Where's My Chevette?

The economic argument against investing in oil companies suggests that high gasoline prices will cause demand to fall and prices at the pump to recede. Looking at the new offerings from the Detroit Auto Show, Robert Aronen wonders how consumers are going to buy small cars when such vehicles aren't rolling off the assembly lines.

Published: 12-Jan-2006

I'll admit it. I'm a sissy. I like small cars. When I was in college in the late '80s, I drove a 1981 Chevy Chevette. Perhaps not the most reliable car I've owned, but when you're 18 and have your own set of wheels, you don't complain. Under ideal conditions, the Chevette's fuel economy would approach 40 miles per gallon, and even though gas prices were less than $1 a gallon, the savings were still mighty welcome, given my student's budget.

The Chevette was a product of the oil shock of the 1970s. From 1977 to 1981, manufacturers filled showrooms with small cars, and the average fuel economy of a new vehicle rocketed 41% in four short years. As a result, gasoline demand dropped, OPEC couldn't hold the cartel together, oil from the North Sea and Alaska flooded the market, and prices at the pump plummeted. For the next 25 years, SUVs and trucks took over the roads, and consumption of that cheap gasoline rose at an annual rate of 2.5%. You can guess what happened next: From 1988 to 2005, the average fuel economy of U.S. passenger vehicles actually fell from 22.1 mpg to 21 mpg.

Whenever I write about peak oil or the lack of refining capacity, I get a few reader responses that say, essentially, "You are underestimating the power of markets. High prices will cause people to conserve, thereby reducing demand." While I believe in the power of markets, I doubt that a fundamental shift in demand, like that of 25 years ago, is taking place -- at least not now, not at current prices.

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