Higher Fuel Prices Driving Demand For Small Cars

Every driver has surely noticed the continual rise of gas prices over the last few months. And due to rising global oil demand, that trend is expected to continue.

The inability to match supply and demand is pushing up both oil and gas prices.

The International Energy Agency says that global oil and liquid fuels consumption grew by an estimated 2.8 million barrels per day in 2010, to 87.8 million barrels per day, the second largest annual increase in at least 30 years. And it foresees consumption rising to 89.3 million barrels per day this year.

Though global oil consumption had slowed during the recession, it is now higher than before the economic downturn.

The US Energy Information Administration (EIA) expects that world oil markets will continue tightening over the next two years.

That's because the EIA projects that world oil consumption will grow by an annual average of 1.5 million barrels per day through 2012.

At the same time, the EIA expects the growth in supply from non-OPEC countries to average about 0.3 million barrels per day this year, and to remain flat in 2012.

Consequently, the decisions of US car-buyers are being driven by rising gas prices. According to the latest sales figures, many buyers are trending toward smaller, more fuel-efficient cars and hybrids.

For example, Toyota sold almost 11,000 Prius hybrids in the U.S. in January, an increase of more than 25% from a year earlier; Nissan sold 47% more Versas in January from a year earlier; BMW's Mini Cooper sales were up more than 22%; and sales of the Ford Focus jumped 41%.

With gas prices expected to range from $3.50 to $4.00 throughout the nation this year, the demand for small cars should remain strong. In response, automakers are launching an assortment of smaller, more fuel-efficient models.

A survey by Kelley Blue Book found that 61% of the respondents say that they have changed their driving habits as a result of rising gas prices, and many indicate they are considering making trade-offs on their next vehicle choice to save money on fuel.

According to the survey, 48% said they would consider a smaller engine size in their next vehicle to deal with rising gas prices; 36% said they would pick a smaller vehicle, such as moving from a mid-size car to a compact car; and 31% said they would move to a more fuel-efficient auto category.

Kelley Blue Book said consumers start to think about changing auto buying habits once gasoline prices cross about $3 a gallon. When it hits $4, about 80% of consumers say gas prices will alter their purchase decisions. And by $5 a gallon, the sentiment is almost universal.

So, based on current trends, from now on the vast majority of car buyers will be factoring gas prices into their purchase decisions.