Fuel prices are ramping up faster than their usual summer gains, and there's a 20 percent chance that prices could spike to nearly $6 a gallon, industry research firm IHS says.
"Only three percent of consumer budgets go to gasoline. That’s tiny," IHS chief economist Nariman Behravesh told attendees at a conference sponsored by IHS and the National Automobile Dealers Association. "But here's the psychological part of it: They're seeing the prices every time they go to the pump."
What Is Causing the Spike?
In the near term, two factors are pushing gas prices higher. The first is supply disruptions and limited capacity. "There's not a lot of spare capacity worldwide for a variety of reasons," Behravesh said, noting supply disruptions in Yemen, Sudan and Syria are partly to blame for the price of oil.
Then there's what Behravesh called the "Iran risk premium," or a bump in gas prices from months-long fears of war with Iran. Sanctions over the country's nuclear program could induce the country to disrupt the Strait of Hormuz, a vital shipping lane for oil. The situation remains tenuous, and IHS says "accidental" escalations, not a military strike, could lead Iran to shut Hormuz. Such fears have already driven oil up $20 to $30 per barrel.
No Big Shift Yet
The Middle East may push gas prices higher, but consumers are sticking to the types of cars they own. Even as gas neared $4 a gallon, Detroit’s full-size pickups combined to improve 13.4 percent in March sales. And the Dodge Challenger, whose city EPA mileage is in the teens, saw its best sales month yet.
"There is still a market for that car, even with $4-a-gallon gasoline," says Reid Bigland, who oversees Chrysler's U.S. sales, told conference attendees. Indeed, a study last month by CNW Automotive Research showed that 82 percent of consumers still trade their cars for the same segment of vehicle, despite more than four-fifths of them listing fuel economy among the top three reasons they traded in their cars.
"Downsizing is now a function of practicality or driving needs rather than an attempt to boost fuel economy," CNW said in a statement. "In fact, of all the respondents, only seven percent of large-car owners traded for a smaller model — barely more than in 2007."
Gas prices would have to reach $4.75 a gallon for consumers to make radical shifts, CNW predicts. An Iran crisis could bring that overnight — but short of it, today's choices and gas prices may not require a change in the type of car you own.
-Kelsey Mays, Cars.com