Long-Term Effects of High Gas Prices

Although gasoline prices have recently retreated from the high levels seen immediately after Hurricane Katrina, most experts agree that we'll never see sub-two-dollar prices again. So what effect is this going to cause for us as automotive consumers?

High gas prices are going to have some major long-term effects that will change the automobile marketing landscape. Look for the following trends:

1. Watch for auto manufacturers to begin changing advertising to focus on vehicle fuel economy. It has already started.

2) Watch for new small sub-compact vehicle introductions from European and Asian auto manufacturers.

3) Watch for prices to increase on hybrid vehicles, and availability to be limited. It's already started.

4) Watch for prices to decrease and incentives to increase for large American-made SUV's.

5) Watch for manufacturers to introduce more fuel-efficient vehicles that use fuel-saving technologies such as those that disable some engine cylinders when not needed.

6) Watch for manufacturers to introduce vehicles that use alternative fuels, or mixtures of gasoline and other less expensive fuels.

7) Watch for prices of fuel-efficient used cars to rise.

8) Watch for manufacturing trends that serve to reduce vehicle weight, which increases fuel economy. An example is eliminating the spare tire that has traditionally been included with all vehicles. Another is using light-weight materials for body parts and mechanical components.

Government EPA Estimates Wrong

The government requires EPA mileage ratings to be posted on the window sticker of all new vehicles. Many automotive consumers depend on these figures to help them make decisions about which vehicles to buy.

However, Consumer Reports magazine recently found that those figures were too high -- often much too high -- on 90 percent of the vehicles they tested. And the discrepencies are becoming greater with each year model.

Consumer Reports recommends that consumers discount the posted EPA city mileage rate by 30 percent for conventional cars and trucks, by 35 percent for larger hybrids, diesels by 36 percent and small hybrids by 42 percent.

Leasing Explained -- Again

Car leasing is often misunderstood by automotive consumers. Is it like apartment leasing? No. Is it like car renting? No. Is it like a loan with a balloon payment? No. Although car leasing has some similarities to all of the above, it's still different.

We explain leasing on our web site, LeaseGuide.com, in a number of different ways to make sure it's understood. However, there's one more way that I'll add here that may help further understanding.

If you've recently been in the market for a new home, you may be familiar with interest-only mortgages, a relatively new financing method that has become very popular in the last few years. The way it works is that you only pay the interest on your home loan, which is a great idea when interest rates are relatively low and home prices are appreciating. Then, in 3 or 5 years, your loan becomes due in full, and you have the choice of refinancing or selling the house for a possible profit.

Car leasing is very much like an interest-only home loan. You pay the lease company interest on the money they spent to buy your new car from a dealer. The difference is that, instead of financing an appreciating asset such as real estate, you are financing a depreciating asset -- a car. This means the financing company (lease company) knows that the vehicle will be worth less at the end of the financing period than at the beginning. Therefore, in addition to monthly interest payments, you must also pay off the amount by which your vehicle is estimated to depreciate during the lease term. Then, at lease-end, you have the option of refinancing, or repaying the lease company either by paying them cash to buy the car or by returning their car.

I hope this helps in understanding leasing.

Who is Delphi?

Giant auto parts supplier Delphi today filed for Chapter 11 bankruptcy. "So what?", you may ask.

Delphi is the primary parts supplier for General Motors, both here and overseas. The company is not one that the general public knows well because their role is behind the scenes in the auto manufacturing world. However, the company is so large that the effects of a possible company failure would be devastating for GM, it's own thousands of smaller suppliers, and, indeed, the entire U.S. economy. It would affect the entire U.S. automobile manufacturing landscape.

Exactly what this bankruptcy filing means in the long term for automotive consumers remains to be seen. It deserves watching as the company struggles with reorganization, cost cutting, and their attempt to emerge healthy in 2007.

What??? No Spare Tire???

Automakers are going to extremes to save money, weight, and space -- and increase gas mileage per government regulations. They are now beginning to leave off essential parts on cars they build -- including spare tires.

Yes, the trend has already begun. Manufacturers such as Toyota and Mazda are now shipping new vehicles with no spare tires. Not even the goofy little temporary tires. Let me repeat -- there is NO SPARE TIRE in some makes and models of new cars. The trend is going to accelerate over the next couple of years.

So what happens if you have a flat tire in the middle of the night on a lonely country road?

Some cars without spares are being offered with "run-flat" tires that purportedly will get you a few miles to assistance if a tire blows. However, what they don't tell you is that if you damage the tire's sidewall by hitting a pothole (a very common cause of tire problems), the tire no longer "runs flat." Another thing they don't tell you is that run-flat tires wear out prematurely and replacing them is not only very expensive, but it is difficult to find a tire dealer who can or will sell and install a replacement. In an emergency situation, you're not much better off with run-flat tires than without.

Mazda, in it's RX-8 with regular tires, offers an "Instant Mobility Kit," which is a cheap can of compressed air and sealant, which only works for simple kinds of tire punctures -- and you still have to get the tire repaired. They offer a spare tire and wheel as a factory option, but if you get it as a dealer option, it only comes with the wheel -- you have to get a tire and have it mounted separately. Of course, the full-sized spare must be stored in your trunk, where it eats up most of the small available space.

Many minivan owners who have "no spare" vehicles are buying regular spares and storing them in the rear passenger area, sacrificing the third-seat or luggage area. Some small car owners are finding that a full-sized spare will not fit in their trunks.

Surprisingly, vehicles sold with no spare tire still have a jack kit -- go figure. Since jacks are very heavy, watch for them to be next on the cut list. What's next?

Want an SUV?

As I predicted earlier, high gas prices have hit SUV sales like the plague. All auto manufacturers saw significantly lower sales in September.

What does this mean to consumers who actually NEED a gas-guzzling SUV and can handle the cost of fueling it?

Great bargains can be had.

Not only are dealers eager to sell their existing inventory but manufacturers are helping out with behind-the-scenes factory-to-dealer incentives as well, especially on 2005 models. Expect to get below-invoice prices on some of the larger SUV models. Dealers don't want to get stuck with products that will be even harder to sell if gas prices increase any more in the future.

On the other hand, if you don't need an SUV and are now leaning toward a smaller, more economical vehicle, you should consider getting yours before the rush. Hybrids are going to be the "hot" vehicles in the coming months. Soon, manufacturers are going to be introducing very small fuel-efficient sub-compacts, now common in Europe, for the cost-conscious crowd.

After Employee Discounts

Now that carmakers' "employee discount" plans are history, what's next?

I previously mentioned the so-called "value-pricing" plans, but these may be slow to get accepted, especially when some of manufacturers, such as Ford, have already gone back to old-fashioned rebates and low-interest loans on selected models.

It's going to be difficult for consumers to change how they view automobile pricing, no matter how hard the car companies try.

What Auto Consumers Fear Most

Although there may be formal studies that I'm not aware of, I have received thousands of emails over the last 10 years at my web site that give me a good notion of what most automotive consumers fear the most about buying or leasing cars.

In no particular order, auto consumers most fear the following:

1) Paying more than other customers have paid, or will pay, which creates a feeling of being cheated.

2) Paying more than can be afforded, which can cause financial difficulties and future credit problems.

3) Buying or leasing a "lemon" vehicle which can result in great inconvenience and stressful interactions with dealers and car manufacturers in attempts to resolve the problems.

4) Buying or leasing a car that they subsequently won't like — knowing that there is no return or exchange policy.

5) Having an accident or having the car stolen — both common fears of brand-new car buyers or leasers (these fears lessen with time).