High pump prices drive car sales: Scotiabank

People are starting to put their money where their mouth is when it comes to high gas prices, and moving to smaller, more fuel efficient vehicles, a new report suggests.

Scotiabank economist Carlos Gomes issued a report Tuesday that suggested pump prices are having enough of an impact on consumers' bottom lines that they are basing their buying decisions on how much fuel they'll need.

"Canadian and American households have started to increasingly buy smaller, more fuel-efficient vehicles, a trend that emerged once oil prices surpassed $100 USper barrel in March," Gomes said in his Global Auto Report.

Gasoline prices movedmore than six cents higher on average across Ontario and Quebec on Monday night. But according to price-tracker GasBuddy.com, the increases were much more moderate elsewhere and even declined in many places.

Crude oil prices have dropped sharply all of this month, but pump prices have largely maintained their high levels.

'Households have started to increasingly buy smaller, more fuel-efficient vehicles.' Scotiabank auto analyst Carlos Gomes

The gasoline industry is notoriously secretive about what causes prices to move up or down. But speculation Tuesday suggested flooding fears on the Mississippi River, coupledwithseveral pipeline disruptions, was having an impact on refining capacity.

Gomes found that sales of compact cars and small crossover utility vehicles jumped 23 per cent in Canada in April comparedto a year earlier, a sharp reversal from previous months when pickups and minivans were leading the way.

Buyers in the U.S. are doing the same thing: "In the United States, sales of compact cars and small CUVs soared 40 per centabove a year earlier in both March and April, and now account for nearly one-quarter of overall volumes," Gomes said.

Those segments made up 18 per cent of the market in 2007, and 20 per cent as recently as 2010.

Auto industry rebounding

The move toward cheaper and smaller cars has not yet eaten into profitability at the car companies, however.

Earnings for the two largest North American automakers jumped to roughly $2,400 USper vehicle in their home market a 10 per cent increase from the 2010 average, Gomes said.

Smaller cars appear to be the vehicle of choice, but car sales of all types remain higher in a rebounding economy. The report found U.S.car and light truck sales remained above an annualized 13 million units for the third consecutive month in April.

Sales in Canada have also strengthened in recent months, averaging an annualized 1.67 million units in March and April, well above the bank's full-year 2011 forecast of 1.59 million units.

"Given the stronger-than-expected performance in Canada, we are maintaining our full-year sales forecast unchanged even as volumes are expected to weaken over the summer and early autum," Gomes said.

But the industry is feeling the impact of the March 11 earthquake and tsunami that knocked the key Japanese automotive industry offline.

Japanese automakers were forced to slash production in Japan by 57 per cent in March compared to the same time last year, Gomes noted.