Question: What is nearly as bad for auto companies as $2-a-gallon gasoline? Answer: $1-a-gallon gasoline.
This is the year -- 1985 -- when the experts predicted Americans would be pumping $2 gas into their cars, loading their houses with insulation, and making the wood stove a ``must'' in every home north of Miami.
Instead, the world faces an oil glut, gasoline prices are plunging, and big cars are becoming as popular as Reagan inaugural buttons.
Congress was so sure gas would be scarce in 1985 that it required auto companies, beginning this year, to build enough small cars to reach a ``fleet average'' of 27.5 miles per gallon. But who wants tiny cars when gas is plentiful?
Chrysler Corporation, which builds the large, V-8-powered Chrysler Fifth Avenue, was planning to switch production at its St. Louis plant to a new, fuel-efficient van. But Chrysler president Lee A. Iacocca changed his mind. The Fifth Avenues were ``selling so well, we couldn't afford to drop them,'' he recently told a group of advertising executives.
Cheap gasoline, of course, is upbeat news for automakers -- if the gas stays cheap. But the yo-yoing up and down of gasoline prices in recent years makes product planning in Detroit more difficult than predicting the stock market.
Automakers' problems are illustrated by car buyers like R.S., an aide here in Washington on Capitol Hill.
R.S. drives a seven-year-old Volkswagen Rabbit, and recently he and his wife decided it was time for something new. After narrowing their choices to either a Pontiac 6000 sedan with a V-6 engine, or the newly designed, fuel-efficient Volkswagen Golf, they made their final choice: They ordered the Pontiac.
One reason was size. The Pontiac, R.S. felt, gave them the room and heft of a larger car. He also liked Pontiac's quality. ``American companies are doing a better job these days,'' he said.
Something that didn't figure into R.S.'s calculations was the price of gasoline. With gas at barely $1 a gallon, he said, the lower mileage of the Pontiac didn't seem very important.
Falling gasoline prices are good news for builders of large cars, like Cadillac, Mercedes, and Lincoln. But the lower prices are also a challenge for both American and foreign automakers.
Look at Ford, for example. Next Tuesday, the company previews its new mid-sized Ford Taurus and Mercury Sable lines. The new cars, being brought out at a cost of $3.5 billion, were engineered with fuel efficiency as a prime feature.
Four years ago, when Ford designers sat down with blank sheets of paper to draw the first sketches of the new Taurus/Sable line, Americans were just getting over the shock of long gas lines and surging prices. There was even talk of gasoline rationing. Yet now, all the headlines are of gasoline prices tumbling down through the $1 level.
At the same time, observes one Ford official, the company is having trouble meeting all the incoming orders for its luxury Lincoln Town Cars with V-8 engines -- the kind of vehicle that a few years ago experts were predicting would soon be as extinct as the Edsel.
Trying to predict gasoline prices, says a Ford official, has proved to be impossible.
What's the answer?
``Plan for any eventuality'' -- rising prices, falling prices, or steady prices, says David E. Cole, director of automotive studies at the University of Michigan's Transportation Research Institute.
Companies like Ford and General Motors can do that. They can engineer, tool up, and move ahead with large, medium, and small cars simultaneously. Those not so cash-rich, such as Chrysler and American Motors, find that financially impossible, which means seesawing prices are more dangerous for them. Japanese automakers, who build mostly smaller cars, could also feel the impact.
With all the recent success of the Japanese, says auto analyst Arvid Jouppi, it's easy to forget that before the Iranian oil embargo in 1979 there were 250,000 unsold Japanese-made Datsuns sitting on United States docks. After the embargo started, those Datsuns sold ``like popcorn at a circus,'' Mr. Jouppi recalls.
Fuel costs, of course, are only one unknown for automakers. A Ford official points out that there's also uncertainty about import quotas, for example. Will they be continued? If so, US companies will have a much better market for their small cars. If not, then it will be much tougher for US companies in the compact and subcompact market.
Chrysler's Iacocca suggests taking some of the uncertainty out of things. He is advocating new taxes on gas and oil which would stabilize prices at a higher level, encourage conservation, and make those smaller fuel-efficient cars from Detroit more popular.
Iacocca proposes a tax of $5 a barrel on imported oil and 25 cents a gallon on gasoline. Together, those taxes would raise $40 billion, help Detroit, and bring the federal budget $40 billion closer to balance.
``Just about everybody would be mad'' if you raised taxes, admits Iacocca. But it's a must for the US. ``If the Middle East supply stops, goodbye `glut' and hello gas lines. Crude would probably jump to about $50 a barrel. . . .
`` will probably be a good [year]. . . . We're going to make tons of money again [in the auto business]; but we're going to be living in a fool's paradise.''
Dr. Cole says despite problems caused by changing fuel prices, the outlook for US automakers is far more positive than a few years ago.
Detroit has come a long way since the first OPEC oil shock of the 1970s. He is also more optimistic than Iacocca about the dangers of another oil cutoff. Cole offers several reasons:
First, ``as the years go by, there really is no such thing as a gas guzzler any more,'' he says. Even larger cars are moving into the 20-mile-per-gallon range, about double their ratings of 10 years ago.
What this means, Cole says, is that gasoline prices become less important, even for larger cars. He offers this example.
If a car is driven 10,000 miles a year, if gas costs $1.50 a gallon, and if the car gets 10 miles per gallon, then the fuel costs for that car are $1,500 a year. If the car is redesigned and its mileage is doubled to 20 miles per gallon, then fuel costs are cut in half, to only $750.
However, what if gas mileage is boosted another 10 miles a gallon to 30 m.p.g.? In that case, driving 10,000 miles will cost about $500, a saving of only $250 over the 20 m.p.g. car. Likewise, boosting a car from 30 m.p.g. to 40 m.p.g. saves even less, only $125.
The critical part for US companies was moving average mileage up over 20 m.p.g., and that now has been done. In fact, the industry average is much better than 20. As a result, US companies are far less vulnerable today to price shocks, Cole says.
Also, expert opinion indicates that with new sources of petroleum and with conservation efforts continuing around the globe, the energy outlook appears much more stable than in the 1970s.
Further, Cole says, the financial picture has changed for some of the major energy producers. Even Saudi Arabia today needs a steady flow of cash. The Saudis and other Mideast countries have moved to industrialize and modernize, and they cannot simply cut off the flow of oil, as they once could, without seriously damaging their own economies.
Finally, Cole says, the US can probably expect Japan to move more and more of its auto production into this country. Quotas, trade imbalances, and growing pressure within the US to protect American jobs all can be expected to play a part in moving some Japanese production to these shores.