Daniel Gross

Rising March Auto Sales: Credit Higher Gas Prices?

U.S. auto sales rose again March, up 12.7 percent from March 2011. The rise took place despite persistently high gas prices, which many analysts feared would put a damper on growth. But a look at the data, and at some of the significant changes in the auto industry in the past few years, suggests the conventional wisdom should be turned on its head. Higher gas prices, rather than hurting new vehicle sales, might help them. As Mike Jackson, the CEO of Auto Nation, told CNBC on Tuesday, "We feel higher gas prices are accelerating sales, not hurting sales." He continued: "The industry has gone all-in on efficiency on all vehicles and people are walking in and see they don't have to give up on size or performance to get 20 percent fuel efficiency."

He's right. The Cash for Clunkers program of a few years ago essentially bribed consumers to turn in gas-guzzlers for more modern, more fuel-efficient versions. But when the market keeps gas prices high for a long time, consumers don't have to be bribed. What's more, the auto industry has changed significantly since 2007 and 2008, the last time gas prices spiked to this level. Then, U.S. automakers suffered because their sales and profits were disproportionately reliant on low-mileage pick-up trucks and SUVs. They simply didn't have much to meet consumers' demands.

That's changed. The past few years have seen a significant, quiet revolution: the greening of the U.S. car fleet.

The website Hybridcars.com is a great clearinghouse for information on fuel-efficiency improvements. Its sales dashboard from February shows that car buyers could choose from dozens of models of hybrids, plug-in electric, and clean diesel vehicles. But while the Prius was the sixth-best-selling vehicle in March (with 28,711 sold), these vehicles remain niche products. Together, they accounted for less than three percent of sales.

Still, they've played an important role. Hybrids and electric vehicles have put pressure on all manufacturers to boost gas mileage. The development of hybrids has led to technologies that can be incorporated into standard vehicles at relatively low cost. Many General Motors cars feature its Eassist system, which pairs an electric motor and lithium ion battery with a gas-powered engine. GM in March said it sold more than 100,000 vehicles that get more than 30 miles per gallon.

The hype and heat surrounding electric vehicles overshadows a great deal of innovation in the past several years by foreign and domestic automakers. Engineers have labored tirelessly to make the basic combustion engine more efficient. Ford has introduced its Ecoboost system into pick-up trucks and passenger car models. The company has announced that it will offer start-stop technology, which effectively turns the engine off when a car idles, as an option in the 2013 Ford Fusion. (The Fusion was the seventh-best-selling model in March, with 28,562 sold.)

Consumers are clearly opting for smaller vehicles. Sales of cars in March 2012 were up 16 percent from March 2011, while sales of light trucks were only up 9 percent in the same period.

There's another significant change worth noting. Several years ago, cars that got lots of gas mileage were generally premium products. People who bought a Prius were making a personal statement as much as a personal finance statement. And when gas prices were low, it took a long time for the investment in a hybrid to pay off.

The opposite holds true now. Many of the high-mileage cars are entry level vehicles, like the Chevrolet Cruze or the Ford Focus. And with gas at $4 a gallon, the savings realized from an investment in a new, more fuel-efficient car become more meaningful. The pain of driving a vehicle that gets 15-20 miles per gallon is far more acute today than it was a few years ago, while the price of getting into a car that gets 35 miles per gallon on the highway is lower than it was a few years ago.

The Chevy Volt and the Nissan Leaf are interesting, cool and different. But the most significant development in the auto industry may be a far more prosaic one. Fuel efficiency is now pitched toward the middle of the buying curve, not just to the top.

Daniel Gross is economics editor at Yahoo! Finance.

Follow him on Twitter @grossdm; email him at grossdaniel11@yahoo.com.

His next book, Better, Stronger, Faster: The Myth of American Decline and the Rise of a New Economy, will be published in May and is available for pre-order.

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