Short-sightedness in vehicle purchases?

Now that gas prices have fallen from last summer's peak of $147/barrel to their current price of around $40/barrel, you just knew that this was going to happen: those gas-guzzling SUVs that nobody wanted when gas was $4 a gallon at the pump are now a hot item again:

The turnabout "shows the fickleness of the market," says (Chrysler President Jim) Press, speaking after a J.D. Power and Associates conference here for auto dealers.

Guessing what people want has been just as hard for dealers. AutoNation, the country's largest dealer chain, struggled last summer to stock enough hot-selling fuel misers on its sales lots.

Back then, CEO Mike Jackson says, buyers were trading their Cadillac Escalade SUVs for Toyota Prius hybrids. Now Jackson says he's canceling orders for such smaller vehicles and ordering more trucks instead.

The change shows how fuel prices rule the car business. In May, 56% of the vehicles sold were cars, not trucks. By last month, the share of cars had fallen to 47%, according to Autodata.

Gas prices averaged $1.845 a gallon by Sunday, less than half their summer peak of $4.114.

The market is becoming "almost schizophrenic" for big or small car demand, says Tom Libby, analyst for Power Information Network. He cautions against writing off small vehicles.

"People are making comments like 'Prius is dead,' " he says, which isn't true.

Ford Motor is adding a slew of small cars, including several derived from vehicles made by its European unit. General Motors has major small car plans, too.

Longer term, "The price of gas is going to go up," Ford Vice President Mark Fields says. Figuring out what buyers want amid wild gas price swings "is like trying to time the stock market."

It simply amazes me that people are basing a decision as big as a vehicle purchase on something as volatile and ethereal as the price of gas. Certainly, other factors are coming into play as well - it's a buyers market for vehicles right now, after all - but it's clear that the price of gas is the major factor when it comes to the decision between a smaller-fuel efficient car and a larger, gas-hungry SUV. Do the people who are buying these large vehicles really think that last summer's gas price spike was a one-time occurrence and that fuel will remain cheap from now on? If people really think that, they're being rather naive.

Petroleum is currently cheap because of the worldwide economic slowdown: the demand for oil is simply weak. The fact that demand for gasoline is typically low during the winter is also playing a role. Gas prices will certainly increase later this spring when refineries go offline to switch to summer blends and the summer driving season approaches. And worldwide demand will eventually increase as well, once the economy gets cranking again (although I personally don't foresee it doing so before 2010). There are still tens of millions of people in China and India who want to buy cars, after all. Just because they can't afford to do so right now doesn't mean that they've gone away.

In fact, once the economy gets rolling again, the pain at the pump could be even worse than what it was last summer. As fuel prices fall, oil companies reduce production investments such as the maintenance of existing oilfields or the development and exploration of new ones, simply because it's not profitable to do. That, however, means that when demand does eventually rise, there could be a "supply crunch" due to the lack of available and ready-to-go reserves. Gas prices would likely skyrocket, and that full-size truck or SUV that looks like a good deal right now will become a money-sucking albatross around the neck of its owner.

Hopefully, the people currently buying these large vehicles are doing so with the understanding that this scenario is a true possibility sometime in the future.