Imagine if your favorite burger joint increased the price of your favorite half pound ground sirloin each day by a few cents. You'd probably shrug it off and keep going because you can't eat anything else without feeling unfulfilled. But after awhile, the emptiness in your wallet cancels out the satisfaction you feel in your stomach. The same goes for the automotive industry. Gas prices have risen 33% over the last 11 weeks to $2.87 per gallon as of late April 2007, prompting concerns that prices could hit $4 within the next few months. In response, GM (GM) and DaimlerChrysler (DCX) plan to introduce smaller models known as microcars as a more fuel-efficient alternative for drivers seeking shelter from the rising petroleum tide.
Photo: mpartheslus, Creative Commons, Flickr
The catalyst driving the rising prices comes from decreasing supply. Rare circumstances that included natural disasters and power failures wreaked havoc on refineries and decreased capacity across the board from 90.4% to 87.8% in just the last week. However, many analysts believe that prices have peaked and probably won't threaten the $3.06 per gallon in the wake of Hurricanes Katrina and Rita back in September 2005. Drivers likely won't tolerate the rising prices for very long and the resulting drop in demand could outweigh the upward pressure from population growth and the higher personal income that comes with a healthy economy.
In any event, DaimlerChrysler and GM believe that the steady rise in gas prices will drive consumers to buy microcars, a new breed of automobile that doesn't use as much gas as subcompacts like the Honda (HMC) Fit and Chevy Aveo, not to mention the compact, midsize, and full-size cars you typically see in showrooms. DaimlerChrysler's Smart ForTwo will hit the U.S. market in 2008 while GM will introduce a new microcar sometime in 2010 under the Chevrolet label. To put it in perspective, an average American midsize gets 21 mpg in the city and 27 on the highway while a microcar like DaimlerChrysler's Smart ForTwo gets 69 mpg. The main tradeoff comes in power. A typical midsize sedan with a V6 engine packs around 250 hp while the 8 ft. 8 in. Smart ForTwo comes with a 3 cylinder, 71 hp powertrain and achieves a top speed of only 90 mph.
If you think these 2 passenger microcars can reverse the fortunes of DaimlerChrysler and GM, don't get your hopes up. The lower power specs and diminutive size make microcars unsuitable for the morning commute from the suburbs or anything more than a cruise around your block. Furthermore, analysts figure that you won't spend $12,000 on a souped-up golf cart when you can walk or take the subway. With DaimlerChrysler trying to sell off Chrysler and GM falling behind Toyota as the world's #1 automaker, the microcar represents the latest example of how domestic automakers' lack of focus could ultimately dig them into an even deeper hole. Gas prices have likely peaked and by the time DaimlerChrysler and GM ride the wave of fuel-efficient microcars, the tide may have already turned.
Disclosure: I do own a mutual fund that may contain one or more of the stocks mentioned in this post. However, any interest that I may own is subject to the discretion of my mutual fund manager.