NEWS FLASH: Detroit Vulnerable When Fuel Prices Rise!

Lexus GS450h

Last July UMTRI released a study that documented the financial risks to Detroit automakers, and the risks to American jobs, of higher fuel prices. The study predicted that gasoline prices over $3.00 per gallon could lead to combined losses of $7 to $11 billion of profits for Detroit automakers.

Since that report, gasoline prices have risen 30-60% and spiked over $3 a gallon. Ford and GM have reported over $19.3 billion in combined losses. In addition, they have lost 4.4 points of market share since 2004.

When the report was released it was criticized by Detroit automakers. They cited the “implausibility” of such high gas prices. GM told the Wall Street Journal that our profit-per-vehicle estimates were too low. In fact, it was our estimates of the impact of gasoline above $3 per gallon that were low—the actual impacts on share and profits exceeded our predictions.

The myopia of the Detroit automakers about their vulnerability was clearly shared by many in the Detroit media. Last year, the Automotive News was the only Detroit-based media group that published (but only on their website) a story about our report. Now, the June 26, 2006 issue of Automotive News has a front-page story that is essentially a follow up to the 2005 story. Thank you, Automotive News, for covering this very important issue before your peers.

There is no satisfaction in being proven right about Detroit’s vulnerability to high fuel prices, especially since the cost of their vulnerability is being borne by thousands of our fellow citizens who are losing their jobs. Let’s just hope Detroit can see clearly now.

Walter is the Director of the Automotive Analysis Division of the University of Michigan Transportation Research Institute (UMTRI). He studies the adoption by consumers and automakers of new powertrain (electric, hybrid, clean diesel, fuel cell, alternative fuels), safety, and telematics technologies. Walter worked for General Motors for 9 years in sales forecasting, product development, marketing, and manufacturing (1993 found him on the floor of one of GM’s component factories). Prior to joining the University, he was Executive Director of Forecasting and Analytics for J.D. Power and Associates. He earned his doctorate in Economics from UCLA in 1983.

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  • Guest

    Turbo-lib dreams of higher taxes are about as probable as a mars landing. Oil is important to the economy and the answer to rising cost is improved technology of hybrids, and solar power. To bad Rafael you seem to dream of higher taxes.

  • rafael_g_seidl

    Richard –

    unlike you, I don’t have an emotional attachment to taxes either way. They are just one of a number of instruments available to getting the job done. They are no more a panacea than enything else but it is plain foolish to rule them out a priori. Better technology comes about because of changed economics and becomes established as mainstream only if those changes are preceived as semi-permanent. Too bad you don’t understand economics.

    Moreover, as I keep saying, higher taxes in one area need to be compensated by lower taxes in another. It’s about SHIFTING the tax burden such that consumers have to EARN tax breaks instead of simply stealing them from their children.

  • Guest

    The best way to force car manufacturers to make fuel efficient cars is to somehow increase the price of gas. The benefit from that should go to research for environment (before it’s too late). Everyone knows that fossil fuel is UN-renewable fuel and causes damage to the environment. If we’re not responsible for the environment that our children and our children’s children live in, who else?

  • jpick3

    Okay, higher taxes I believe would work in time, but there would still need to be more vehicles to choose from the complete this route — which could take years. And, of course, we need changes ASAP. I realize the political reality of the situation, but for goodness sake, why in the world isn’t there a far more aggressive increase in CAFE standards than there now is instead of hurting the average Joe until he has the money for a new vehicle? No one can tell me that the the big 3 doesn’t have the know-how to accomplish this with the improvement in technology that has occurred in the years since their fuel economy has improved in the least.

  • walter

    One SUV, one Pickup, one large van examples:
    Hummer H3 GVWR 8,600 lb
    Ford Super Duty Pickup GVWR 10,100 lb
    Chevrolet Express 12 Passenger Van 3500 Regular Wheelbase GVWR 9,600 lb

  • vincent.belovich

    Taxing gasoline is only a partial solution to encouraging consumers to buy more fuel-efficient models. Most consumers have a real choice as to which vehicle they drive, but less of a choice as to how far from work they may like to live. So a tax on the vehicle needs to be included as well–and it needs to be a BIG one.

    Someone who concsiously chooses to buy a Hummer should be allowed to, but they should take responsibility for their actions by paying for the externalities up front. These externalities are increased health care costs, DoD costs to fight for oil, pollution costs (acid rain, etc.), and global-warming costs (difficult to estimate, but nonetheless real). Today’s vehicles will spend a lot of time burning fuel on the roads during their lifetimes, so the damage they do should be paid for by the original buyer. The money made here could be used as tax incentives for people to buy the top 5 or 10 fuel efficient cars and/or for R&D. That way every automaker can attract consumers by making sure they build cars in the top 5 or 10 in fuel efficiency. This also gives them a constant goal to strive towards, which reduces their uncertainty in what consumers will want in the future.

    We should all keep in mind that during WWII, US manufacturers went from building their typical “widgets” to jeeps, tanks, airplanes, ships, rifles, etc. within a matter of 6-12 months or so. If we had that sort of leadership now, I bet every car, light truck, SUV and minivan could be hybrid within a few years. And hydrogen wouldn’t be too far behind….

    Maybe I’m just a partisan engineer…..but I would bet that if GM and Ford just unleashed their engineering staffs, they would be doing a lot better in a few years. They could easily pay for this R&D by just forgoing the top people’s bonuses for a year!

    The turbo-neocons who stick their heads in the sand and ignore the problems are just like the CEOs of Ford and GM–no vision, no leadership!

  • rafael_g_seidl

    Vince –

    one of the reasons German cars feature engines with substantially lower displacements than their US counterparts is that the vehicle license fee there is based on displacement, not vehicle value. France used to have a VLF based on vehicle weight. Arguably. the one based on value is the only one that is really technology-neutral.

    That siad, there is no reason not to make it sharply progressive, and combine it with rising fuel taxes. Regardles of which mix of measures you prefer, acceptance by the US electorate will hinge on concomitant income tax cuts for the less well-off. No-one should get a free ride, but neither should it become unaffordable to drive at all.

  • Guest

    Rafael, you are probably the one who doesn’t understand economics and it’s political ties. You probably have me hands down on environmentalist issues but you are dead wrong on taxes. If there is zero chance of enactment then you are the one emotionally tied to higher taxes for your environmental gain. The facts are huge Tax credits are already given for hybrids and solar and Congress has pushed for elimitation of gas taxes not more.
    I remain hopefull that increased investment in new technology and alternative fuels with gain eponentially in market share my company is actively pursuing both.

  • Guest

    Raise taxes so the idiots can continue mismanagment of our tax dollars. I don’t think so.
    Market forces will eventually fix this because China and India will continue to use more oil and before you know it it will be $5 a gallon. The stupid infighting will continue to leave use vulnerable. New Hampshire’s Sununu at a congressional hearing ” I don’t think a family purchasing a Minivan with 22MPG vs 28MPG is a national security issue” What leadership! A 27% increase in fuel economy would n’t be helpfull! Well since 1 out of every 7 barrels of oil in the world is used for US transportation I would have to disagree with Mr Sununu.
    Cafe is a joke-Dodge Magnum, Subura Outback, PT Cruisers are trucks to keep the company Cafe lower. I love these cars but give me a break. Classify them correctly.
    I think Toyota is going in the right direction. The Hybrid Camry finally allows a large family car for higher mileage vs power of the Honda Accord Hybrid.

    I feel much better after this little rant : )

  • rafael_g_seidl

    Jerry –

    (a) I do NOT advocate giving more money to Congress. 100% of any revenue due to any increase in fuel taxes should go to income tax credits. It’s simply a shift in how taxes are raised, NOT a change in the total amount.

    (b) The Dodge Magnum is a truck. The Subaru Outback is a wagon. The PT Cruiser is a compact car. By all means rant but rant correctly please.

    (c) As for CAFE, it’s a joke in part because the Big Three lobbied for and got a loophole related to E85: any FFV will be counted as running on gasoline half the time and on E85 the other other half (bogus assumption #1). When on E85, only the 15% gasoline are counted (bogus assumption #2). The ethanol is presumed free (bogus assumption #3) and its production is assumed not to require any fossil fuel (bogus assumption #4). It is because of this loophole that Detroit was able to build millions of additional trucks and SUVs without falling foul of CAFE or paying gas guzzler taxes.

  • Guest

    Vince is the only sensible one of you lot..
    If American manufacturers could do it before, they
    sure can do it now ,IF they only had the kick in the
    backside to DO it. There are enough low weight batteries now developed to make a SUPER hybrid
    MULTIFUEL vehicle ..

  • Guest

    exactly where do you come up with station wagon and subcompact in regards to cafe classification

  • chas-martin

    Nothing inspires innovation like panic. That was the conclusion Burt Rutan came to in his early years of aerospace design. And, the incentive to build highly efficient cars has never really experienced that level of sustained panic until now. It’s the designer’s responsibility to rise to fulfill the need. See: Intersectional Thinking in Auto Design.

  • Guest

    Over reliance upon low mileage vehicles makes the Big 3 vulnerable to high gas prices. Consumer Reports tested the Camry Hybrid and came up with 34 MPG (24/41), pretty good for a full sized sedan with zip. You will note the Big 3 has nothing on the market to even offer as competion.

  • Guest

    Ford’s 2Q loss was blamed on slow SUV sales.

  • racksjackson

    Fuel prices rises every time whether in India or any other country. Now important thing is that save Fuel if you want to use it for long time.

    I am explaining about How to Replace a burned-out headlight on your car. Cars will have one of two designs: On some cars, you replace only the small headlights inside the larger glass head lamp, and on other cars, the inner bulb and larger headlamp are one piece that must be replaced.

  • racksjackson

    Fuel prices rises every time whether in India or any other country. Now important thing is that save Fuel if you want to use it for long time.

    I am explaining about How To Change Your head lamp
    Step 1: Set Up
    There are two types of headlights: Old school sealedheadlamps and more modern component headlights with an unfixed bulb. Be sure to off-ramp your headlight switch in car.
    Step 2: Older Light: Remove Retaining Rings
    If your car has been a sealed headlight, remove the screws and molding around the headlight. Locate the 2nd retaining ring and remove those screws. This should be free the headlight.
    Step 3: Unplug
    Pull headlight softly forward and unplug the power cable attached to the back of the lamp.
    Step 4: Let There Be Light
    Plug new headlamp into power socket, restore the two keeping ring, molding and screws.
    Step 5: Component Headlights: Remove bulb
    If you have a component headlight, reach behind the headlight assembly and carefully remove the burned out bulb by rotating or unscrewing the socket.
    Step 6: Replace New Bulb
    Now Place new bulb into the socket, without touching bulb directly with your fingers.
    Step 7: Retighten Assembly
    Retighten the bulb fastener to the bulb assembly.