Friday, May 09, 2008

Economic signal of high fuel prices: consumers need to downshift on fuel usage

There are three economic signals embedded in higher oil and gasoline prices: 1) the economy is stronger than a lot of people are claiming, 2) there is a huge financial incentive for investment in development of energy alternatives, and 3) if consumers want relief they need to "downshift" and cut their usage of fuels by traveling fewer trips, shortening travel distances, and switching to more efficient transportation. I suspect that fuel prices will come down somewhat in the near future (June), but the economic signal for consumers to downshift will remain very strong from here on out, even as development of "green" energy alternatives progresses. Of course, just because the economic signal for a consumer downshift is there does not mean consumers will pay attention to it. OTOH, there is some evidence that consumers actually are starting to downshift their fuel consumption, notably the fact that gasoline demand in the U.S. grew at a much slower pace than the economy and population grew over the past year. Call it a nascent or developing trend.

It will be interesting to watch the sales trends over the next six months for hybrid vehicles, smaller high-efficiency vehicles, and larger less-efficient vehicles. It will also be interesting to see what kind of line-up comes out of Detroit for next year. With a weak economy, their own sales down, and persistently high fuel prices, eventually they will get and act on the economic signals blaring at them. It may take them another couple of years to fully "get it", but they undoubtedly will eventually respond to changes in their market.

-- Jack Krupansky

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