The pandemic supply chain shortages created an imbalance between supply and demand throughout the automotive industry, significantly raising the cost of purchasing a vehicle. The decrease in manufacturers’ abilities to produce and deliver brand-new cars also increased in the used market, giving sellers more power to set their prices. However, vehicle availability isn’t the only major influence on the used car market. The ongoing cost of refueling a vehicle contributes to lifetime ownership expenses—and the prices drivers pay at the pump are influenced by a variety of economic and geopolitical factors. You might be surprised to learn how oil prices can affect the average car buyer. 

Supply and Demand in the Fuel Market

Since gas is derived from crude oil, this global commodity is closely related to the automotive market. When oil production and consumption are relatively balanced and healthy, prices at the gas station tend to be lower, which can make owning a car more affordable for the consumer. This can be especially true when gas prices are stable for long periods of time.

However, crude prices have been irregular since the start of the COVID-19 pandemic, when oil demand and consumption plummeted, despite the abundant supply¹. Throughout 2020, prices even dipped into negative numbers. Saudi Arabia proposed a decrease in production among the Organization of the Petroleum Exporting Countries (OPEC) and Russia, but Russia chose to sustain its levels of production, contributing to an overstock of crude.

When oil prices fluctuate greatly due to changes on the supply side—which happened in 2020 and are expected following announcements from OPEC and Russia of dramatic decreases in production²—consumers become concerned about gas prices and their car-related expenses. Average gas prices over the summer approached $5 per gallon, even without accounting for inflation³. Current average prices are below $4 per gallon, which is an improvement compared to the summer but still an increase over this time last year⁴.

Despite these high prices, demand seems to be steady and higher than in previous years due to the lack of pandemic-related travel restrictions. However, crude oil prices are declining due to global fears over a looming recession and a corresponding drop in demand. There are no official predictions⁵ of this happening, but volatility often harms consumer confidence.

How Fuel Prices Influence Drivers

Used Vehicle Inventory

Unfortunately, predicting market influences and used car demand isn’t as simple as comparing gas prices to vehicle ownership. Consumer preferences tend to be directly influenced by the cost of filling up the tank. Higher fuel prices lead to increased interest in more efficient vehicles compared to larger SUVs and trucks. However, other external factors—like overall price increases due to new and used inventory shortages³—can deter people from buying cars. Holding onto an older vehicle keeps it out of the used market, contributing to the inventory shortfall.

Fuel Efficiency

Lower gas prices make increased fuel consumption more financially viable for the consumer. Not only can this entice people to drive more, but it can also make them more interested in purchasing a car—this can be especially beneficial for people looking to buy larger vehicles, such as SUVs and pickup trucks. Larger vehicles also tend to have bigger profit margins for manufacturers and dealers, making increasing sales of those models more desirable at all levels of the supply chain. 

According to AAA, as of October 24, 2022, the average gas price in the U.S. is $3.793 per gallon⁶, down from the highest recorded average price of $5.016 per gallon on June 14, 2022. This downward trend could help make larger used vehicles and those with combustion engines more popular as the cost of use becomes more manageable.

While the national average has gone down, costs can still vary depending on the state as well. AAA’s October 24 report shows that the average cost of gas in California is $5.752 per gallon, while Georgia drivers can expect to pay $3.201⁶. Drivers in areas with high gas prices may be more compelled to prioritize efficiency than those in regions where fuel is less expensive. California, in particular, is beginning to phase out new gas-powered car sales, which will alter the used car market as drivers trade in their vehicles for electric models.

The Shift to Electric Vehicles

Gas prices can also drive interest in electric vehicles (EVs). The International Energy Agency (IEA) reports that EVs only made up about 5% of sales in 2021⁷, but an increasing number of manufacturers are designing and producing new electric models for the 2023 release. The interest is supplemented by legislation in California and New York that requires new car sales to shift from gas-powered to electric over the coming years. This turnover will increase the number of gas-powered cars on the used market, which can help relieve some inventory-related pressure.

The transition to electric vehicle ownership is likely to have its challenges. Some brands experience long wait times before buyers can take possession of their new cars, and new technology can make the cars themselves more expensive to develop and maintain. Charging the battery also incurs costs since individual drivers need at-home charging capability, and the country needs to scale up its EV infrastructure. These challenges can influence demand the same way fuel costs can.

ACV Auctions Helps You Meet Customer Demand

Like all commodities, fuel prices are bound to fluctuate over time. Car buyers are sensitive to these changes and look for stability, so make sure your dealership is well-stocked with reliable vehicles. ACV Auctions is the go-to marketplace for finding high-quality vehicles with transparent condition reports and straightforward buy fees, as well as financing and transport options designed for dealers.

Sources:

1. U.S. Bureau of Labor Statistics. From the barrel to the pump: the impact of the COVID-19 pandemic on prices for petroleum products. Monthly Labor Review. Retrieved October 21, 2022 from https://www.bls.gov/opub/mlr/2020/article/from-the-barrel-to-the-pump.htm

2. McHugh, D. (6 October 2022). How will OPEC+ cutbacks affect oil prices, inflation? PBS Newshour. Retrieved October 21, 2022 from     https://www.pbs.org/newshour/economy/how-will-opec-cutbacks-affect-oil-prices-inflation

3. Subramanian, P. (10 June 2022). Auto demand could face a ‘real problem’ amid rising rates, sky-high gas prices. Yahoo! Finance. Retrieved October 21, 2022 from       https://finance.yahoo.com/news/auto-demand-could-face-a-real-problem-amid-rising-rates-sky-high-gas-prices-170616017.html

4. U.S. Energy Information Administration (17 October 2022). Gasoline and Diesel Fuel Update. Petroleum & Other Liquids. Retrieved October 21, 2022 from https://www.eia.gov/petroleum/gasdiesel/

5. Browning, N. et. al. (16 September 2022). Analysis: Lower oil prices defy robust forecasts for global demand. Reuters. Retrieved October 21, 2022 from       https://www.reuters.com/business/energy/lower-oil-prices-defy-robust-forecasts-global-demand-2022-09-16/

6. State Gas Price Averages. AAA. Retrieved October 24, 2022 from https://gasprices.aaa.com/state-gas-price-averages/

7. Paoli L. et. al. (September 2022). Electric vehicles tracking report. International Energy Agency. Retrieved October 21, 2022 from  https://www.iea.org/reports/electric-vehicles

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