Gas Price Increases Prove It Again: Cost Is What Will Drive Consumers Towards Sustainability

Fuel economy has been important to commuters like me for some time.  I work 35 miles from home and spend a lot of money on gas, so the run-up in fuel prices has been of great interest.  I spent a lot of time evaluating options before buying my current vehicle, the number one consideration being achieving a reliable 30 miles per gallon or  more.  Hybrid gas-electric vehicles have become pretty common, but other new technologies have lagged as far as development and introduction, and finding an inexpensive and maximally-efficient vehicle has not been easy.  Back in early April I wrote in some notes, off the top of my head:

What are the barriers to adoption of new automotive technologies?

Demand side barriers: (1) Cost versus traditional technologies, (2) perceived cost/benefit vs. traditional technologies, (3) consumer unfamiliarity, (4) concern about battery replacement costs

Supply side barriers: (1) producer learning curves, (2) training and staff development, (3) specialized infrastructure needs such as battery handling, shipping, and storage, (4) coping with perceived risks to customers and workers; (5) availability of parts, (6) issues around new raw materials, (7) cost of new manufacturing equipment, (8) availability of new production facilities & trained labor, (9) cost of service training, etc.

Examples: (1) availability of batteries limits production (and constrains available quantities) of hybrid vehicles, (2) dealer price increases in the face of increased demand limit sales of hybrid vehicles, (3) cost premium versus existing vehicles (substitutes) defeats the business case for buyers, (4) potential buyers just don’t see the economic case yet, (5) buyer worries about maintenance costs (such as battery replacement) discourage purchase of hybrids

Gas prices changed more quickly than anyone expected.  I didn’t anticipate the rapid run-up of oil and gas prices we’ve seen over the past couple of months (March through May, 2008), however. Now one of the most popular discussion topics at work concerns the “emotional break-point” where consumers are so conscious of the cost of gasoline that they are suddenly changing their choices based on it, and forgetting many of their previous concerns about hybrids.  One thing is certain: buyers see the economic case for purchasing a hybrid or other gas-saving technology now.

 We again must face the fact: For consumers, cost rules.  As gas prices rose from the $3/gallon range to the $4/gallon range, the majority of consumers suddenly realized just what an impact increasing fuel prices were going to have, and the market for vehicles made a major shift. Suddenly consumers are all looking for smaller cars, ignoring trucks, SUVs, and large vehicles, and the sales of fuel efficient vehicles are suddenly dominating total vehicle sales.  Sales of scooters, too, have surged.

The market shift has put pressure on auto makers.  The auto makers must be scrambling now like never before to come up with more fuel efficient technologies and get them on the road. Not to say that they weren’t concerned and taking action before, but the amazing drop in sales of trucks and SUVs in the last couple of months has shocked the Detroit auto makers into major cost cutting and (I expect) some serious acceleration of new technology development. 

Cost will drive civilization towards sustainability.  The gas price run-up is a clear example of the way I expect things to go on our way to a sustainable planet.  Resources will become increasingly scarce, driving costs upward until consumers are inspired or forced to change their habits.  New technologies will appear, and some will even marginally be accepted, long before they become an economic imperative, but once costs rise and the new technologies become economically viable behavior will definitely change.  As in the case of gas prices, changes will not occur in an orderly or easily predictable manner, making it hard for corporations to be ready for the changes.  To make matters worse, the changes will often occur far more rapidly than product developers can respond to them, and availability of more saleable products will lag significantly behind market demand.  In the end, though, the change will come, as it must.  Now I’d like to know whether the early adopters tend to come out ahead, or if a lot of them get left “holding the bag” with higher average costs or dead-end technologies on their hands.  Sounds like a study is needed.

As always, I welcome your comments.


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