August 1, 2016
At a time when everyone seems to be enthralled by the potential of alternative fuels and advanced powertrains, one market fact seems to remain undisturbed at this time: America’s on-the-road transportation energy is dominated by liquid fuels, especially those derived from the compressed remains of former inhabitants of earth-or in other words, petroleum.
In fact, according to WardsAuto, through July 99.26% of all light duty vehicles (LDVs) sold in the United States in 2016 were powered by liquid fuels (this includes gasoline, diesel and hybrid vehicles), the majority of which consist primarily of petroleum products. This realization spurs a renewed interest to look more closely at the petroleum market to better understand where we are and where we might be heading.
First, where have we been? From the first week of January 2014 until mid-August 2016, oil has dropped from $96.47 for WTI and $108.73 for Brent to $47.16 and $48.60, respectively. This represents a 51.1% and 55.3% drop in oil prices. At the same time, retail gasoline and diesel fuel prices dropped from $3.32 and $3.88 to $2.15 and $2.32, respectively, down 35% and 40%.
This recent drop in petroleum prices has reputedly taken the wind out of the sales of alternative transportation technologies. According to popular media accounts, consumers will buy and sell vehicles based upon the prevailing cost of fuel. While this is a severely overblown generality, there might be some evidence that the two trends (fuel prices and vehicle purchases) might follow similar trajectories.
WardsAuto reports that since 2014 sales of hybrid, plug-in and electric vehicles have dropped from a market share of 3.5% to 2.6% through mid-2016. Meanwhile, gasoline-powered vehicles increased market share by 1.31%. (The drop in diesel sales is significantly related to VW emissions issues which resulted in a federal prohibition on sales of those vehicles.) These are not huge swings, but when considered in relation to the change in fuel prices, the trends can lead one to see a possible correlation.
The bigger swing in purchasing behavior is not so much between powertrains as it is between classes of vehicle. This is another major “finding” of the popular media – when fuel prices drop, truck sales spike. The data would seem to indicate once again that this generalization could be based on fact.
An increase of nearly 6% in truck market share would seem to be “proof” that fuel prices drive vehicle purchase decisions, but correlation does not necessarily mean causation. There are a number of other factors at play to increase the sale of trucks.
Here is one of the major issues in my opinion: dealer incentives on truck sales have been aggressive, giving consumers up to $11,000 off of MSRP, thereby greatly encouraging purchases of these vehicles. I spoke with one consumer who reported she and her husband bought a pickup truck because they saved $10,000 off the retail price – they were not even in the market for a pickup. Fuel prices were not the deciding factor – the allure of the “deal” was.
I suspect consumer interest in alternative powertrains will continue to wane if fuel prices remain at relatively low levels. Consumer interest is very fickle, but their buying behavior is not as volatile. Low fuel prices can, over time, have an influence over consumer preferences, but consumers’ confidence in stability at the pump is not likely to be very strong.
Despite any type of influence fuel prices might have, I don’t believe these alternative vehicles will stop gaining market share. I believe this primarily because regulatory pressures compel the auto industry to increase their production and sale of vehicles that deliver efficiency that may be outside the realm of possibility for traditionally-fueled internal combustion engines.
In the draft Technical Assessment Report released this summer, EPA and NHTSA assert that OEMs can meet their 2025 requirements with modest use of electrification. But the OEMs themselves believe this conclusion to be too optimistic. An industry executive was recently quoted in Automotive Engineering (a publication of SAE) saying that if the U.S. fleet were to match the efficiency of the top 1% of regular powertrains it would fail to comply with regulations beyond 2020, let alone 2025.
So, clearly, the need for advanced technology persists, but in the meantime the nation continues to rely on energy provided by fossils extracted from beneath the earth’s surface. Auto engineers are squeezing out as much power and efficiency as possible from this fuel and the corresponding engines, but it may not be enough. Hence, while the market will remain dominated by petroleum for the foreseeable future, market share will eventually be ceded to alternatives. Although, as long as fuel remains “reasonably” priced, this transition to advanced technologies may be the result more of a push into the market by regulated manufacturers rather than a pull by the market from cost conscious consumers.