Price of Fuel Remains Big Factor in Car Market

If fuel prices exceed $4 per gallon by 2013, it particularly will affect residual values of mid-compacts and premium fullsize SUVs, an ALG research report says.

That’s because demand for vehicles in those two segments are most influenced “positively and negatively” by what people pay at the pump, says Matt Traylen, chief economist for ALG, a firm that forecasts residual values, largely for the leasing industry.

ALG’s new research report quantifies the major supply and demand factors contributing to 36-month residual predictions.

“Despite the recent drop in oil and gas prices, we are maintaining our long-term gas-price forecast of over $4 per gallon in 2013,” Traylen says.

Still, crystal balls tend to fog up when it comes to predicting future fuel prices. Although those prices affect vehicle demand, accurately predicting them can be elusive.

“Gas prices are the biggest drivers of the market,” Traylen says at a recent National Remarketing Conference. Yet, those prices can yo-yo. “There is tremendous volatility,” he says.

That makes it hard to predict future vehicle values. Fullsize SUV residuals tend to rise when gas prices fall and drop when fuel prices climb. The opposite is true for smaller, more fuel-efficient vehicles.

Demand in the mid-compact segment, which includes hybrid-electric vehicles, spiked in 2008 when gas prices hit record highs.

Although it dipped briefly when gas prices receded, mid-compact demand has remained above the industry average, benefiting most recently from several new product introductions and higher gas prices, says ALG, publisher of the Automotive Lease Guide.

The firm’s outlook for the mid-compact segment is positive, based in part on its forecast that U.S. gas prices will average $4.13 per gallon in 2013. That is expected to positively impact used auction values by 13% relative to the overall industry, contributing 9.3 percentage points to ALG’s current 36-month residual value forecast.

U.S. hybrid-electric vehicle sales peaked in 2008.

Melding in other factors, ALG expects the segment’s used auction values to improve 29% overall in the next three years.

In the premium fullsize SUV segment, demand has been declining for more than two years as gas-price volatility and the recession have more than offset the positive impact of new product launches.

ALG’s 2013 gas-price forecast bodes badly for used premium fullsize SUV residuals. The segment’s 36-month residual value forecast will drop 7.4 percentage points, the company says.

Overall though, the segment’s used auction values are expected to remain unchanged over the next three years, because significant declines in used-vehicle supply and increasing wages and housing prices will offset the negative impact from gas prices, ALG forecasts.

But gas prices still matter, Traylen says. Just the thought of higher prices at the pump can influence vehicle values. “Even if it doesn’t happen, if people think fuel will hit $4 a gallon,” it can hurt the market demand for a large vehicle with a thirst for fuel and conversely increase the popularity of fuel-efficient cars.

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