How Demand for Crude Oil Affects the Auto Industry
Did you know the global demand for crude oil was expected to hit an all-time high of 96.5 million barrels daily in 2021? Crude oil is the lifeblood of modern life, and virtually every industry uses it, from agriculture to healthcare and petrochemical. The automotive industry uses refined crude oil as fuel to propel cars and lubricate engines. Consequently, oil demand and prices affect the auto sector in the following ways.
One of the biggest effects of crude oil demand is on vehicle ownership. When fuel prices decrease, two major things happen. First, car owners have more disposable money they can divert to other purchases. They can use the savings from low fuel prices to replace an old car with a new one. New vehicles are more fuel efficient and require less maintenance and repairs and boost enhanced safety.
Second, people who cannot afford a car can boldly buy one due to the lower cost of ownership. Apart from fuel, other costs of vehicle ownership include insurance, licensing and registration, maintenance, and depreciation. Repair costs are also considerable, with the common repairs in 2017 being changing oil and oil filters, replacing windshield wiper blades, and changing filters.
However, lower fuel prices do not necessarily result in increased vehicle purchases in high-fuel tax countries like Norway. In other countries, low oil prices may cause the government to amend tax policies and fuel subsidies. Hence, consumers don’t get maximum cost savings. Increased crude oil demand and, consequently, high fuel prices decrease vehicle ownership incentives, reducing car sales.
Type of Vehicles Purchased
Demand for crude oil affects the type of vehicles consumers purchase. While you may expect Americans to buy fuel-efficient vehicles as fuel prices decrease, the opposite is true. In most cases, people buy high fuel-economy cars like SUVs and trucks because their maintenance cost, particularly fueling, goes down. Since these vehicles use more fuel, the changes in fuel prices are significant.
Besides their lower purchase cost, gas guzzlers are more spacious, better styled, and offer a greater feeling of safety. Also, they are perfect for off-road experiences and weekend adventures. Electric vehicles are worse hit by low fuel prices, and their sale plummet. An increase in fuel costs results in more sales for small and low-fuel economy cars as auto owners reduce maintenance costs.
Profits For Automakers
Automakers record higher profits, with most consumers opting for bigger, more powerful vehicles. This is mainly because bigger vehicles have higher profit margins than smaller ones. Nonetheless, automakers need to invest in increasing the fuel efficiency of bigger vehicles to comply with regulations on the manufacture of greener vehicles to reduce pollution and dependence on imported oil. Also, they must adjust manufacturing schedules to prioritize big but efficient cars.
With many countries enacting policies to lure consumers towards fuel-efficient vehicles, automakers have invested in fuel-saving technologies to attain this goal. They sell most of these technologies at a premium to help consumers increase fuel economy and reduce carbon footprint. Since all American vehicles collectively travel trillions of miles per month, automakers expected that consumers would buy these products to reduce operating costs. Lower fuel prices mean that fewer consumers need the technologies, thus a decline in their demand and lower ROI. Those buying these technologies see a higher payback period because they need to cover more miles for the products to pay for themselves.
The demand for crude oil has a tremendous effect on the auto sector. Lower fuel prices lead to more vehicle purchases as car owners have more disposable income. Also, it makes driving cheaper, and thus car ownership becomes appealing. Automakers record more car sales, especially bigger and high fuel economy cars, and a decline in the sale of fuel-saving technologies. The opposite is also true since high fuel prices will reduce vehicle ownership, increase the purchase of small fuel-efficient cars, and boost the sale of fuel-saving products.