The cost of fuel has been in the news recently, due to large increases resulting from the war in Ukraine. The war isn't only going to affect fuel prices though, as the New Zealand Herald reported yesterday:
For more than a year, the global auto industry has struggled with a disastrous shortage of computer chips and other vital parts that has shrunk production, slowed deliveries and sent prices for new and used cars soaring beyond reach for millions of consumers.
Now, a new factor — Russia's war against Ukraine — has thrown up yet another obstacle. Critically important electrical wiring, made in Ukraine, is suddenly out of reach. With buyer demand high, materials scarce and the war causing new disruptions, vehicle prices are expected to head even higher well into next year.
The war's damage to the auto industry has emerged first in Europe. But US production will likely suffer eventually, too, if Russian exports of metals — from palladium for catalytic converters to nickel for electric vehicle batteries — are cut off...
In the United States, the average price of a new vehicle is up 13 per cent in the past year, to $45,596, according to Edmunds.com. Average used prices have surged far more: They're up 29 per cent to $29,646 as of February.
Before the war, S&P Global Mobility had predicted that global automakers would build 84 million vehicles this year and 91 million next year. (By comparison, they built 94 million in 2018.) Now it's forecasting fewer than 82 million in 2022 and 88 million next year.
Mark Fulthorpe, an executive director for S&P, is among analysts who think the availability of new vehicles in North America and Europe will remain severely tight — and prices high — well into 2023. Compounding the problem, buyers who are priced out of the new-vehicle market will intensify demand for used autos and keep those prices elevated, too — prohibitively so for many households.
It's easy to explain what is going on here with simple supply and demand models of the new and used car markets. First, let's start with the new car market, as shown in the diagram below. The market last year was at equilibrium, with demand D0 and supply S0, leading to an equilibrium price of P0 ($40,350, based on the 13 percent increase noted in the quote above) and Q0 (94 million, assuming a similar number to 2018) new cars traded. The cost of car production has increased, because of the shortage of computer chips (increasing their price) and now the same for electrical wiring. This decreases the supply of new cars to S1, increasing the price to P1 ($45,596 in the quote), and decreasing the quantity of new cars traded to Q1 (82 million in the quote). [*]
Now consider the market for used cars, as shown in the diagram below. Again, the market last year was at equilibrium, with demand DB and supply SA, leading to an equilibrium price of PB ($22,981, based on the 29 percent increase noted in the quote above) and QB used cars traded. Used cars and new cars are substitutes. With new cars increasing in price, they became relatively more expensive than used cars, so car buyers have shifted to buying used cars instead of new cars. The demand for used cars increased to DA, increasing the price to PA ($29,646 in the quote), and increasing the number of used cars traded to QA.
So, if you are looking for a car any time soon, you can expect to pay a higher price for the car, as well as a higher price at the pump.
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[*] For simplicity, I've ignored the increase in demand for new cars alluded to in the article. The overall effect of that, combined with the decrease in supply, would be equilibrium price increasing by more, but an ambiguous effect on the equilibrium quantity of new cars traded. Given that the quantity of new cars traded has likely decreased, the increase in demand must be relatively smaller than the decrease in supply (and much smaller, given the large decrease in new cars traded).
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