"Oil at $100 per barrel equates to a gasoline retail price in the $4 per gallon range," says Robert Schultz, S&P's automotive credit analyst. For domestic automakers and suppliers, credit ratings for financing would become tighter. Schultz notes that while overall aggregate demand for new vehicles has been steady, domestic carmakers were already grappling with market share losses and a consumer shift away from SUVs (down 14 percent from last year) and pickup trucks (down 11 percent in the first half of this year). "A drop in consumer demand, in the midst of their turnarounds, could really hurt them and their suppliers," says Schultz. The real danger presented by another oil shock of this magnitude is that overall demand could fall. Both Ford and GM sales are down this year. Should consumer demand fall, a shrinking piece of an even smaller pie will increase the gravity of margin compression and shrinking market share upon both of them. The echo effect Oil at $100 per barrel would impact more than just parts and new vehicle sales. The echo effects of rising prices would be felt in other industries and sectors and return to the aftermarket. Directly, the costs of shop supplies would rise. Indirectly, changes in consumer spending would also be felt by the aftermarket. Chemicals analyst Kyle Loughlin says a spike in oil prices would be felt in the petrochemical industry. He notes that fluids and lubricants, plastics and polymers, paints and coatings, and other automotive-related products would feel the impact not only in the costs of raw materials, but also from a distribution perspective. Although the petrochemical industry is in a strong financial position currently, Loughlin says that the delicate strategy of raising prices to cover raw material cost increases, especially if too quickly, could trigger a decrease in consumer demand. The ability to pass on transportation surcharges also has its own risks. Fortunately for these cash-rich companies, hedging strategies - wherein companies buy derivative investment products like futures or swaps to offset anticipated cost increases - can provide some temporary relief from having to act immediately or drastically. But hedging can only provide a limited amount of time before pricing must be addressed. S&P retail analyst William Wetreich says that consumer spending is traditionally the sector most sensitive to rising oil prices - whether the increase is gradual or a shock. The consumer market is also sensitive to the timing of any price increase, such as the Christmas season. Consumers often react by reprioritizing their discretionary spending. For example, from a transportation viewpoint, where commuting to work may remain a priority, other issues may be sent to the back-burner, such as maintaining vehicles, purchasing new parts or accessories or upgrading in-vehicle infotainment. Timing is everything Wetreich notes that consumer spending on energy has fallen from 8 percent of family income in 1981 to 6 percent in 2006. Compare that to the current $78 per barrel price of oil (at press time) is much higher than back in 1981. "A 50 cent-per-gallon increase in gasoline represents about 0.5 percent of average household incomes," he states. "Do people make drastic changes for just 0.5 percent?" Weitreich does clarify, however, that few families are "average," and that an increase in oil pricing would hit lower-income families and the businesses they patronize harder than other households. Wetreich says that consumers no longer view high gas prices as a temporary trend, but a fact of life. The trouble is that automotive spending - like spending on movies or restaurants - is one of the discretionary areas subject to the most erosion, until either a rise in income re-energizes spending elasticity, or the necessity of a breakdown collars the consumer. The degree to which automotive spending would be affected, Wetreich says, is a function of how much oil prices rise - and how quickly the rise occurs.
Shock therapy There is the adage that fish and people are somewhat alike: Drop a fish into boiling water, and it will do anything to jump out. But raise the temperature gradually, and it will willingly boil to death. Oil prices, like water temperatures, can have the same effect. Consumers absorb gradually rising prices more willingly that they do a sudden change. The shock of the 1973 and 1981 oil crises demonstrated that. The problem with $100-per-barrel oil is, S&P says, that no one knows the timing or extent of a jump in price. Will it be more gradual, with smaller tremors, as over the past few years, or are we due for the big one? If quick and severe, a spike would fuel a snapback on spending in the aftermarket, directly in the automobile sector, and indirectly by consumer spending. If there is a lesson to be learned here, however, it is that there is an opportunity for aftermarket retail and repair shops to be proactive in managing the risk of a sudden oil price increase. One way is to contact customers and encourage them to have lagging maintenance performed now, before any sudden oil price increase strangles both their vehicle's efficiency and their ability to afford service later. Timing promotions and marketing campaigns for driving peace of mind ahead of Thanksgiving and Christmas spending is another way to tip consumer spending in a shop's favor. Encouraging spending on needed servicing now is not only just good business acumen, it also provides good customer service, as it smoothes the impact of pending oil price increases over time. Another aspect that can be reviewed is parts inventory and ordering. Ensuring slow-moving parts or accessories are not clogging a shop and tying up much-needed working capital is one means. Using a third-party shop management solution to handle parts ordering and billing, instead of the more costly and time-eating fax and phone means of doing business, is another. The fact is, like an earthquake or tsunami, none of us can prevent the coming of $100-per-barrel oil. We can, however, take steps to prepare and be better positioned to manage the severity of the impact when it happens. (Sources: Standard &
Poor's, DOE)
