How Are Falling Oil Prices Affecting the Car Industry?

Thanks to falling oil prices, the U.S. auto industry set a new sales record in 2015. With 17,470,659 vehicles sold last year, automakers beat their previous record of 17,402,486 vehicles sold in 2000 by 0.83%.

A December boon in purchasing was especially helpful to setting the new record. Buoyed by low gas prices, consumer confidence in their ability to purchase new vehicles helped drive sales for brands like Nissan, Toyota, and Honda, which experienced spikes of 19%, 11%, and 10%, respectively, over December 2014 sales levels. The overall volume of vehicles purchased across the U.S. auto industry in 2015 increased by 5.7% over 2014 numbers.

Crossovers, Trucks, and SUVs sold particularly well, with sales of these vehicles jumping a whopping 19% in December 2015 and 13% for the whole year. Given automakers’ recent expectations that consumers would buy more fuel-efficient vehicles, the volume of purchases for larger vehicles has surprised some automakers. However, as gasoline remains relatively inexpensive, a consumer’s return on investing in more expensive fuel-efficient vehicles falls dramatically, signaling that automakers may need to pullback production of more fuel-efficient cars in favor of more affordable, standard gasoline-using vehicles.

The U.S. market is not alone in experiencing the positive effects of falling oil prices. Overall lower car ownership costs in developing markets like India and the Association of South East Asian Nations are expected to bring to new buyers in those countries as well.

Oil prices have been falling since 2014 for a number of reasons. First, the U.S. has almost doubled its domestic production of oil, thereby increasing the oil supply and stopping its reliance on imported oil. As of July 2016, the U.S. is producing more oil than its drivers need. Additionally, despite its recent economic troubles, Russia continues to produce oil at record levels. OPEC has also stopped cutting production to control prices, plus Iran’s return to exporting oil following the lifting of sanctions has also increased the oil supply. Finally, because of weak economies in China and Europe and more fuel-efficient cars filling many markets, demand for oil has stayed below supply. As the fall months approach, oil prices are expected to keep falling.

However, despite overall increases in the number of U.S. cars sold, vehicle sales in regions that produce oil and natural-gas have fallen. Sales in the 11-county area around Dallas-Fort Worth, an area that overlaps a huge natural-gas field, fell by 4.4% in the first nine months of 2015. Meanwhile, Oklahoma experienced the largest decline in new vehicle registration in the entire country in the first 10 months of 2015.

There is also concern that low oil prices may lead to changes in government fuel subsidies and tax policies in many countries that will take away savings from consumers.

This article was first published on Robert A. Butler’s website