This time it might be real: Why this fuel price surge may hasten the end of low mpg vehicles

The last time U.S. gas prices surged above $4 per gallon, in 2008, some pundits wrote the obituary for vehicles with low fuel economy.

Turns out, the death announcement was premature.

In recovering from the 2008 financial crisis, consumers displayed a strong desire for even bigger vehicles, resulting in steadily increasing SUV, crossover and pickup sales to dominate the U.S. market.

So will the 2022 surge in gas prices, spurred by Russia’s invasion of Ukraine, also turn out to be a nonevent for the transition to a low-emission vehicle future?

If it’s a short-term blip, then yes. But if there is a prolonged period of elevated gas prices, then there’s good reason to believe it will hasten the demise of the internal combustion engine and accelerate the move to electric vehicles.

The key difference from 2008 is that electric and hybrid cars now represent very real alternatives for consumers. When the Great Recession struck, it did result in stronger demand for fuel-efficient vehicles — there just weren’t many on the market for consumers to buy. Tesla had not launched the Model S yet, and the Toyota Prius was the only viable hybrid option.

By contrast, today there are around 20 EV models available in the U.S., with almost every major automaker focused heavily on battery-electric vehicles or BEV variants for future production. From 2022 to 2028, we project that over 75 percent of the 247 new models planned to be launched in North America will be electrified, either full EVs or hybrids.

If our current economy and supply chain were in a normal state, we would be seeing a sharp shift toward consumer adoption of EVs as a result of the latest gas price surge. Even though the price premium of buying an EV remains a barrier to widespread adoption, consumers tend to think in terms of the monthly impact on their pocketbook.

At $4.25 per gallon, a Ford F-150 owner who drives 15,000 miles per year would be paying $3,350 per year for gas, or around $275 per month. On a psychological level, the prospect of eliminating much of that expense with the electric F-150 Lightning or a similar EV becomes more powerful each day. The freedom that EVs offer from expensive gas station visits would have potent appeal.

The caveat, of course, is that market conditions are anything but normal these days. The combination of strong consumer demand and supply chain disruptions — now exacerbated by the Ukraine crisis — has sent vehicle prices surging and pushed dealer inventories to record low levels.

And used cars are more expensive, too — the consumer price index for used cars jumped 40.5 percent between January 2021 and the same month this year, while the sticker price on new vehicles rose 26 percent.

Facing empty car lots and intense competition for both new and used vehicles, consumers increasingly are concluding that, in a pinch, “any car will do.” As a result, nearly every EV model is sold out, and there is a lengthy waiting list for new-car buyers.

But with gas prices expected to stay high for many months, if not years, there is an opportunity to trigger more EV sales. Even if consumers can’t make the switch now, the pain they feel at the gas pump will plant a seed for future decisions to cut their dependence on gas.

That becomes an added incentive for automakers to rapidly ramp up launches of electric models and push their manufacturing operations and suppliers to overcome logistical logjams as quickly as possible. Automakers who are tooling up for EVs today will be in prime position to benefit from the pent-up demand for electric cars in the next few years.

Aside from EV leader Tesla, General Motors has major investment plans to build out its EV products. It has been aggressively expanding its electric lineup, with announced plans for BEVs to make up 30 percent of production by 2028. Ford Motor Co. has announced its own major EV products and is leading the way with the Mustang Mach-E and F-150 Lightning, the electric version of America’s bestselling truck.

Some automakers are playing EV catch-up in a big way. For example, Stellantis, parent of Chrysler, Jeep, Dodge and Ram, had been set to have less than 20 percent of its lineup electric by 2028, but it is now accelerating the switchover. High gas prices have put intense pressure on Stellantis and other automakers who were uncertain about EVs before.

Of course, EV production is facing its own challenges as a result of the supply crunch and the Russia-Ukraine conflict, putting upward pressure on battery raw materials and resulting in higher sticker prices. For example, a key ingredient in lithium ion batteries, nickel, has seen intense volatility on concerns over the trade restrictions on Russia, which accounts for a significant portion of global nickel supply.

Automakers and their suppliers will need to become more aggressive in securing key materials like cobalt, nickel and lithium from more stable and less volatile countries, including the U.S. At the same time, they will be exploring innovative solutions in new battery technologies, such as solid-state lithium or improved lithium iron phosphate.

Still, the fact that electric batteries can be enhanced and developed with different technologies and materials provides another long-term advantage over the internal combustion engine. Gasoline will always be gasoline, and continuously vulnerable to global instability, economic crises, groups like OPEC and big commodity price swings.

Mark Barrott is a principal and leader of the Mobility Intelligence Center for Plante Moran.

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