Shale glut turbocharges America’s motoring revival
We’ll send you a myFT Daily Digest email rounding up the latest US & Canadian companies news every morning.
Steve Campbell, a factory manager, can measure the upheaval caused by the US shale revolution in fractions of a second.
To churn out one extra vehicle per hour at his Ford plant in Louisville, Kentucky, he must shave six-tenths of a second off the production time for each individual car. Lately, his bosses have been pressing him to get both his machines and his workers moving faster.
Shale oil is the explanation. The huge quantities liberated by fracking have turbocharged the US auto market by falling crude prices and pulling down the cost of petrol.
That has led to big savings for Americans buying fuel at an average of $2.76 a gallon today — higher than it was in January but almost $1 below its level a year ago.
The instinctive response of many has been to trade up to newly affordable gas guzzlers.
On the production line in Louisville, workers rush to put together the components of their main product, the Ford Escape, a compact sport utility vehicle from the hottest section of the market. In 2012, they were producing 320,000 vehicles per year. Now they have to turn out 400,000. “When things are running well . . . there’s no better sound,” says Mr Campbell.
US auto sales are humming, hitting annualised rates of more than 17m in May and June, their highest levels since 2005, according to Motor Intelligence, a data provider. This has been propelled by bumper sales of SUVs and pick-up trucks, which sometimes go as little as 15 miles per gallon of fuel, compared with 40 miles for a small car. Cheaper petrol, however, dilutes the cost.
“After living with high gas prices for four years, it may be that people can now get the SUV they’ve been itching for,” says Patrick DeHaan, analyst at GasBuddy.com, a website that tracks retail gas prices.
The US is experiencing a motoring renaissance. The distance the average American travelled by road last year rose for the first time since 2005, and the number of people travelling by car over the July 4 holiday weekend is expected to reach 35.5m, the highest figure in more than a decade, according to the American Automobile Association. Louisville residents are happy to hop in their cars and head to the beaches of South Carolina or Florida, a 10 or 11-hour drive away.
Filling up her Jeep at a gas station next to the Dixie Highway, Patricia Brown, a school bus driver, says low petrol prices allow her to visit relatives 120 miles away in Indianapolis. “I’ll go a couple of times a month when gas is cheaper. If it gets expensive, I’ll leave a five or six week gap.”
Some trends that hurt the motor industry have not gone away: young people are getting their driving licences later; more old people are moving to city centres to live car-free; and cycling and carpooling are becoming more popular. But talk of the end of car culture has faded.
Petrol prices are not the only factor behind the motoring revival. The strengthening US economy has played a big role, boosting consumer confidence and spending on all big-ticket items from cars to kitchen appliances. Economists also note that some people are using their petrol price savings to pay off debt or put money aside.
The rediscovered enthusiasm for driving is much more marked in the US than in Europe. Europeans already pay a lot more for fuel: the average at UK petrol stations today is the equivalent of nearly $7 per gallon. And they are less likely to notice and react to swings in the price of crude oil because taxes make up at least half the pump price across the EU.
In the low-tax US, the impact of shifting raw material costs is felt more viscerally because they are far more obvious — and consumers tend to respond with more melodramatic haste.
Car salesmen recall how panicked customers rushed to ditch larger vehicles when prices rose above $4 a gallon in 2008. Greg Daunhauer, president of the Bylerly dealership in Louisville, says: “I know people who are worth more money than I would have in three lifetimes and they are still very conscious of the price of gas.”
Bob Hook, general manager of a Chevrolet dealership, says: “We’re a little bit reactive as a society. We’re always thinking about gas, or we’re not thinking about gas at all. $4 is the point where everyone freaks out. Now it’s not at the front of everyone’s mind any more.”
Echoing the findings of academic research, Mr Hook says car buyers tend to have a “false sense of security” that petrol will stay at its current price over the life of the vehicle.
The Energy Information Administration, a government agency, provides some near-term assurance: it predicts US petrol prices will stay below $2.75 a gallon until the end of 2016.
That would give motorists more time to enjoy the benefits of cheap fuel — and the managers at Ford more reason to count their split-seconds.