The Economic Impact of Rising Oil Prices in Automotive Industry

The Economic Impact of Rising Oil Prices in Automotive Industry

The rise in the oil prices plays a major role in the automotive industry. “The world consumes over 82 million barrels of oil per day (BPD), with the united states taking roughly 20 million BPD” (McFarlane). Oil provides 97 percent of the transportation fuels that helps to run the cars, trucks and other vehicles in the nation’s highway (Heinberg). Thus, when the price of the oil rises, it clearly concerns the auto industry because the companies are competing with each other to meet the new demands for more fuel efficient consumer conscious at reduced price. There is no doubt that it is affecting the profit margin of the company. Moreover, increase oil price is also affecting the type of vehicles demanded by the customer and the way those vehicles are designed.

The demand of oil and the difficulties in oil refineries is the major cause for the increased oil price. Oil is used mainly for two purposes: Firstly, to make the gasoline and secondly in tire production. The gasoline prices in the US have increased dramatically during the last few years reaching averages over $ 3.00 per gallon (EIA-Energy Information Administration). Oil is the major ingredient in the production of tires. Increased in oil prices means increase in the cost to make the tires, increase in the cost to heat or cool the plant where tires are made and lastly increase in the cost to ship the tires. The tire makers are increasing the price of the tires because of the increase in the price of the oil. Both gasoline and tire production affects the auto industry as the increase in the price in gasoline and tire production affects their profit margin.

The current increase in the price of the oil began early in 1999 due to various reasons. One of the reasons is the dispute in the Middle East beside with negligible changes from Organization of Petroleum Exporting Countries (OPEC). Due to this, the U.S. Government had kept the oil price very high to this very day. Recent increases in the price of oil have reached their highest level since the Gulf War, and further increases could hurt U.S. economic growth including in the growth of auto industry. The effect of higher oil price could show up in the feebler vehicle sales. But that was not the case in mid 1940s. The auto industry was seen as both a leader and a beneficiary of American growth and the economic achievement. More than 50% of the vehicles sold were produced by General Motors (Abernathy and Clark). The U.S. “Big Three”- General Motors, Ford, and DaimlerChrysler- motor vehicles corporations made a range of vehicles that met every consumer needs. But in early 1979 when OPEC suddenly increases the price of the oil, consumers reacted by shifting towards small, fuel efficient cars. The “Big Three” and other small car companies could not keep up with the demands. So, people shifted towards the small fuel efficient imported vehicles. Today, “Big Three” only produce 60% of all automobiles and light truck sold in the United States (Abernathy and Clark). These changes have had major effect on the structure and location of the US motor industry. Though “Big Three” still dominate the market, other foreign companies are also on their way in this class. The sale of Japanese cars increased because they meet the efficiency standards that American cars did not. Cars with big engines and large heavy bodies were no longer made in order to preserve oil and boost the economy.

The increase in the oil prices impacts the auto industry by direct, indirect and induced economic multiplier effects (Michigan Public Service Commission). Direct impacts are the increased expenses for purchased oil or oil products. Indirect impacts includes the changed prices paid for other products and services such as tires which pass along the higher fuel costs in the automobile prices. Lastly are the induced impacts of price increases. The former two causes vehicle prices to rise and this feeds through wage increases, which raises labor costs, which in turn, raises the price of the product that is the price of the automobile in the auto industry.

Oil prices are largely driven by the global supply and demand. When oil prices rise, it becomes more expensive to manufacture and transport the goods, in this case, autos. Deputy CEO An of Geely, a private Chinese company, expresses his disappointment by the oil- price changes. He added that changes in the oil prices have a bigger impact on the auto industry as this makes a lot of demands on the carmakers and raises the standard and they have to design the product thinking more about the fuel consumption (O’Rourke). The increase in the cost to produce the products must be factored in the higher price of the product. The sale of automobile is affected by