Sunday, June 7, 2009

Peak Car? Where next?

There was some mention on the blogs this weekend about the United States having reached "peak car." It is a similar idea to peak oil except that instead of being supply driven (the idea of peak oil is that the available and economically accessible supply will begin to drop), "peak car" is driven by demand.

One of the interesting things about the last year is the extreme drop in car sales. For a while, car sales had been humming along, at between 15m and 20m per year. Before the current recession got in to full swing last September, gas prices hit car sales. All of the sudden, the cars which were readily available—generally gas-thirsty, larger vehicles—were out of vogue, or at least unaffordable. And while everyone wanted a Prius, supply was so short that wait lists grew to several months long and used Priuses actually appreciated—which is almost unprecedented.

That followed through the summer of 2008—a.k.a. "The Summer of Four Dollar Gas." People drove less, rode transit more and generally showed that high enough gas prices would begin to change behavior (although since demand for gas is so inelastic, even a doubling of its price only diminished demand by a few percent). And then the economy crashed in September, and credit markets tanked. Foreclosures skyrocketed, and many more people made due with older cars. Thus, car sales, which had not fallen below a seasonally-adjusted annualized rate (SAAR) of 16m for more than a month for nearly a decade (1999 through 2007) crashed. By January, the SAAR was under 10m, a rate last seen in 1981. Chrysler and GM have been forced in to bankruptcy. (It is easy to sarcastically remark that it was because they made cars that no one wanted, and surely that is part of the problem. But for ten years they were also feeding a buying frenzy which created more cars than necessary, so that when the bottom fell out, they were not in a position to scale back.) Ford is cutting back drastically, and foreign automakers have seen sales plummet as well.

In 1978, car sales briefly flirted with the 16m mark, but then fell back towards 8m by 1982, sending Chrysler to the brink. It's an interesting parallel—the peak and nadir numbers are similar—but likely not apt for two broad reasons. One, the 1976 peak at 16m was a singular peak—sales had hovered around 12m for a few years (the Times' data only goes back to 1976, but we can assume that sales were slow in 1974 and 1975 during the gas shortages), jumped to 16m, and then fell back. But for nine years, from 1998 to 2007, through thick and thin, vehicle sales plateaued at 16m per year. Starting in 2005, the plateau began to slip, until it decreased, parabolically, in late 2008 and early 2009. Car sales, which had been remarkably non-volatile for a long period, fell at a rate never seen before.

The other reason this historical comparison is sketchy is that the early 1980s and the late 2000s are very different times. In the late 1970s, car ownership was still the wave of the future. The Interstate Highway System had been largely completed in the couple years before, and suburbanization, which had drawn out millions from non-car-dependent neighborhoods, seemed to be accelerating. 1980 was, for several major American cities, the low point of their population. Racial strife was simmering down, but still quite recent, and "white flight" was prevalent. By 2000, however, many cities had gained population off their 1980 lows, and the 2008-9 recession may have put the stake in the heart of the ever-expanding suburbs and their three-car garages, something the stagflation days of the late '70s did not accomplish. Additionally, sentiments towards automobiles seems somewhat different. While I have no anecdotal evidence from the early 1980s (uh, I wasn't born yet), I can only assume that people rarely said things like "when my car dies, I'm not buying a new one." I've heard this a lot recently.

Finally, wide-scale demographics are different now than they were in the early '80s. The large generation in 1980 were baby boomers. This generation had grown up largely in the idyllic suburbs of the 1950s and 1960s, or at least aspiring to (or moving to) them. Roads were new and wide, traffic was minimal, and the new American ideal was seen to be two cars in every garage. The large generation today, the millenials (generally the offspring of the boomers), grew up in the same communities, but times had changed. The suburbs were older, sterile and boring. The city was no longer seen as anathema to a healthy lifestyle. More younger folks are moving to cities, where they are less likely to need to own one (or more) cars.

So, given this data and these very anecdotal trends, let's hypothesize that we have reached "peak car." Let's assume that, while auto sales may recover to 10m or even 12m, the number of cars per person in this country will decrease, and the number of cars overall may even do so as well. The country has been adding cars at a rate of about four million per year (almost exclusively the growth was "light trucks") for quite some time—if sales all-of-the-sudden drop by half, the number of cars may begin to plateau as cars, inevitably, die. What happens if we have, indeed, reached peak car?

Well, first of all, what will the car production capacity be? With recent cuts and both Chrysler and GM going through bankruptcy, it is quite possible that auto production will fall towards current demand. 12m cars per year is, very roughly replacement rate. (A long article in New York Magazine—this is the second page—quotes it as 15m but, as car sales drop and people keep cars longer, I'd expect the replacement rate to drop as well.) And with the return to savings and changes in both demographics and spending patterns, this might be the rate in coming years. If nothing else, if less than 10m cars are sold this year, it is quite likely that, having sold six or seven million fewer cars than normal, the number of cars on the road could, for a year, anyway, do something quite unusual: drop.

But—and this is a pretty big but—this does not take in to account peak oil, or at least oil prices skyrocketing. This could put the damper on car sales, and push them below replacement rate. If gas were to go to $6 or $8 per gallon, vehicle miles traveled would decrease (as we have seen), land use would probably change, and demand for alternate-fuel cars would go through the roof. This would create two problems. First, the current availability and charging capacity for these cars is in its infancy, and will likely take a decade or more to develop. Second, while battery technology is advancing, ramping up to the scale of millions of car-sized batteries would take time, energy, and cost.

For many years, the American car companies built at capacity, and the American consumer bought. When there were issues with American cars (quality, fuel consumption), foreign automakers moved in. The problem is that the auto industry is built on having a very non-volatile demand, as its supply is very inelastic—at least if demand outstrips supply. A normal car takes several years to design, even when it is a derivative of something on the road (a SUV chassis on a car body with an overpower engine, for example.) For significantly different cars—the Chevy Volt or Toyota Prius, the lead time is much, much longer—the Prius was in development for seven years before sales in the US started, the Volt has been rumored for years and we've seen only a concept car.

Thus, if the total capacity of the system is decreased and, for whatever reason, the market dictates that consumers want a type of car not being made, the demand for cars will outstrip supply. This will leave consumers in a situation where they can buy a cheap, fuel-inefficient vehicle for cheap (as we saw last summer, when big SUVs had their prices slashed by half) or wait for months, if not years, for a more fuel efficient model—or pay premiums of thousands of dollars for one. If the number of cars per person begins to stabilize or fall—which is unprecedented in the last century of American history—it's possible that it could create a paradigm shift for the American car industry, and American development in general. When gas was near $4, as it was last summer, we saw unprecedented rises in transit and bicycle use. While the housing market's completion of its crash has dictated development since then (or lack thereof), a prolonged period of high gas prices without efficient or alternative automobiles could drastically effect patterns of settlement, a recentralization of jobs (since employers would be incentivized to have jobs in places accessible by non-car transportation—especially if a stronger economy created more supply for jobs, as right now most job-seekers will take whatever they can get), and densification of areas served well by transit which, in may cities, consist of surface parking and recent single-story development. And this, of course, is a good thing.

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