With oil prices breaking the psychologically important level of US$50 per barrel for the first time, many are beginning to conclude that the world is on the verge of an oil crisis on the scale of 1973. Markus Doerr, head of Ricardo Strategic Consulting’s Central European practice, argues that this has been a wake-up call for the automotive industry and consumers alike. Here he analyses the origins of the current price spike, the lessons of history and the strategic choices for the future.
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Few could claim that oil has been abundantly available over the last decade, and pump prices for gasoline and diesel have remained an occasional political issue in many geographical regions.
Prices have however remained at comparatively stable levels and have created an environment in which consumers have developed a growing appetite for ever larger SUVs and higher performance engines.
It would be tempting to view the current oil price shock as being reminiscent of the 1973 oil crisis, but such an analysis is in many respects too simplistic.
The 1973 oil crisis was entirely politically motivated and triggered by the Yom Kippur war: put simply, its basis was a deliberate tightening of supply by the principal oil producing nations to others that were seen to be politically allied with Israel.
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By GlobalDataThis time it is combination of several factors for which there is no easy and certainly no short-term fix.
A different type of ‘crisis’
Demand for crude oil is tightening at an international level due to the rapid industrial development of the Chinese and Indian economies. China in particular continues to post annual GDP growth in excess of 8 per cent and the motorization of these economies is just at its humble beginnings. As net consumers of oil, the growth of these two economies will continue to tighten the market for crude into the future. But this increase in demand comes at a bad time for the energy industry; the low oil prices and apparent security of supply enjoyed through the late 1990s led to a shortfall in investment which now places a constriction on downstream supply.
Compounding all of these factors are the increasing international instability and insecurity: with a meaningful response to the root causes of international terrorism being a protracted undertaking, this is likely to prevail for many years to come. In such an increasingly tight market, disruptions to supply – actual or threatened – caused by factors such as the recent attacks on Iraq’s already decimated oil infrastructure and the crisis facing Russia’s Yukos, can only add to the frequency and severity of price spikes.
Given this situation, there will be no return to low oil prices in the range of US$ 20-30 per barrel for light crude which were enjoyed so recently. A more realistic equilibrium price in the range US$ 35-40 could be possible, but there are no guarantees that prices will not settle on a higher level.
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Impact on the automotive industry
Increased oil prices will clearly have a significant effect on the automotive industry, shattering hopes for the desperately awaited turnaround in 2005. They would not only lower the growth prospects, they might also result in a significant change of the vehicle line-up and the technologies deployed on vehicles.
While the origins of the recent increases in crude oil prices are very different from those which led to the 1973 oil crisis, the lessons of history might help us to better understand the likely consequences of an oil crisis. In the mid seventies Japanese companies were able to break into the US market with smaller and much more fuelefficient vehicles than those offered by domestic manufacturers – a competitive threat to which American car companies had virtually no response. Sales of diesel vehicles also increased substantially as consumers were attracted by their superior fuel efficiency – a trend which even impacted the US passenger car market where diesel penetration reached a peak of 6% or 500,000 units in 1981. In all vehicle segments styling became heavily influenced by aerodynamic considerations and the Cd-coefficient was broadly used as a “marketing value.”
Automotive manufacturers today need to revisit their product portfolio and technology strategies and prepare themselves for what could be the largest challenge since the 1970s.
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Meeting the technology challenge
If automakers are to re-focus their product line up on increased fuel efficiency, there are many choices to be made and candidate technologies from which to select. But none of these choices comes for free. Almost all of the technologies incur high on-cost that cannot easily be passed on to the final customer given the prevailing economic climate. Some of the technologies have negative impacts on certain toxic emissions or on driveability, others improve the perceived or real environmental friendliness or can even be marketed as an improvement in the vehicle’s driveability.
The optimum response to the technology challenge will vary between market sectors and automotive manufacturers. The target regions and customers and the brand positions are too different to allow for a “one size fits all” strategy.
Much is at stake – deciding the right product and technology strategy for the future is hugely complex and will impact the profitability over many years. Product portfolio and technology choices point the directions of hundreds of millions of dollars in investment in R&D and facilities and decide on the market success of the brand.
Technology route mapping
Ricardo has invested heavily in researching technologies to improve fuel efficiency and has a deep understanding of the trade-offs that come with each of the technologies. Instead of describing future technologies in static roadmaps, Ricardo is looking at combinations of technologies and how they evolve over time. There are multiple routes to the future and they depend on the importance of brand attributes, target customers and key regions.
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Using this methodology and leveraging the large expertise based on a solid foundation of research, Ricardo can help automotive manufacturers to find their optimum route into a more fuel efficient future that provides the best balance of all the important optimization criteria that have to be considered. Once the technology route is defined it can be broken down into a series of development projects and into a
technology cascade for the vehicle lines – all in an effort to make the deployment both manageable and affordable.
By deploying strategic methods such as technology route mapping, Ricardo can assist vehicle manufacturers in all parts of the world adapt in today’s rapidly changing market. The price of crude oil may not be fully predictable over the coming years and the extent and duration of individual price spikes uncertain, but the longer term trend is clear. In these circumstances an understanding of the likely resultant impact of higher fuel prices upon consumer behaviour and the strategic options available given the current product portfolio and technology mix, may enable the most forward thinking automakers to gain advantage in uncertain times.
This article was first published in the Ricardo Quarterly Review, a publication prepared by Ricardo in association with TwoToneMedia.
