The Value – Issue #6: Do Gasoline Prices Even Matter Anymore?

Welcome to The Canadian Black Book – The Value. Our goal is to provide our clients and partners with news, event updates, new initiatives and opinions from Canada’s trusted source for vehicle values and automotive insights. In this edition we cover:

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By Brian Murphy, VP Research & Editorial, Canadian Black Book

Gas prices have been a staple for dinner table conversations, and social media chatter across this country for years.  With gas prices recently approaching record levels, it has me wondering if it matters to our market less than they once did.  I feel like there’s an industry myth around how much fuel prices truly impact our business today.

Of particular interest, is understanding how pump prices affect vehicle values and vehicle sales, if at all.  Do steep fuel costs hurt thirsty vehicles at auction?  Do they lower their residual values?  Do they harm new vehicle sales?

According to Statistics Canada, the price of gas in the nation’s capital hit $1.336 /L back in April, which is just 4 cents short of the all-time record from June 2014 of $1.374.  This is 15 per cent higher than April of last year, and an impressive 33 per cent higher than April of 2016.  No matter how you slice it, we are at a high point for fuel prices.

What do consumers think about this?  Does it change their purchase intentions?  Annually IPSOS conducts a poll of Canadian car owners commissioned by Canadian Black Book (CBB).  This poll, conducted earlier this year, touches on many vehicle related matters, including consumer attitudes towards gas prices and vehicle shopping.   We recently asked: “If gas prices rise $0.25 per liter or more between now and the time that you will shop to replace your current vehicle, which of the following would you consider doing as a result.” A third of respondents indicated they would consider a hybrid.  Perhaps more interesting is that 29% said it would not affect their purchase decision at all.

Buying a hybrid, the number one choice in our poll, seems like a logical way to combat higher gas prices, with a proven technology.  But is it a smart investment?  Looking at the new car market we see the premium for a hybrid model is often around $5,000 over non-hybrids.  With gas at $1.33 that means you would have to burn around 3,800 litres less fuel over the ownership period, to recoup your additional purchase price.  If you’re only planning to keep the car for five years (or less) it will be almost impossible to earn that money back.  Given that hybrids usually don’t retain their value as well, the consumer will be challenged there too.  Not to mention, with a hybrid you may end up with less cargo capacity or forgo a folding seat.  There is the benefit of lower greenhouse gas emissions, but at the same time there are environmental question marks around the construction of the battery and the end-of-life management of the battery.  Hybrids may not be the silver bullet to save money here.

In 2008 we also had very high gas prices.  We passed $1.30 per liter for the first time.  Around that time vehicle values plummeted in the market.  Some vehicles dropped by more than 15 per cent, in a very short period of time.  Did high fuel prices cause this sell off?  Likely not.  If you recall, that was also the dark days of a financial crisis, so it is quite impossible to separate the effects of the two events.

If we look at CBB’s data (see graph) for retained values of 2-6 year old vehicles combined with Statistics Canada’s fuel price data, we see some interesting trends.  When fuel prices rose in 2011-2014, it really had no effect on the Full Sized Truck or the Full Sized Crossover market values.  Interestingly, Compact Car retained values strengthened significantly.  When fuel prices fell, the values for compact cars weakened and the trucks strengthened.

This suggests that in times of high fuel prices consumers may switch to smaller cars, while those hooked on trucks/SUVs are unlikely to change their buying patterns.  Currently the switch to SUVs and trucks is marching forward rapidly.  Now well over 60% of all vehicles are trucks, higher fuel prices don’t seem to be scaring those buyers into cars that are now more efficient than ever before.  Admittedly, there are many other factors at play in the market that affect price, but this data suggests fuel prices only have an impact on certain market segments.

In the decade since 2008, many changes in vehicles themselves have come about that have reduced the sting of higher fuel prices.  During that period (almost two product life cycles for some manufacturers) fuel economy has been improved.  More advanced transmissions, engine technology such as stop-start, cylinder deactivation and direct injection are widely deployed within the industry.  The use of more aluminum and high strength steel has helped to lower vehicle mass.  All of this has helped lower operating costs by lowering fuel consumption.  Plus there are more choices for consumers, with quite a number of hybrids, plug-in hybrids, electric vehicles, even few fuel cell options.  At least now if a consumer wants a greener choice, more exist.

As more of these technologies deploy and engines become more efficient, I propose that the price of fuel will matter even less.  From a purely practical standpoint, if you are only burning 4 or 5L/100/km you are much less likely to get upset if the price mysteriously moves up $0.11 as a long weekend approaches!

As I was writing this article, I reached out to a handful of vehicle remarketing professionals and asked – what impact the recent spike in gas prices had for them?  Were they seeing weaker returns on some vehicles?  Everyone I spoke to indicated it was hard to measure and they saw no negative consequences.

It would be foolish to suggest that consumers don’t care about fuel prices at all.  However, when we look at some recent history and the current growth of less efficient trucks and SUVs it appears that the impact of fuel prices on many aspects of car buying is not as significant as many people assume it to be.

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