breath at the pumps in 2008? Here's why it'll be easier to handle if prices soar again (and they probably will).

By Money Staff Jan 17, 2011 6:45PM

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

 

 U.S. News & World Report on MSN MoneyWhen 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.

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.

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.

 

More from MSN Money and US News & World Report:

VIDEO ON MSN MONEY

25Comments
Jan 18, 2011 10:41AM
avatar
He forgot another good reason.  When President Bush was in office, newspapers printed stories of high gas prices and reporters asked the President questions about what he was doing to lower gas prices.  Now with gas prices skyrocketing, there is silence.  Perhaps that is why newspapers are dying and journalists are no longer respected.
Jan 18, 2011 1:22PM
avatar

What a complete and utter crock.  A gas price hike like this article predicts will cripple the fledgling recover.y  And, nice headline - $4 gas and how to get by.  Then the article lists not one thing about how to get by.  Just, hey, hope you bought a more fuel efficient car the last time gas prices skyrocketed for no real reason other than speculation and stopped purchasing luxuries like food. 

 

MSN money is going downhill fast.  What a dumb article.

Jan 18, 2011 12:29PM
avatar
who is this article kidding?!  It still will hurt many people.  It's ridiculous that the oil companies are exempt from scrutiny, but then again, they 'own' many politicians.
Jan 18, 2011 10:28AM
avatar

except for the people who didn't get a new car and are still driving the same one they did in 2008.

 

 

Apr 13, 2011 3:56PM
avatar
I can't believe the premise of the article. If we can't afford $4 gas how in the Hello are we going to afford a new fuel efficient car. We are hearing the same kind of articles from you speculating what fuel prices will be instead of forcasting that this current rise in prices is going to destroy the economy for the middle class and send most of us into bankruptcy.
Apr 13, 2011 9:29AM
avatar
If we had a Republican president this article would have ripped him or her to shreds for putting us in this situation.  With a Democrat president we can live with high gas prices and they wont be so bad this time.  Give me a break.
Jan 18, 2011 3:19PM
avatar
The problem with $4 gas is not having to pay for gas to drive the car, so much as it drives the cost of EVERYTHING up.  Food and everything else is transported with vehicles, so if the cost of that transportation goes up, so does the price of the product.  Plastics are made from oil, as are medications, DVD's, TV's, and just about everything we use on a daily basis.  The price on all of that goes up too.  The economy CANNOT handle a 25% price increase in the cost of our basic necessities. 
BTW, the oil companies in this country only conrtol about 10% of world supply anymore.  Everything else is owned by overseas corporations or nations (like Russia or Saudi Arabia).   Welcome to Peak oil.  Welcome to the endgame.   Things are about to get really nasty, and then even nastier.

Jan 18, 2011 2:47PM
avatar
If gas prices hit $4.00 gas just watch the economy tank just like it did last time, most people haven't bought a small car or a new car of any kind, don't have the money. we are being ripped off and no one in Government will do anything to help.
Apr 13, 2011 11:52AM
avatar
The only reason there isn't more out cry is because Obama is in office, when the guy from Texas was in office and we were making his oil buddies rich this was covered every night. Just the  threat of drilling helped to bring prices down. There is no excuse for this, 4 dollar gas will wreck whatever recovery we were starting to see.
Apr 13, 2011 8:17PM
avatar
Another "puff" piece written by a true propaganda mill. Did you rely on models and theories as you write this from your ivory tower? Back in 2008 it hurt bad and it will hurt worse this time because way more people are out of work! That unemployment check if you're still getting one only goes so far!!!
Apr 19, 2011 11:58AM
avatar

A recovering economy boosted the price of gasolineWhat recovering economy?

 

Too many transparent news articles. The majority of the news media reflects the same philosophy the Federal Government has...American people are stupid and easily duped..

 

'Unemployment Down 8.9%' 
(over 21%)

 

'Inflation Holds 2.8%'

(over 10%)

 

'Housing Industry Rebounds'

(1 + out of 5 houses in Florida stand empty)

 

'Recession Bump Smooths Out'

(we're in a rapidly increasing Depression) 

 

One lousy green Bell pepper costs $1.49 in WalMarts. I'm glad I'm so old I don't need much food to survive.

Jan 18, 2011 11:19AM
avatar
Buy the major oil companies stock, it will go up w/ the rise in oil prices, and the nice dividend can pay for the increase at the pump.  If you can't beat em,and big oil has been around since the Rockefellers and has always been profitable, join em!
Apr 19, 2011 5:23PM
avatar
Wow. Gotta love the MSM. In 2008 $4 a gas was going to destroy the world as we knew it. People would have to decide between food and gas. DAMN THAT BUSH!!!

But now less than 3 years later, all of a sudden $4 isn't so bad. Why it will barely even be noticed by anyone. YEAY OBAMA!!

And the MSM wonders why it's almost dead.

You have ZERO credibility left.

Apr 19, 2011 5:28PM
avatar
Hey by the way, does this authror understand that cars are not the only things that use gas?

HELLO MCFLY? Anyone home?

Trucks use gas. And sorry moron, but you can't "downsize" a truck that carries goods across the open highway. Diesel at $5 will mean everything you buy that is delivered via truck - which is 90% of what you buy - will cost more. Food will cost more. Clothes. Electronics. Airplanes use jet fuel. Which means travel will cost more. More cost means less people traveling. Less people traveling will mean hotels laying people off along with places like DisneyLand and other tourist attractions.

And just wait until November when people in the north start getting their heating bills and it;'s 30% higher than this past winter. Guess nobody will mind though huh, because they bought a Honda Civic.

Is this really what journalism has become? Sad and pathetic.

Feb 2, 2011 10:44PM
avatar
Welcome to the real world! Depend on countries that dislike you and in the end we will get burnt.
We should be "drill baby drill" not sending the oil rigs somewhere else!

Apr 26, 2011 2:20PM
avatar
@ Someone (DontBuy)

Exactly. This author doesn't realize that other things require gas too. Another example would be our postal service. Postal delivery trucks use gas too. So what happens if gas goes up? Price of stamps goes up? Delivering things goes up? What about ships that deliver cargo? Imports and Exports? They use fuel and pardon my language but they use more f******* fuel than airplanes and cars combined. Just look at Port of Los Angeles or Miami. Only thing going down is our economy.

I don't know about all of you but if I have enough cash to buy a hybrid car, that cash is going to my grocery bill and bank account.
Jan 18, 2011 2:59PM
avatar
If gas gets anywhere NEAR $4/gallon, there will be a rebellion in this nation starting in the voting booth.  It's "hype" articles like this that give me pause about "freedom of the press".  What a stupid article.
Apr 29, 2011 3:35PM
avatar
THE ONLY SMART SPENDING I  NO OF IS NOT TO SPEND AT ALL.
Jan 18, 2011 3:25PM
avatar
Gas will hit $4/gallon again.  The question is when?   I've cut back my fuel usage ten years ago.  I thought $2.50/gallon gas was expensive, and did something about it. 

1. I traded in my 16mpg cars for 32mpg cars.
2. In nice weather, I ride a motorcycle that gets 60mpg.
3. I drive less.
4. I shortened my commute.
5. I bought energy stocks so I can make money off of those that drive guzzlers.

Bring on $4/gallon gas.  I'll still be spending less on fuel than I did in 2000.

Apr 30, 2011 10:47PM
avatar

how can a country that has led the world in the globalization of the economy be expected to revert back to a small-town economy?

 The taliban has come to msn

Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

SMART SPENDING

MSN Mobile: Go to msn.com in your phone's browser.