U.S.News & World Report
5 Myths About $3 Gas
Friday November 16, 3:44 pm ET
By Rick Newman


A couple of years ago, the prospect of gas costing $3 per gallon--indefinitely--loomed as an economic cherry bomb and a threat to the American way of life. Automakers considered $3 gas to be the threshold at which car owners would rebel and trade in their SUVs for scooters. And economists feared it would crimp consumer spending--the great engine spurring U.S. economic growth--as people traveled less, cut back on shopping, and generally stayed home and moped.

It hasn't happened.

Needless to say, rising pump prices are an economic hardship for some people, like low-income workers who drive long distances to their jobs. But gas prices that now average about $3.10 per gallon--more than twice what they were five years ago--seem to have had surprisingly little effect on the cars people buy and the way they drive. Here are five dramatic scenarios associated with $3 gas that various seers have predicted but now look like they aren't going to happen.

Americans will flee big cars. Some drivers have downsized, but there are actually more land yachts on the road today than there were before the big run-up in gas prices. Large vehicles account for 27.9 percent of the market today, according to J. D. Power & Associates, compared with 27.1 percent in 2000, when gas hovered around $1.50 per gallon. Many people simply need big haulers to transport kids or gear, no matter how much gas costs. And wealthy drivers don't particularly care if it costs $60 or $70 (or even $150?) to fuel their megamobile.

Pricey gas will end our love affair with SUVs. Sales of midsized SUVs are down, but that's largely because many models have been replaced by crossovers that offer a smoother ride and better styling. Owners of big SUVs, meanwhile, seem to be sticking with their beasts through thick and thin. Sales of vehicles like the Cadillac Escalade, Hummer H2, Jeep Wrangler, and Mercedes GL are strong. At General Motors, sales of fancier trim lines, which can yield profits approaching $10,000 per SUV, have been a surprising bright spot. "We're selling a much richer mix than we would have thought," says Gary White, the vice president in charge of full-size trucks.

Small cars will transform the market. When the Toyota Yaris, Nissan Versa, and Honda Fit hit the U.S. market in 2006, headlines (including one in U.S. News) predicted that drivers shell-shocked by pump prices would rapidly embrace the thrifty little "B cars" that were popular elsewhere in the world. The B cars have been modestly successful, but a far bigger trend is the exploding market for appealing crossovers like the Honda CR-V, Nissan Rogue, and Chevrolet HHR. Crossovers account for 17 percent of the market today, up from just 4 percent in 2000. Buyers love them because of their all-in-one versatility: Crossovers ride like sedans but sit higher, and many have flexible seating configurations and other features that make them more practical than the old SUVs. It's a fringe benefit that they tend to be smaller than the midsize SUVs they're replacing and get better gas mileage.

There will be a hybrid in every driveway. In 10 or 15 years, maybe. But for all the celebrity endorsements and media hype, hybrids still represent just 2 percent of the market. That's likely to grow steadily, but as automakers have experimented with different kids of hybrids, they've also hit some limits on consumer acceptance. Sales of the Honda Accord hybrid were so poor, for example, that the company stopped building it; prices starting at about $30,000 were simply too steep for pragmatic Honda buyers, who didn't see much payback. And a recent J. D. Power study found that interest in hybrids declined for the first time this year, with the biggest drop among young buyers 25 and under. That's happened as the mileage ratings for most hybrids have been revised downward--in some cases by a hefty 20 percent--and as federal tax rebates for some models have expired.

Consumers will freak out over costly gas. There was clearly a psychological effect on consumers as gas prices crested $2, starting in 2004, and $3 this year. But it appears to have been short-lived, and some simple economics explain why: A typical Cadillac Escalade driver, averaging 14 miles per gallon, spends about $280 per month on gas at current prices. His gas bill has gone up by about $150 since 2002. But along the way incomes have risen, too, and mortgages, representing a far bigger monthly expense, have gotten cheaper for millions who bought or refinanced at low interest rates. And while gas prices have risen by a bit more than inflation over the past 25 years, lots of other things people spend money on--like appliances, electronics, clothes, and, yes, cars--are a lot cheaper. So while downsizing or driving less might save a few bucks, many consumers can still afford to splurge. With gas prices expected to stay high and maybe even rise further, analysts now wonder what will happen if $4 becomes the new $3. The answer might just be not much.