ALT-1 The Benefits and Costs of Suvs
During August and September of 2005, Hurricane's Katrina and Rita swept threw the Gulf Coast of the US. Both Hurricane's damaged many oil rigs, and put some of the UO oil production to a halt. Because of this, the price of a barrel of oil skyrocketed. This caused the price of gasoline to rise dramatically, in many parts of the country it hovered at over $3.00 a barrel for a few weeks. Even though the price was rising, the Demand for oil continued to rise. People were scared there was going to be a shortage. In the Southern states near where the hurricane's occurred, many gas stations did run out of gas, and people waited in line for hours to get refueled.Two months have now passed since the effects of Katrina and Rita ravaged the United States. Because of the rise in gasoline prices, the demand for large gas guzzling SUVs plummeted. GM and Ford posted September U.S. sales declines of 24 percent and 20 percent. Light truck sales dropped 30 percent and 28 percent. When the price of gas increased, people in the US quickly realized that the size of their vehicle wasn't very important anymore. SUVs and trucks might have more room, but the cost of owning one has become too high for many. Many people that are driving SUVs have now realized that they really don't need one. SUVs are an elastic good. Since the cost of owning one has increased, people have started to sell their SUVs and downsize to smaller vehicles that are more fuel efficient and cost less to upkeep.The cost of owning an SUV isn't only how much it costs to fill the gas tank. SUVs also have higher costs for repairs and insurance then normal passenger cars. Insurance rats on SUVs can be up to 22% higher on SUVs compared to a four door passenger car. SUVs also cost considerable more to purchase. The Opportunity cost of owning an SUV is high. You have to give up more money to own an SUV, but on the other hand, a passenger car has less space, and usually isn't four wheel or all wheel drive. You lose a lot of money in gasoline costs. The average new car gets 28 to 40 miles per gallon on the highway. Most SUVs get less then 20 miles per gallon, and some even get less then 16 miles per gallon.There is a very high opportunity cost of owning and operating an SUV. Let's say that you own an SUV that gets 20 miles per gallon, which you purchased over a passenger car that would have gotten 30 miles per gallon. We will assume that you drive an average of 12,000 miles a year. Currently, gas is at $2.29 a gallon. Driving the SUV you will spend $1,374 on gasoline. Driving the passenger car you will spend $916 on gasoline. To own that SUV, it will cost you $458 more a year, and that is only in the price of gas. Add in the average cost for repairs, tires (because SUVs have larger tires which also cost more), insurance, and regular maintenance. The price comparison between the two just keeps getting higher and higher.Even before the price of gasoline increased, the opportunity cost of owning an SUV was high. Yet people still bought SUVs all the time. People were more willing to spend out the money a few months ago on SUVs then they are now. I think this is mainly because insurance and maintenance costs of owning an SUV aren't seen weekly. Your insurance is usually paid monthly, so the extra cost is spread out and it doesn't seem like it is much higher. Maintenance doesn't occur every week, so it's cost is also spread out over time, and harder to see. The increase in the price of gasoline is seen and reacted to almost immediately. When you filled your tank last week and it only cost $40, and this week when you filled it the cost was $55, you tend to notice that right away.The biggest problem with the quick increase in the price of oil is that is occurred very quickly, and there was little time to react. When the first hurricane hit, and the damage was realized, the cost of a barrel of oil skyrocketed and the country was already hurting and didn't have a lot of time to react. This caused a lot of panic and worry all over the country. People immediately started thinking of ways to save money by cutting back on spending. A slow change started to occur, but people in the United States seem to have a very short attention span. It wasn't until Rita hit near Texas that people's fears were realized. You can drive down almost any road and see SUVs and Motor home for sale by owners. Drive by many car lots and the SUVs are just sitting there as their prices get drastically reduced in hopes of moving them off the lot. The people of the United Sates have reacted to the increase in Gasoline with panic.So what happens now? The price of a gallon of gas was about $3.00 just over two months ago. Before the hurricane it was hovering around $1.50 a gallon. The demand for gasoline has now begun to recede. Many people have already sold their SUVs and purchased more fuel efficient cars and are now using less and less gasoline. Some people have chosen to drive as little as possible, and now they walk or ride a bike wherever they need to go. As the demand for gasoline beings to drop, what will happen to the demand for SUVs? Gasoline has already come down to $2.29 a gallon locally, and is averaging $2.17 a gallon across the United States.The price of gas is decreasing because the demand for gas is decreasing. The price of SUVs has decreased because the demand for SUVs has decreased. Now that SUVs are cheaper, and gas is once again getting affordable, are people going to being to purchase SUVs at new ridiculously low prices? It looks like the answer is going to be yes.The price of SUVs has fallen because there are no so many on the market, and consumers were worried about how much it would cost to fill the tank of their SUV. Now that the price of gasoline is coming down again, people who were never able to afford a $27,000 SUV, are now able to afford it because the price is now closer to $22,000. So now that they are getting a better deal on the SUV, they will purchase them, and that means they will purchase more gas, and the price of gas may slowly being to rise again.The price of gas will not rise to the heights that it did with the hurricanes if more people start buying SUVs again, but it will probably rise slightly and then hold steady as long as there are no more big hits on the market. Already, Ford, GM, and Chrysler have announced small increases in their SUV sales.The opportunity cost of owning an SUV may be great, but it seems many people are willing to pay the cost. Even when the price of gasoline increases dramatically, many people still choose to drive their SUVs. For many consumers, the cost of owning a SUV is slightly elastic. The change in the cost of owning in SUV, only slightly changes the demand for SUVs. The demand dropped quickly at first, but now the demand is rising again.What is the future for SUV sales? I believe as long as the price of gas keeps going down, people are going to buy the SUVs that are now at low prices. There may have been a slight scare to the SUV market, but American's have short attention spans, and they will soon forget the effects of Hurricane Katrina and Rita.
