Spending clunkers cash

Nov. 16, 2009
The US government's $3 billion Cash for Clunkers program, designed to put more fuel-efficient vehicles on the road, mainly involved deals that swapped used, full-size pickups for new, full-size pickups with barely better gasoline mileage, according to an Associated Press analysis of federal data.

The US government's $3 billion Cash for Clunkers program, designed to put more fuel-efficient vehicles on the road, mainly involved deals that swapped used, full-size pickups for new, full-size pickups with barely better gasoline mileage, according to an Associated Press analysis of federal data.

New Ford F-150 and Chevrolet Silverado pickups, along with Ford's Escape midsize sports utility vehicle, were among the 10 most popular vehicles purchased with government rebates. "The most common truck-for-truck and truck-for-SUV deals totaled at least $911 million," AP reported.

The single most common swap—with more than 8,200 deals reported—was trading older F-150 pickups for new models of the same type of vehicle.

AP reported participants in the government program were "17 times more likely" to buy a new F-150 than a Toyota Prius. The Prius, according to a separate study by Deutsche Bank Securities Inc. (DBS), is "far and away the most successful hybrid vehicle in the US, accounting for over half of all hybrids sold to date in the country (797,000 out of 1.584 million through August)." That would seem to support a common assumption "that Soccer Moms…want to drive a four-DVD living room welded to a light truck chassis to the shops, for their comfort, convenience, and perceived security," said Paul Sankey, DBS senior analyst for US integrated oil and refining. But that assumption "may be a misconception," he said.

When oil prices climbed in 2007-08, consumers stopped buying SUVs. "They did not switch from conventional SUVs to hybrid SUVs; they abandoned SUVs altogether," Sankey said. "If presented with extremely high gasoline prices, Americans will move towards smaller, lighter, and more-efficient cars, because that is clearly what they did in 2007-08." And, he said, "We see no evidence to date that SUV sales are rebounding in a lower gasoline price environment; thus we believe that the change in vehicle tastes for the US consumer may have undergone a secular shift."

'Disruptive' hybrids

Hybrid vehicles are "a 'disruptive technology' like digital cameras—a superior product that altogether replaces the previous incarnation," Sankey said. "Our view is that oil supply tightness will squeeze against rising global GDP-driven oil demand into a major price rise that will peak at $175/bbl in 2016. This will stimulate a further acceleration in the adoption of high-efficiency vehicles, most notably hybrids, a trend that will put sustained pressure on US gasoline demand, the largest single component of global oil demand."

A "key conclusion" from DBS's recent analysis of hybrid vehicle economics is that the Prius is "close to economically justified" in terms of price premium vs. efficiency savings. "But do Americans really want to drive a slow, lightweight hatchback?" Sankey asked. "Crucially, we estimate that before 2020, hybrid SUVs don't justify the expense with efficiency unless oil hits $230/bbl."

DBS said the fuel efficiency gain from current SUV hybrid technology is much lower than for cars, which undermines the economics for the SUV. Average fuel economy for the Ford Escape conventional SUV is about 21 mpg, while the hybrid version gets about 28 mpg, analysts said.

Sankey said, "Unless there is a step-change in the fuel efficiency differential between hybrid and combustion SUVs, we believe it will be a long time before the light truck category (which is still about 42% of US personal vehicle sales in 2009) has an economically advantaged hybrid. Right now only about 1% of US personal light vehicle sales are hybrids (either SUV or pickup truck) vs. about 3.5% of cars."

Sales of hybrid light trucks peaked in 2006, just 2 years after the launch of the first hybrid SUV. Light trucks accounted for almost 30% of hybrid sales in 2006, before falling to 20% in 2007, even before the 2008 oil price spike and recession. Year-to-date in 2009, SUVs and pickups account for 18% of hybrid sales, DBS reported.

The US incentive program for hybrids has lost much of its impact with major hybrid-makers being phased out as their eligibility ends. Federal tax credits of as much as $3,400 for the purchase of a new hybrid vehicle have been available since the 2005 tax year. The credits phase out over a 1-year period for any given manufacturer once the company has sold over 60,000 eligible vehicles.

"We believe, however, that a new round of incentives will emerge from the US government to encourage purchase of hybrids and electric vehicles," said Sankey.

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