OREANDA-NEWS. Fitch Ratings believes that the fall in oil prices to a 6-year low at less than USD50 a barrel will not lead to a significant short-term jump in European new vehicle sales, although sustained low prices could have a medium term impact. We maintain our current base case of an approximately 2.5%-3% growth in auto sales in Western Europe in 2015, following a 4.8% increase in 2014.

We believe that demand for cars will continue to be driven primarily by other economic variables including unemployment, disposable income, fiscal and interest policies and consumer and corporate confidence, rather than more distant considerations about the cost of using a car. In addition, gasoline prices in most European countries contain a high proportion of taxes, which acts as a buffer limiting the effects of Brent price movements.

The situation in Europe is somewhat different from the US, where short-term correlation of new vehicle sales to oil prices has been greater. In particular, sales of light trucks, including large SUVs and pickups have typically benefitted from declines in gasoline prices.

Nonetheless, sustained lower European gasoline prices could increase average mileage and ultimately increase the rate at which buyers replace their vehicles, due to quicker ageing and more breakdowns from higher distance driven. This could be slightly positive for auto sales in the medium term.

However, sustained low gasoline prices could also be detrimental to manufacturers' strategies in their efforts to drastically improve fuel consumption and meet stringent regulations on emissions. Low gasoline prices could entice customers to stick to vehicles with traditional combustion engines and deter them from considering the purchase of vehicles with more fuel-efficient alternative powertrains, including electric, hybrid and fuel cell engines. Should gasoline remain sustainably cheap, future efforts from governments and manufacturers to develop infrastructure and promote the use of vehicles with alternative propulsion technologies will be critical.

Correlation between oil prices and new vehicle sales has been very low historically in Europe compared to the correlation between sales and other economic indicators such as unemployment and consumer confidence, with no noticeable direct impact from lower prices on the purchase of new cars. For example, in 2H08, the price of Brent fell from nearly USD140 per barrel to just over USD40 in early 2009. But European car sales dropped more than 15% from 15 million units to less than 13 million due to the financial crisis triggered by the Lehman Brothers bankruptcy. Conversely, the price of Brent more than doubled to nearly USD80 between mid-2004 and mid-2006, while car sales grew continuously in the same period.