Issue: May 2006


The Price of Fuel - What Happens at $4.00 per Gallon?



by Joerg Dittmer

A recent Frost & Sullivan study queried U.S. consumers who own or lease at least one vehicle as to how they are coping with the rising price of fuel. The study's relevance has grown along with fuel prices since its publication. At what price will people start to make significant changes to their lifestyles? At what price will they have no choice but to do so?

81 percent of survey respondents indicated that they became more concerned about the price of fuel in the course of 2005, with 34 percent professing themselves much more concerned. Male and female respondents differed little on this question, but younger respondents and higher-income respondents expressed less concern. Whether respondents owned newer small, newer large, or older vehicles made little difference on this question. However, owners of newer small vehicles are more likely to be satisfied with the fuel economy of their vehicles than are owners of newer large vehicles and owners of older vehicles.

When asked how satisfied they were with the fuel economy of their primary vehicle, few respondents were neutral. 35 percent proclaimed themselves completely or somewhat unsatisfied, and 54 percent proclaimed themselves somewhat or completely satisfied. This result held across age groups, but respondents from lower-income households were more likely to be unsatisfied. Additionally, those who have become much more concerned about fuel prices are less satisfied with the fuel economy of their vehicles.

Possible Responses

At $3.00 per gallon, driving 10,000 miles per year at 25 miles per gallon costs $1,200. If the price of fuel goes to $4.00 per gallon, this cost jumps to $1,600. The savings ratio of US households is notoriously low, meaning that many households will not be able to easily absorb such an increase. Among their possible responses:

- Reduce non-essential driving
- Increase the use of their most fuel-efficient vehicles
- Use alternative forms of transportation
- Purchase a more fuel-efficient hybrid vehicle
- Purchase a more fuel-efficient diesel vehicle

Over half of respondents already have reduced non-essential driving and have increased use of their most fuel-efficient vehicles. Only 18 percent have increased their use of alternative forms of transportation. 13 percent have purchased a more fuel-efficient gasoline vehicle, 4 percent have purchased a hybrid vehicle, and 4 percent have purchased a diesel vehicle.

Respondents were asked which of these actions they would take at increasingly higher fuel prices. At $4.00 per gallon, an additional 30 percent of respondents would purchase a more fuel-efficient gasoline vehicle, and an additional 25 percent would purchase a hybrid vehicle, but only an additional 12 percent would purchase a diesel vehicle. At $5.00 per gallon, these numbers rise to 46 percent, 46 percent, and 21 percent (cumulative), respectively.

Only 7 percent of respondents say that they are highly unlikely to reduce non-essential driving, and 13 percent say that that they are highly unlikely to increase use of their most fuel-efficient vehicle, regardless of the price of fuel. 42 percent are highly unlikely to use alternative forms of transportation.

41 percent are highly unlikely to purchase a more efficient gasoline vehicle and 50 percent are highly unlikely to purchase a hybrid vehicle. Diesel-powered vehicles have little popularity, with 75 percent of respondents saying that they are highly unlikely to ever purchase one. However, this may be because diesels currently are available primarily in larger pickup trucks. If modern, clean, and smooth diesel engines become available in a greater variety of vehicles, people may become more willing to consider them.

Purchase Criteria

When asked about their purchase criteria in choosing their current vehicles, 54 percent of respondents included fuel efficiency in the top three criteria. Type of vehicle was also important (49 percent), followed by vehicle safety (41 percent), handling (38 percent), and engine performance (38 percent). Engine performance is defined as power, acceleration, and smoothness.

Fuel efficiency becomes even more important as the price of fuel increases. At $4.00 per gallon, 81 percent of respondents would include it as a top-three priority, and at $5.00 or more per gallon, 84 percent would do so

This result holds across all demographic segments -gender, age, household income, current vehicle, satisfaction with the fuel economy of current vehicle, and degree of concern about rising fuel prices. The importance of fuel economy increases as the price of fuel increases in all segments.

People are seen to be more willing to trade handling than engine performance for greater fuel efficiency. 38 percent of respondents had handling as a top-three priority in choosing their current vehicles, and 38 percent had engine performance as a top-three priority. At higher fuel prices, handling drops progressively in importance, down to 31 percent at $5.00 or more per gallon. However, engine performance actually becomes a top-three priority for more people at higher fuel prices at $5.00 or more per gallon, 43 percent of people rate it as such.

While this may not seem entirely realistic at first glance, it probably reflects the fact that people realize that with greater fuel efficiency, performance may be compromised. This finding says that many people are not willing to make this tradeoff. This may pose a major challenge to both vehicle makers and government policy makers as they seek to improve fuel economy.

Boosting Fuel Efficiency

Pressure on vehicle makers to boost fuel efficiency is mounting from both government and consumers. Following are some technologies that vehicle makers can use to boost fuel efficiency while maintaining performance:

- Cylinder deactivation - turning off some cylinders when full power is not needed
- Diesel engines - a unit of diesel fuel contains more energy than a unit of gasoline, and diesel engines use fuel more efficiently
- Gasoline direct injection - fuel can be saved by injecting it directly into the cylinders rather than into the airstream to the cylinders
- Hybrid powertrains - various hybrid technologies save fuel by turning the gasoline engine off when the vehicle is stopped, by running in electric-only mode when appropriate, and by recapturing energy through regenerative braking
- Turbocharging - a well-known technology that boosts power when needed

These technologies are seeing various degrees of application. Diesel engines remain unpopular in the United States, even though their technology is much improved. If offered and promoted in the United States, they could attain substantial popularity. In Europe, about half of light vehicles now sold are equipped with diesel engines, indicating that diesels also may have market potential in the United States. However, emissions standards must be met, and a policy to set taxes so that diesel fuel is less expensive than gasoline would help.

This article is based on Frost & Sullivan study F663-18, The Impact of Rising Fuel Prices on U.S. Consumers - Driving and Vehicle Purchase Behavior. For a free virtual brochure and for more information, please contact Tolu Babalola, tolu.babalola@frost.com.

Source: Frost & Sullivan


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