Gas price swings: a design challenge

Some support a higher gas tax to support automakers’ new electric models.

DETROIT (AP) — Deep inside the research centers of General Motors Corp., Ford Motor Co. and Chrysler LLC, the companies are spending billions to develop plug-in electric cars at a time when gasoline has dropped below $2 per gallon.

If their fears come true, gas prices will be so low when they start rolling out the cars next year that people won’t buy them, and all the high-priced research will have gone to waste.

At GM and Chrysler, which have nearly run out of cash and are surviving on government loans, the companies can’t afford to make mistakes in spending limited research and development dollars, but they can’t predict the future, either.

“It’s obviously a challenge when you’re in a resource-constrained world,” Frank Klegon, Chrysler’s product development chief, said in an interview last week at the North American International Auto Show. “The market and the consumer are flexible from the perspective of what they want and what they need, and because the demand curve changes instantaneously, it appears, as good as we are, we’re not that instantaneous.”

In a five-month period from July to December, average gas prices nationwide fell 58 percent from $4.11 per gallon to $1.74, creating a huge problem for automakers to predict what vehicles to design or build to match consumer demand.

The fear of producing the wrong cars has created a whisper campaign, with industry officials saying they may approach the incoming Obama administration about raising the federal gasoline tax or setting up a system that keeps the price of oil above a certain level.

“It makes life very difficult if the market gyrates wildly over the course of several months, and that’s exactly what we’ve seen happen,” Ford Executive Chairman Bill Ford Jr. said in a recent interview with The Associated Press.

Gas price swings have trapped automakers before, especially last summer when the price spike caught many with too many pickup trucks and sport utility vehicles and too few smaller, more efficient cars. Lower prices cut sales of the Prius gas-electric hybrid by 45 percent in December and forced Toyota Motor Corp. to shelve construction of a new factory to make them in the U.S.

The changing market slammed automakers’ profits, especially among the Detroit Three, starting their slide toward financial doom.

Higher taxes or a floor would give automakers a “clearer planning horizon” because they design future models three to five years in advance, Ford said.

Jim Queen, GM’s global engineering head, said the Obama administration may be open to gas taxes or policies imposed by many European countries that reduce oil consumption and make it easier for manufacturers to match their products to demand.

“My personal opinion is we’d be better served in the U.S. if we could somehow establish a comparable floor that you see in Europe,” Queen said. “And I think with the new administration we may have a shot under the umbrella of an energy policy to start talking about these things.”

Federal and state gasoline taxes combined average about 40 cents per gallon in the U.S., far less than in many European countries. The European Union has set a minimum gas tax of about $1.80 per gallon, and most countries tax above the minimum, said Nigel Griffiths, director of global automotive forecasting for the consulting firm IHS Global Insight in London.

Raising the 18.4-cents-per-gallon federal gas tax would have benefits other than helping the automakers, because higher prices would reduce consumption and greenhouse gas emissions, said Kenneth Medlock, an energy fellow who teaches economics at Rice University in Houston.

He is against a mandated floor on oil prices because it wouldn’t be a constant revenue source for government, but he favors a gas tax increase with money going for mass transit and research in alternative fuel vehicles.

“That’s where in my mind the role of government comes in, sort of subsidizing the uncertainty in the market,” he said.

Raising taxes also is a political risk, even though it could lead to lower oil prices because it would reduce demand, Medlock said.

“It’s a difficult pill to swallow right now, especially given the financial hardships we’ve all been facing,” he said.

A spokesman for Obama had no immediate comment on the president-elect’s stance on gas and oil prices.

Absent a change in government policy, automakers continue to pursue everything from electric- and hydrogen-powered cars, to hybrid gas-electric cars, to improved fuel economy for the internal combustion engine.

“Part of it is you have to look at what you think long-term trends are going to be, and I think on a long-term trend basis, the cost of gas is going to be higher rather than lower than it is today,” said Jim Lentz, president of Toyota Motor Sales USA. “Along that path, you may have spikes and you may have valleys. Hopefully we don’t see too many spikes and valleys as tight as these last two have been.”

Chrysler’s Klegon said the company is designing future vehicles, such as the midsize Chrysler 200C concept car unveiled at the auto show, so they can handle electric or conventional powertrains. Daimler AG showcased its BlueZero concept, which offers the same model of car but with three possible powertrains: one with a hydrogen fuel-cell, one with battery-electric drive, and a gas-electric hybrid.

“You’ve got to be able to offer these alternatives,” Klegon said. “Certain people still want performance in a car like that over fuel economy in a market like it is today. But you cannot ignore future regulations and likely gasoline spikes in the future.”