Low oil prices: Boom or doom for the global auto industry?

The recent global decline in oil prices is having a major impact on the global economy. In rich economies that import a high percentage of their oil the fall in prices is a boon to consumer spending and has the potential to have a major stimulative effect on the local economy. However, the opposite is true in economies that are major oil producers and whose wider industrial technological bases are less well developed, which are seeing falling oil receipts and weakening economies, with Russia and Venezuela falling into this category. However, after becoming used to USD100 a barrel oil price in recent years, an unprecedented supply surge from the US and lower demand has led to a marked decline in oil prices to the current rate of USD60 which may have a significant effect on OEMs business and technology strategies going forward. And what is different this time around is that OPEC has broken with decades of practice and not cut production to maintain prices, and has handed over responsibility of price determination to the market.

Differing impacts depending on market

The impact of falling oil prices will of course vary from market to market. In high fuel-tax markets the percentage change in fuel pump price is less than in the US. By way of example, a USD20 drop in crude oil price will reduce Norwegian pump prices by about 15%, whereas the price impact in the US would be about 35%. In addition, compared to the US average, passenger vehicles in other markets use less fuel due to their smaller size and lower annual distances travelled. Anecdotal evidence suggests that European consumers have noticed the change at the pump, but their purchasing behaviour is not expected to change significantly. In China, fuel prices are set by the government, with adjustments as frequently as every two weeks. The major markets of Japan, Europe, US, China and others have requirements to meet certain levels of performance with respect to fuel consumption or CO2. There are also government requirements and/or incentives for certain alternative powertrains ranging from California's mandate to offer zero emission vehicles to Japan's recent incentive for Full Hybrids that attenuate or override market forces and fuel price considerations to some extent. There is likely to be some upside for OEM margins, particularly in the US market. Some lower input costs combined with a small increase in capacity utilisation and a slight shift towards larger, traditionally more profitable vehicles suggests margins could improve, although these could be offset to some extent by the need to deploy more alternative powertrains (stop-start, hybrid and electric and natural gas) to achieve regulatory fuel efficiency/CO2 requirements.

Impacts on light-vehicle market

Low oil prices will affect the total global industry volume as well as segment shifts, but the impact will vary significantly from one market to the next. Powertrain and other vehicle technologies will also shift as OEMs strive to maintain compliance with regulatory standards regardless of market preferences.

Light-vehicle sales

Following the 2009 recession, the light-vehicle market had a strong growth outlook with IHS Automotive forecasting over 760 million cumulative global sales in the years between 2014 and 2021, a 33% increase over the previous eight-year period. Lower oil prices will only serve to fuel growth. The direct impact of low oil prices alone on vehicle purchases is difficult to quantify, although IHS Automotive estimates that cumulative global sales could rise another 5-7 million units over the forecast period. Not surprisingly, the largest beneficiaries will likely be the US market where the lower fuel prices will improve consumer confidence more quickly, and developing markets such as India and ASEAN where lower ownership costs will bring new buyers. However, low oil prices may also lead to government changes in fuel subsidy and tax policies in many countries, so the full impact of cost savings may not reach every consumer.

Powertrain technologies

The impact on powertrain technologies will mirror the market response. In Japan, China and Europe, the initial expectation is that there will be little change in these markets. OEMs in all the major markets are bound by existing regulatory trends and will need to continue developing fuel efficient fleets regardless of fuel price and consumer preferences. In the U.S. market there will be a greater need to improve the average fuel efficiency of the new vehicle fleet, especially with a greater number of larger vehicles are expected to be bought. While the decline in fuel price has been too fast, and is expected to be too short, for any major change in investment strategy and technology roll out schedule. Diesel demand is not expected to be affected by low oil prices. In Europe, both diesel and gasoline prices are falling by roughly the same amounts; their relative attractiveness is basically unchanged. In the US, diesel prices are also declining, but they remain higher than those for gasoline. Diesel will remain attractive to those segments that need the benefits of high torque and long cruising range. In China, policy directs diesel fuel to commercial use, and the consumer sentiment favours gasoline. In Japan, diesel demand is anchored by tax policy and it is already priced much lower than gasoline. The expected crude oil price changes will not significantly alter the economics of diesel in Japan. The industry has a long lead time from initial product concept to physical production vehicle, generally three to five years for many manufacturers, so planning decisions for new vehicles may need immediate re-evaluation, although the current expectation is that oil prices will climb back to early 2014 levels within that time frame, leaving the industry with little time (or need) to respond. Overall sustained low oil prices may require adjustments to longer-term product plans.

Outlook and implications

With IHS currently forecasting that oil prices will return to previous peak levels of around USD120 a barrel by the end of the decade, the impact of the current accelerated dip in oil prices should be relatively limited in terms of the technology, production and powertrain strategies that are being employed by the major global OEMs. However, there will be differences in how the effect of low oil prices are felt on a market by market basis, with the declining oil price having the most effect on consumer behaviour in the short-term in low fuel tax economies such as the US, which should see some short-term migration to bigger and less fuel-efficient vehicles as a result of the current downward pressure on pump prices. However, while major changes in OEM strategy are not expected because of established regulator trends and because of the relatively short-term nature which is expected for the oil price change it should also be said that the drop in fuel prices is an additional disruption to anyone planning the next generation of vehicles and powertrains. It could not have come at a worse time. Europe is expecting CO2 standards for 2025 to be set in the range of 75–80 g CO2/km soon, and the current rules for US CAFE regulations are firm only through 2021, with those for 2022 to 2025 under review. The time period during which oil prices remain low and the resultant market response are bound to have a significant impact on the final outcome of these regulations. In addition, in the absence of massive subsidies, the drop in oil price pushes most alternative fuels off the table, economically in the short-term. Clearly, the new oil pricing is going to make further market penetration of alternative fuels into the US and other low fuel-taxation markets quite challenging.

This article is a summary of a IHS Automotive briefing note.