THE BLOG
03/02/2012 04:52 pm ET Updated May 02, 2012

Gas Prices Up, Car Profits Down

Even though car sales are near doubling in some parts of the country, the result of high gas prices combined with those improved sales could mean lower profits for car companies doing business in the U.S.

Why?

Because the profit margins on smaller, high fuel mileage cars, trucks and S.U.V.'s now in demand are much lower than those on full-size vehicles. All this means is that higher gas prices push sales of hybrids, current and coming E.V.'s and four-cylinder "toaster cars" like Scion's xB and Nissan's Cube, so at the end of the day, the car companies can actually lose money as sales increase.

This is not the desired result which General Motors, Ford, Fiat's Chrysler and all the others have been counting on as the auto industry has struggled and clawed its way back to profitability. But it is the kind of surprise which fuel prices can cause.

Bob Lutz, the sometimes bombastic former Vice President of G.M., was famed for saying that the single most important factor affecting car sales and car prices had nothing to do with cars -- it came down to fuel prices. Lutz felt so strongly about this that, known publicly for loving high-performance cars, he championed what eventually became the current Chevrolet Volt hybrid and was on-the-scene through the development and short-term marketing of the E.V. 1, which was sold at Saturn dealers.

Lutz was not the only futuristic-type at The Corporation through the '60s and '70s. Roger Smith, who was Lutz's boss for decades, and who rose to a sort of ignominious fame in Michael Moore's film Roger & Me, was made out to be a Neanderthalic throwback to the G.M. of the 1920's rather than the visionary he ultimately turned out to be. Anyone who was supportive of Lutz, Saturn and the E.V.1 and Volt can't be completely dismissed as Moore did in his hatchet job on Smith.

So now we're in the middle of a shock to the system resulting in gasoline averaging over $4 a gallon in much of the country. Southern California has been no stranger to $5 and more per gallon these past few weeks.

Another irony could be a rise in the pricing of everything from Kias to Hyundais and other well-known small cars. We probably won't see Chevy Sonics priced closer to Corvettes than Cruzes anytime soon, but car-makers are stuck in the middle of double-digit sales increases combined with gas prices which are rising even more quickly while profit margins drop.

What it actually costs to make a car is one of the manufacturing industry's most closely guarded secrets. The longer a car stays in production without major changes means the higher profits can be for the car-maker. That's why pickup trucks and S.U.V.'s are such fantastic profit-drivers for the car companies. Changes in the sheet metal costs a certain amount, but keeping the same platform, drivetrain and engine means car-makers might just as well be printing money as making trucks.
No one really knows what will happen with this current crisis.

Wait until yet another irony becomes clear to American consumers -- that gas prices have generally been kept artificially low in the U.S. and while we whine and cry about $4 a gallon gas, many other countries have had gas prices closer to $4 a liter as long as the stuff has been sold.