The Effect of Gasoline Prices on Automobile Sales in USA Market from 2002 to 2006

Nowadays, the situation in gasoline industry worldwide is considered to be quite serious and some countries can even face the real threat of a profound economic crisis caused by high prices of oil. Even such economically powerful countries as the US are affected by high prices gasoline but the consequences of such a situation are still worthy to research. In this respect, the impact of high gasoline prices on automobile sales, and consequently, on automobile industry is one of the most serious problems that economists are expected to solve. It should be pointed out that the US market demonstrates a stable trend indicating at the interdependence between high price gasoline and low levels of automobile sales in the country. This research paper reveals this interdependence and traces the basic theoretical and practical reasons explaining such a trend in the US market.

Introduction

In recent years the changes of gasoline prices produce a very serious impact on economic development of many countries of the world, including such leading ones as the USA. Obviously, the unparalleled growth of prices on rude oil could not fail to affect practically all industries but its impact on automobile industry turned to be particularly dramatic. As the analysis of the situation in the US in recent years reveals, high gasoline prices results in lower level of automobile sales that means certain retardation of the development of automobile industry at large and its conventional departments, oriented on the production of vehicles using gasoline or other oil-based fuel, in particular.

Naturally, it is extremely important to find out the reasons for such interdependence in order to prevent possible crisis in automobile industry in terms of the US, at least, and to forecast the possible consequences of such a situation in the gasoline and automobile markets. In fact, this problem should not remain without research, otherwise the further probably growth of gasoline price could produce practically unpredictable impact on automobile industry.

At the same time, it should be pointed out that this problem is not new and the interdependence between gasoline prices and automobile sales have been already found but in the current research it is particularly noteworthy to analyze the development of automobile industry in the condition of unparalleled growth of gasoline price in the US market.

Literature review

The recent researches related to the problem held by such specialists as Jacoby (2005), Sage (2001), Danaher (1999), and others have already researched this problem and revealed the trend of certain slowdown in the rates of automobile sales in the situation when gasoline prices increase dramatically. In fact, the similar situation could be observed in the mid-1970s when the crisis in oil market also provoked a profound economic crisis in many countries, including the US. At the same time, the researchers basically agree that automobile sales proportionally depend on gasoline price. In this respect, it is noteworthy to refer to the researches of G. Rise (2005) who emphasized that the production of automobiles, especially those consuming higher amount of gasoline than average vehicles, have been increasing dramatically in the second half of the 20th century until the crisis of 1970s when the automobile sales decreased dramatically, basically because of gasoline deficit and increased prices and stimulated the shift of automobile manufacturing to the production of vehicles which consumed moderate amount of gasoline.

Demand and supply as the main factors of interdependence between gasoline prices and automobile sales

Naturally, the current situation in the US market of gasoline and automobile industries, being quite unusual, still has to be explained and, first of all, it is necessary to find some theoretical reason for the interdependence between gasoline prices and automobile sales.

In fact, it is quite logical to presuppose that automobile and gasoline industry operate according to basic economic laws, such as demand and supply. According to this theory, demand and supply are interdependent and the higher demand stimulates supply that in practical terms leads as a rule to higher prices. On the other hand, high supply and low demand lead to quite a contrasting situation when prices decrease proportionally to the difference between the levels of supply and demand. As a rule, such a situation leads to over-consumption.

On projecting this theoretical assumptions on gasoline-automobile interdependence, it should be pointed out that high gasoline prices are basically caused by the lack and instability of gasoline supply. Consequently, gasoline demand also remains high, while automobiles sales decrease (Klein 2001) since automobiles actually consumes gasoline and the demand on automobiles decrease in the expectations of possible deficit of gasoline and because of the current insufficient supply and high prices of this product (Rise 2005).

Changes in gasoline prices

In such a situation, in order to better understand the interdependence between high gasoline price and low automobile sales, it is necessary to trace the changes in gasoline market. In fact, in the early and mid-1990s the oil price in the US, which actually one of the most important factors, influencing gasoline price, was about $20/barrel, while in the contemporary economic situation the oil price has already surpassed the $60/barrel level (Jacoby 2004).

Obviously, the increased oil price couldn’t fail to affect gasoline price. As a result, according to Jacoby, “at $2.53, the average for regular gas hereabouts is just 6 cents shy of its record high price … and every bit of 34 cents higher than on this date last year” (2005:271).

Thus, it is evident that recently gasoline price has achieved its highest levels.

The impact of changes in gasoline prices on automobile sales

Nonetheless, in terms of the current research, the level of gasoline prices is not important but in its relation to the rates of automobile sales. In this respect, it is possible to refer to Klein who estimates that the rate of automobile sales produced in the US decreased by 3.5% in 2000, while those imported from Japan, for instance, by 1.9% (2001). The latter fact may be explained by the level of consumption of fuel by vehicles produced in the US and Japan, since often the latter consume less gasoline than American automobiles.

Furthermore, the general trend of increasing gasoline price and respective decrease of automobile sales lead to the profound crisis in one of the leading American automobile companies, such as Ford (Rise 2005) and the same trend may be observed within GM.

On the other hand, the recent development of new branches of automobile industry aiming at the manufacturing of automobiles using fuel alternative to gasoline (Danaher 1999) indicate at the logical attempt to substitute the lack of gasoline and high price of this fuel by different sources of energy creating new demand on vehicles of new type which could independent from the supply of gasoline.

Conclusion

Thus, it is possible to conclude that the interdependence between high gasoline price and low automobile sales may be explained from the position of demand and supply theory. The current research reveals the fact that the recent increase of gasoline price in the American market has led to decrease of automobile sales caused by the deficit in gasoline supply and its high price to the extent that automobiles functioning on alternative fuel are growing to be more and more popular.

Bibliography:

1. Danaher, C. Seven Arguments for Reforming World Economy. London: Routeledge, 1999.
2. Jacoby, E. Gas price trends. LA: McGraw Hill, 2005.
3. Klein, Sage. Advertising and Consumer Behavior. New York: Routeledge, 2001.
4. Rise, G. The Development of Automobile Industry in the US since the mid-20th century. New York: New Publishers, 2005.
5. Rolf, K. American Economy: Past, Present, Future. Chicago: Mills Publishers, 2000.
6. Weiler, J. Alternative Ways of Development of American Economy. New York: Guilford, 2000.