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Saturday, August 20, 2005

The High Price of Gasoline

The gas crisis predicted by many has arrived, as well as a great transformation in American society. News stories about the high cost of gasoline are abundant in newspapers, with the Detroit Free Press having one every day. Here's a quote from one such Free Press article found here:

"I love my truck," Coates, a tow-truck driver, says of his 2004 Ford F-150, "but I've got it on a lease and I want to get rid of it now. It costs $100 a week to get to work and back. You want to have fun and you can't because of the cost of gasoline."

These are the words of armageddon for dealerships and American automakers. Bound by countract, owners who lease gas guzzling cars can at any moment trade in their vehicles for something less expensive, and more fuel efficient. The result will be gas guzzling trucks and SUVs stuck on lots gathering dust. I expect future lease clauses to either eliminate the ability to trade in your SUV or pickup, or dealerships to not offer trade in deals for SUVs and pickups.

Here in Britain, this just isn't news. People complain about long commutes, and wish for the government to have more comprehensive public transportation, but the fact remains that a family that has already budgeted a certain percentage of their income towards fuel purchases, if those expenses are already high and the percentage rise in price is low, it just doesn't matter as much when compared to the American dilemma. Americans are seeing their fuel prices increase by 50 percent over the course of a calendar year. The reason fuel is so cheap in America is not because America is a rich country and blessed with an abundance of fuel, it is because the American government does not apply high taxes to gasoline. In Europe, expensive gas is the norm because of taxes. In a sense, European governments have been weaning their populations off of oil for decades. Like America they have experienced a war in the Middle East to maintain fuel pumping, a war which they lost. This would be the Suez Canal crisis of the 1950s. If America loses in Iraq and is forced to deal with an Iraqi government that sets the price of oil as they see fit, we will undoubtedly see an American society forced to make due with smaller vehicles.

What does this mean for domestic manufacturers? It means evolve or die. Ford and GM are quite capable of making fuel sipping cars. Ford is the most popular marque in Britain. Many of the Europeans I have met were surprised to learn Ford was even an American company. The problem for Ford and GM will be taking their European vehicles and modifying them for American tastes. We're seeing attempts already: Ford has a decontented version of the European Focus built on an older platform for America, and GM is attempting to bring over Opels as Saturns. GM is really in trouble, because it will have to somehow take one European line of cars and make them fit over several different American marques.

As Americans are shoehorned into smaller cars, they will want higher quality smaller cars. If we look to the north of the American border at Canada, we find that the best selling passenger vehicle there is the Mazda 3. Why is that? Canada is a country very similar to America culturally, with similar roads and highways, and yet it has higher prices for gasoline. The cars sold in Canada are basically the same cars sold in America with a few exceptions and additions. The Mazda 3 is basically the highest quality sub-compact on the market. It's bigger than the high quality Mini Cooper, and it doesn't face competition from the European style Focus, Renaults, Peugeots, or Opels. By being the highest quality car in its class in a market segment that usually features decontented inexpensive cars, it dominates. And it will continue to dominate until other marques that specialize in high quality small cars enter the market to compete.

In other words, expect big changes in the American market VERY soon.

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