Gas at $2 Bucks Plus Push Buyers to Consider MPG

DETROIT, May 13, 2004; Michael Ellis writing for Reuteurs reported that more buyers are taking diesel-powered Volkswagens for a test drive; others are trading in their sport utility vehicles for family sedans, or opting for a model with a smaller engine.

The recent rise in U.S. gasoline prices to record levels has Americans shopping for more fuel-efficient cars, and has at least dampened their love for SUVs which some consider the biggest gas guzzlers in suburbia.

"This is definitely different. It's all over the news. I guess people just figure that prices will never go down," said Tim Murphy, the new car sales manager at Toyota of Santa Barbara in Goleta, California.

CarMax Group Inc., which operates 51 used car and 12 new car dealerships across the United States, cited gasoline prices on Wednesday as one possible reason for weaker sales over the past few weeks. CarMax cut its earnings outlook, sending its shares down more than 13 percent on Wednesday, and the stock of its competitors down between 2 and 4 percent.

The average price at the pump hit a record high, unadjusted for inflation, of $1.95 per gallon for regular gasoline, up about 45 cents from a year ago, according to AAA. In California, the average price was $2.27 a gallon for regular, the motorist group said.

To top it off, gasoline prices have yet to hit their highest for the year, with the traditional peak summer driving season not set to start until Memorial Day weekend later this month, the U.S. Energy Information Administration has said.

Detroit's automakers last week added new incentives on SUVs to cut inventories of unsold models, despite already generous offers, after sales in April were weaker than many had expected.

The higher prices could shift demand toward more fuel-efficient models, which had been poor sellers in the past, said Ford Motor Co. Chairman and Chief Executive Bill Ford Jr.

Gas prices could "help drive customer behavior the way you'd like to see it," Ford said, when asked what the company was doing to improve the fuel economy of its vehicles, at the company's annual meeting on Thursday.

WAR JITTERS

Also hitting new and used vehicle sales is the war in Iraq and the slow pace of job growth, car dealers and industry officials said.

"Our business has been at levels lower than historical levels for the last few months. What part of that gas prices play is very hard to determine," said Steve Whitener, co-owner of Briarwood Ford in Saline, Michigan.

In years past, when prices at the pump spiked, sales of SUVs continued to climb. But this time around, buyers seem more cautious, said Allen Levenson, vice president of sales and marketing with Asbury Automotive Group Inc. , which operates 140 car franchises in the U.S.

"This is the first time that I've seen a noticeable shift," Levenson said.

Some consumers are trading in large SUVs for smaller models, Levenson said. "There is a little slowdown in the large SUVs. They're buying the smaller SUVs or the passenger cars."

Hefty incentives, including General Motors Corp.'s "Truckfest" promotion, contributed to a 1.5 percent drop in the average price of large SUVs in April from March, according to Edmunds.com. Prices for compact cars rose 2.4 percent in April from March, Edmunds.com said.

DIESEL AND HYBRIDS

Consumers are taking a second look at Volkswagen's diesel-powered cars, which get 40 miles per gallon or more, said Pat Foley, the used car manager at Rey Reece Volkswagen in Portland, Oregon.

"The interest has definitely increased," Foley said. "I would buy 10 used diesels today if I could find them."

Diesel costs about 15 to 20 cents per gallon cheaper than gasoline. But diesel cars are not sold in several states, including California, due to higher emissions of smog-forming nitrogen oxide.

Volkswagen had the U.S. market for diesels cornered, but DaimlerChrysler AG's Mercedes recently launched a diesel version of its E-Class luxury sedan, and Jeep plans to launch a diesel Liberty SUV this autumn.

Murphy said his California Toyota dealership can't get enough of the Prius hybrid gas-electric car, which gets 55 miles per gallon. In contrast, sales of the Sequoia and Land Cruiser large SUVs, which get about 15 or 16 miles per gallon, have softened, he said.

One dealer, who asked not to be named, said some used car wholesalers have stopped buying large SUVs.

"There's so many people who have them, and they're going to unload them, because of the gas," he said.