Fueled by reduced prices at the gas pump, U.S. consumer confidence is expected to continue to rise, resulting in a potential shift to larger vehicles in the U.S. and Canada as these vehicles will be more affordable to own and the value of fuel economy becomes less important to consumers.
“These changes will impact short-term production plans in locations around the world, and at first glance, may be counterintuitive.”
From a global perspective, IHS analysts estimate that cumulative global sales could be 5 to 7 million units higher over the period (2014 through 2021) as a result of lower oil prices. The largest beneficiaries will be the U.S. market, based on improved consumer confidence; and developing markets such as India and the ASEAN region where lower ownership costs will bring new buyers.
To balance the shift in consumer preferences, IHS Automotive research indicates that U.S. vehicle manufacturers are ramping up production plans for larger light trucks – including SUVs and pickups – at the expense of the smaller B- and C-segment vehicles.
In other markets around the world, OEM responses are consistent with each other, but significantly different than those in the U.S. market. IHS Automotive expects that there will be little to no change in vehicle preference or production changes due to the greater insulation of pump prices from oil costs based on taxes and/or subsidies. The impact in these markets is significantly reduced by government incentives and the need to meet regulations.
Powertrain Changes and Fuel Efficiency
The impact on powertrain technologies is expected to mirror the market response. In Japan, China and Europe, little change is expected in the near term. OEMs are continuing to follow regulatory developments, and they will need to offer increasingly fuel efficient fleets regardless of fuel price and market preference.
In the U.S., however, there will be a greater need to improve the average fuel efficiency of new vehicles due to the expected up-segment market shift. Based on this, IHS Automotive expects an increase in market share for technologies already in the pipeline.
“The unexpected decline in fuel price has been too fast and is expected to be too short for any major changes in investment strategy and technology rollout timing,” said Phil Gott, senior director, long-range planning at IHS Automotive. “These changes will impact short-term production plans in locations around the world, and at first glance, may be counterintuitive.”
As an example, one OEM in Japan has already cut back domestic production levels for some of its most fuel efficient models. At the same time, U.S. production plans for the hybrid share of a larger sedan have been raised. Such tactics are needed because while fuel prices are expected to return to higher levels by the time 2025 requirements must be met, a shortfall in meeting the standards necessary in the interim years will cost an OEM important credits that they may be counting on for 2025. As a result, IHS Automotive expects greater penetration of alternative powertrains, primarily stop-start and hybrid, as well as downsized and boosted gasoline engines in the next several years.
No Impact Expected for Diesel Demand
IHS Automotive analysts do not anticipate any impact on diesel demand as a result of the changing oil prices.
“At this time, we do not expect diesel demand to be impacted by low oil prices,” Gott said. “The direction for diesel prices in Europe -- the largest light duty diesel market -- is similar to gasoline and the attractiveness of diesel vehicles is relatively unchanged.”
Also, given government regulations and consumer sentiment for diesel in China and Japan, IHS does not expect much fluctuation in those markets either. For the U.S., diesel prices are declining, but still remain higher than gasoline. It’s anticipated that diesel will remain attractive for those segments that need benefits of high torque and long cruising range.
Implications for Regulatory Reviews
The drop in fuel prices across major auto markets is cause for additional disruption to those planning the next generation of vehicles and powertrains, including regulators. With Europe and the U.S. markets currently working on standards for CO2 and fuel consumption for 2025, the timeframe over which oil prices remain low and the resulting market response are bound to have a significant impact on the final outcome of these regulations.
As an example, if the relatively low fuel prices in the U.S. cause greater shifts towards higher fuel consumption vehicles, the review process under way could determine that existing targets are too stringent, and cause debate among consumers, politicians and labor unions, among other stakeholders. IHS anticipates a likely solution would be a combination of incentives, credits and multipliers for the sales of select advanced technology vehicles similar to flex-fuel credits that are just now being phased out.
In Europe, the likelihood of stringent standards for 2025 is a bit less uncertain, as the overall market response is expected to be less dramatic. However, the impact comes at a time when some politicians are signaling their discouragement of the use of diesels in certain cities. While fuel prices are expected to be recovering by 2020 or so, European OEMs are more concerned about the impact of regulations and aligning their powertrain strategies to meet the 2025 challenges.
“Regardless of the outcome, the timing of the current price decline injects an additional level of uncertainty into the auto industry’s planning cycle,” Gott said. “As we start this year, we are just 10 years or one platform cycle away from the most stringent fuel efficiency standards. To plan for profitable manufacturing of vehicles and components in this era is perhaps one of the greatest business challenges the industry has seen in a long time.”