The Spectacle Blog

Letting the Market Work—Energy Edition

By on 5.2.08 | 3:35PM

I'm all for alternative energy. I would love for there to be a cleaner source of fuel, and would relish the oppourtunity for the U.S. to give the oppressive, terror-sponsoring governments of oil-rich countries the proverbial middle finger. But I also hate subisdies and mandates. The government shouldn't choose winners and losers in the devopement of new forms energy, fund pork barrel projects, or take actions that distort the market.

The only way that we are ever going to reduce our dependency on foreign oil is for the price to stay high enough, long enough, to create incentives for Americans to change their consumption habits. So it is heartening for me to read in the NY Times that the market is starting to work, with Americans purchasing smaller cars to save money on gas.

In what industry analysts are calling a first, about one in five vehicles sold in the United States was a compact or subcompact car during April, based on monthly sales data released Thursday. Almost a decade ago, when sport utility vehicles were at their peak of popularity, only one in every eight vehicles sold was a small car….

"It's easily the most dramatic segment shift I have witnessed in the market in my 31 years here," said George Pipas, chief sales analyst for the Ford Motor Company.

The trend toward smaller and lighter vehicles with better mileage is a blow to Detroit automakers, which offer fewer such models than Asian carmakers like Toyota and Honda. Moreover, the decline of S.U.V.'s and pickups has curtailed the biggest source of profits for General Motors, Ford and Chrysler.

Once considered an unattractive and cheap alternative to large cars and S.U.V.'s, compacts have become the new star of the showroom at a time when overall industry sales are falling.

Sales of Toyota's subcompact Yaris increased 46 percent, and Honda's tiny Fit had a record month. Ford's compact Focus model jumped 32 percent in April from a year earlier. All those models are rated at more than 30 miles per gallon for highway driving...

Automakers ignore the move to smaller vehicles at their own peril. G.M., for example, is playing catch-up by introducing a dozen new cars and crossovers in the next few model years.

This is classic economics--consumer demand shifting in response to the rising price of a complementary good. If a car company wants to remain competitive, it has to offer fuel effecient alternatives. This is all happening without any need for any government-imposed increase in fuel effeciency standards. If gas prices remain high, it's only a matter of time before private investments in alternative fuel research become more and more pervasive. When politicians pander with short-term strategies for reducing the cost of a gallon of gas, it just postpones this day of reckoning.
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