High Gas Favors Ford's Shift to Smaller Cars

This consisted of not driving anywhere, mowing the lawn or using other gas-powered tools, and resisting the impulse to turn on the heat when the thermometer dipped into the 40s. This made for a pleasantly tranquil experience on Memorial Day itself, freed from the usual demands of errands and chores.

It's also unsustainable, given that the nearest grocery store is 10 miles away and I come here on weekends from New York City, with no direct public transportation links. I read this week that some are predicting gasoline will hit $6 a gallon in the not-distant future. This will no doubt encourage conservation and the continued development of alternative fuels, which is all to the good. But in the meantime, there's going to be plenty of hardship, and I don't mean for city dwellers like me who may have to curtail their weekend activities.

Most of my neighbors in this rural area of upstate New York don't commute to a city for their jobs. Nearly all of them drive a pickup truck — some have two — or an SUV. I've often been struck by how much driving they do, both for work and for pleasure. After the commute from Manhattan, I tend to stay put. But I understand that the appeal of isolation can wear thin when you're here all the time. My neighbors think nothing of roaming over a five-county area, visiting relatives and taking in sporting events, state parks and fairs, in addition to driving to distant jobs.

Suddenly, all that has become much more expensive, prohibitively so in many cases. Ford Motor (F) said last week that it had seen a precipitous drop-off in the sale of new trucks and SUVs during the first two weeks of May. That coincides with the most recent surge in oil prices to over $130 a barrel, and gas prices in New York of over $4 a gallon. It's also consistent with my sense that people around here have stopped waiting for energy costs to return to "normal." Short-term measures have been exhausted, and they're starting to face the long-term future of high oil prices.

This is all terrible news for the auto industry. Or is it?

Among other things, my neighbors are talking about trading in those trucks and SUVs for small, fuel-efficient cars. Or, more frequently, keeping the trucks but driving them only when needed, and adding a fuel-efficient vehicle for everyday use. This got me thinking: Imagine if all, or nearly all, of those SUVs you see on the highway are likely to be replaced soon with more fuel-efficient cars. This past weekend I passed a Hummer dealership in New Jersey, its lot crowded with vehicles but deserted of customers, and felt an impulse to drop in. Imagine the plight of a Hummer salesman these days.

For auto makers still depending on the large-vehicle market for most of their profits, this is grim. That would be General Motors (GM) and Ford, though even Toyota Motor (TM) acknowledged recently that it had erred in overestimating demand for large trucks. But longer term, this strikes me as an opportunity for the auto industry, especially for those producers nimble enough to respond to this remarkable shift in consumer demand. Trucks, SUVs and large gas-guzzling cars may be languishing, but I predict a surge in small-car sales. A colleague of mine recently went shopping for a small, fuel-efficient car for her son. I thought she'd find deals galore, but I was wrong. Popular small models were flying off the lot and selling at full list price.

Ford shares lost 15% last week amid news that its large-vehicle sales were plunging and that it considered it "extremely unlikely" that it would return to profitability in 2009, as it had earlier forecast. Having just reiterated my confidence in Ford a few weeks earlier, after it reported a surprising quarterly profit, as well as being a Ford shareholder, this is doubly disappointing. But Chief Executive Alan Mulally says he sees a long-term shift in demand away from large vehicles. If this is what it takes for Ford to face reality, then so much the better. The company said it was cutting SUV production by as much as 40%, but it also said it was boosting production of its fuel-efficient Ford Focus and Fusion models. Lost in the bad news is the fact that Ford actually has some decent models to offer consumers facing $4-per-gallon gas.

By contrast, a GM spokesman said the company "is looking at the situation, and seeing where it is right now and where it is going." What has GM been looking at all along? Given its persistent optimism about truck and SUV sales, this hardly inspires confidence.

So I remain comfortable with my Ford position. At under $7 a share, I'd even buy more for the long term. Investor Kirk Kerkorian just tendered for up to 20 million shares at $8.50, so I'm not the only one who sees value here.

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