IRVINE, Calif. -

Kelley Blue Book’s Eric Ibara says the commonly held notion that gas prices will “inevitably rise” should be reconsidered, citing oil production increases in the U.S. as grounds for this assertion.

But a potential drop in gasoline prices could prove detrimental to OEMs and manufacturers if they are not prepared

Ibara , director of residual value consulting at KBB, noted that the gap between gasoline prices and natural gas prices is expanding, resulting in a shift towards more CNG-powered (compressed natural gas) vehicles.

Explaining the reasons behind this price gap, Ibara said, “In the first quarter of 2012, according to the Wall Street Journal, oil production in the U.S. averaged more than six million barrels a day, a level not seen since 1998. This has been a contributing factor to the recent drop in crude oil below $80 a barrel.

“The technology that enabled this increase is called hydraulic fracturing, a technique that allows previously inaccessible oil and gas to be removed from the ground. This has resulted in a separation between gasoline prices, which have risen since 2008, and natural gas prices, which have dropped,” he continued.

As a result, more CNG-powered vehicles are hitting the market, starting with municipal vehicles, such as city buses and waste-collector trucks.

Moreover, Ibara noted that earlier this year, “all three domestic manufacturers announced CNG versions of their full-size trucks, offering truck buyers an option that consumes less expensive fuel.”

What effect will this trend have on fuel rates?

“This trend will likely continue and reduce the demand for gasoline,” Ibara noted, perhaps easing fuel prices in the process.

Also contributing to this potential lessening of demand for gasoline is the increasing fuel efficiency of new vehicles — spurred by Corporate Average Fuel Economy standards call for the average fuel economy across all vehicles sold by a manufacturer rising to an average of 34.1 miles per gallon by 2016.

“This represents an improvement of approximately 33 percent over the average of all vehicles sold in 2008,” Ibara stressed.

And as fuel-efficient vehicles continued to require less and less gasoline, again, demand will lessen.

What Does This Mean for the Industry?

A short-term result of this trend:  “If normal trends hold and no extraordinary event occurs, it is likely that gas prices have already peaked for the year,” Ibara stated.

"Gas prices at the pump have historically been lower when oil prices have been at their current level of around $80 per barrel. Prices of around $3 a gallon could be possible later this year,” he continued.

As a result, Ibara explained this could equal “bad news” for the gas sippers.

“From the peak of gas prices at the end of June 2008, to the bottom of the decline in prices in January 2009, compact and subcompact sedans lost an average of about 20 percent of their values,” Ibara noted.

“Hybrids lost even more, an average of 34 percent, or more than $8,000 per vehicle,” he continued.

Though this run-up and decline is not as drastic as seen during the 2008 gas-price scare, “softness in these segments is expected to accompany lower gas prices,” officials stressed.

Ibara also went on to explain why the rise in fuel prices this year differs from a similar situation in 2008.

“While the rise in fuel price makes 2012 appear to be similar to 2008, there is one significant difference. In 2008, as gas prices plunged, fuel efficient vehicles dropped in value while large utility vehicles and trucks gained. In 2012, large vehicle values did not decline as gas prices climbed. This is because of a shortage of used vehicles across almost all segments," he shared.

“Therefore, a drop in gas prices this year is not expected to cause a further rise in prices among trucks and utility vehicles. For new-car sales, consumers have preferred larger vehicles as long as gas prices are affordable. In 2008, gas prices rose during the first half of the year and then plummeted throughout the second half," Ibara continued.

"That year, retail sales for fuel efficient vehicles (compact cars, subcompact cars and hybrids) dropped by 29 percent from the first half to the second. Consequently, a decline in retail sales in these segments is expected for the second half of this year, but won’t be as severe as the 29 percent  drop in 2008,” he added.

Lastly, the KBB executive explained that low gas prices are likely to create an “inventory imbalance” as CAFE requirements for 2016 start to take hold.

Will manufactures be “locked” into producing vehicles that consumers aren’t in the market for? Will this make it difficult for OEMs to achieve CAFE targets?

On the other hand, Ibara noted that “fuel-inefficient vehicles would be produced in controlled numbers and their shortage could result in artificially high prices.”

That said, Ibara contends that consumers might be left “unsatisfied” if they have to settle for a vehicle that might not be their first choice.

But that’s not all.

“A further consequence of this market imbalance could be a hit to manufacturers’ bottom lines if they are forced to incentivize fuel-efficient models and are restricted in selling more high-profit, fuel-inefficient models. Over a long period of time, this could impact manufacturer’s research and design budgets,” Ibara explained.

“From a residual value perspective, if these trends materialize, they will likely present a few challenges to manufacturers,” he added.

He also cautioned that as demand for a model falls,  manufacturers need to resist the “temptation  to direct excess volume to daily rental service.

“Balancing production with demand will be critical, along with a miserly application of incentives only when needed,” he added.

To avoid these problems, Ibara noted that anyone holding a portfolio of vehicles could run an analysis of the residual risk as lower gas prices.

“As stated above, there is little upside gain from larger vehicles this year to offset lower values for fuel-efficient vehicles. From the oil spike in 2008, many in the auto and financing industries are aware of the risks associated with rising fuel prices,” Ibara explained, wrapping up his commentary.

“At Kelley Blue Book, we believe higher gas prices five years from now is only one of several scenarios against which vigilance is required. Developments in the oil and gas industry, along with the CAFE requirements for 2016, will conspire to keep a lid on fuel prices," he noted.

“However, those same CAFE regulations and the current used-car inventory levels could create risk factors that did not exist in 2008 should fuel prices continue to drop. Considering what’s at stake, it seems prudent to have a plan that considers such a scenario," Ibara concluded.