Many automobile consumers these days are very concerned with the high cost of gasoline. The high cost of gasoline has impacted the way automobiles are being built as well as how they are being used on a daily basis; there has been a steady decrease in the number of vehicles sold over the past decade. In 2001 there were a total of 17,472,378 vehicles sold in the United States, whereas in 2011 there were only 13,040,632 vehicles sold (WardsAuto, 2012), this could very well be related to the price of crude oil. In December 2005 crude was at $61.04, as of February 2011, crude oil prices have risen to $109.77 (nyse.tv, 2012) . This effect has also been noticed in the sale of light trucks. In 2001, there 9,102,378 light trucks sold in the United States, whereas in 2011, there were only 6,951,210 trucks sold (WardsAuto, 2012). Given that light trucks depend heavily on fuel consumption it is worth investigating whether demand for light trucks will grow or shrink going forward.
This report uses statistics from the United States to determine whether demand for light trucks will grow or shrink in the future. The number of trucks sold in the United States is much higher than the number of trucks sold in Canada, as well; the United States has been significantly affected by a financial crisis which may have played a major factor in the purchase patterns of light trucks. Along with innovations and Americans affection for light trucks, it seemed like the logical choice to investigate the demand for light trucks in the USA as opposed to Canada.
Given the recent financial crisis in the United States it seemed like a logical place to start. Table 1 depicts a graph of the United States GDP from 1951 to 2011 compared with light truck sales from 1951 to 2011. There seems a direct correlation between the GDP and truck sales. As the economy output in the United States rose, truck sales rose as well, and whenever the economy slipped there was a decrease in the number of light trucks sold. There seem to be explanations for why there have been periodic dips in truck sales since the 1950’s. In the early 1980’s there was a significant drop in the number of trucks purchased, this could be related to the Iranian Revolution which destabilized oil production in the Middle East (Magazine, 1979), along with highest prime rates in the history of the United States at 20.35 in December of 1980 (System, 2011).
Once the economy started to improve in the early 1980’s truck sales increased, and soared until 1988, then there was a steady decline until 1991, and this decline could be attributed the recession on the early 90’s (Research, 1992). Beginning in 1992, there was unprecedented growth in the number of light truck sales. There were approximately 5 million light trucks sold in 1992 (WardsAuto, 2012), and increased every year to peak at 9.8 million in 2004 (WardsAuto, 2012). Starting in 2004 there was a plateauing effect of the truck sales, manufactures couldn’t push the demand over 9 million (WardsAuto, 2012). It could have been that we might have reached some sort of equilibrium between supply and demand. But in 2008 the number of trucks sold plummeted to 6.7 million (WardsAuto, 2012), but the GDP stopped growing as well (Analysis, 2012). The sub-prime mortgage crisis could be attributed the lack GDP growth, as well as number of light trucks sold, as consumers disposable incomes were significantly reduced, and savings were wiped out.
Given that there is a correlation between economic growth and light truck sales, it could be said that demand for light trucks is closely tied to economic activity, however, there are other aspects of this that could provide more context. There was a thought earlier that light truck sales plateaued in 2004 at approximately 9 million units sold per year until the sub-prime mortgage crisis; however, the plateauing effect may have been a result of the price of crude oil. Crude oil prices started on a steep increase in mid-2003 at approximately $30 US/barrel to $130 US/barrel by mid-2008 (Canada, 2009). The increase in crude oil price may have shifted the demand curve towards the left and allowed production to reach equilibrium. Evidence suggests that the increase in crude oil price only slowed down the demand for light trucks while financial crisis affect the demand much more significantly.
Table1
(Commerce, 2012) (WardsAuto, 2012)
The process of creative destruction is already under way with regards to crude oil. California is currently offering $11.1 million clean vehicle rebate (California, 2009). “President Obama Announces Funding for Breakthroughs in Natural Gas and Biofuels as Alternative Fuels for Vehicles” (Energy, 2012), and most interestingly Hawaii’s clean energy plan is aiming to be 70% clean energy by 2030 (initiative, 2010); interestingly, General Motors and their partners have committed to building hydrogen powered vehicles and fueling infrastructure for Hawaii by 2015 (Motors, 2010). This is a significant step in reducing the dependency of crude oil for vehicles, especially light trucks. Manufactures are starting to introduce hybrid versions of light trucks as well.
Now it’s important to understand why people buy light trucks in the first place. Could light trucks be replaced by other modes of transportation, or other types of vehicles? Light trucks are commonly found on construction sites, they are great for storing large items, and they can tow heavy equipment which makes construction jobs much easier; however, trucks go further than just construction, many tradesmen find light trucks as a necessity for their day to day job. There are also many individuals who use light trucks to haul their RV’s, Jet Skis and everything else they need for the cottage, or weekend getaways. Light trucks also provide an easy way to go off-roading and maneuver around uncharted dirt roads to reach ones destination. Last but not least Trucks do convey an image; trucks are synonymous with the American image. As long as things need to be hauled, and large storage space is required, it’s hard to envision another type of vehicle or mode of transportation that is currently available being able to replace the functionality provided by light trucks.
While light trucks have their main use cases, manufacturers have also been adding subtle changes to entice consumers to choose trucks versus other types of automobiles. For example, trucks now have much more room in the cabins; they have the latest technological gadgets including Blu-ray players to keep the kids entertained on long trips. Light trucks these days are providing the functionality required at the construction sites, along with the comforts of a luxury car all in one.
It can be said that there are two major factors that will influence the demand for light trucks. One is economic recovery, we can see from Table 1 as the economy recovered in 2009, truck sales spiked as well with respect to the GDP. Secondly innovation which leads to creative destruction can break barriers that may exist due to the high cost of crude oil and shift the production possibility frontier towards the right as seen in Figure 1. If the GDP continues to grow till 2015, it can be suggested that light truck demand by 2015 will be similar to the plateau before the sub-prime mortgage crisis of 2008, resulting in a demand of approximately 10 million units. Consumers need light trucks, they satisfy a particular market segment, and as light trucks innovate they could tap into other market segments as well and experience growth similar to the stretch from 1992 to 2004.
Figure 1
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