RNR Breaks it Down: Tire Prices

Dear Bree,

I’ve noticed that the price of tires has really gone up in the past few years and I’m wondering if there’s a method to this madness.  What the heck goes into making a tire that makes it more expensive today than, say, five or ten years ago?

Curious Callie

 

Dear Callie,

That is a many-layered question you ask, but I’ll do my best to answer it.  I’ll start out by giving you a list of the top factors that affect tire prices: supply of rubber, oil prices, tariffs, supply and demand, the vast selection of tire sizes available today and emerging markets.  All of these things are out of your control but they all affect the price you’ll pay for tires now and in the future (and for a lot of other products. as well).  I think it’s best to just break this down for you item by item and keep it simple, so here goes:

Supply of Rubber:  You learned this in your basic economics class, right?  If you need something but there’s not enough of it, the price of that item goes up.  Have too much of something, and its value decreases.  The same is true of rubber.  When there’s a slow-down in the auto industry, there may be a corresponding drop in tire prices.  A flood in India wipes out key rubber plantations, and the price shoots up.

Oil Prices:  There are two types of rubber used to make tires, natural and synthetic.  Natural, of course, is coming from those rubber trees we briefly discussed in our supply section. Synthetic rubber is made from petrochemical feedstocks and the main raw material used is crude oil.  About a billion tires are made every year, and about 70% of those tires are synthetic.  Now, it takes about 7 gallons of crude oil to make 1 tire: 5 gallons to make the feedstock and two to fuel the manufacturing process.  Roughly, these figures translate to about 5 billion gallons of oil used to make tires every year.  If you’ve been to the pump lately to fill up your car, then you understand why the price of tires is going up.

Tariffs:  Tariffs are the taxes or duties paid on certain imports and exports.  In 2009, the US imposed a 35% tariff on all car and light truck tires being imported from China because law-makers felt that the market was being flooded by cheap Chinese tires.  It was touted as a way to save American jobs but it also significantly raised the price of tires for all tire consumers.

Supply and Demand:  We talked about supply in our first section dealing with the supply of rubber, but it also applies in our discussion of oil prices.  With more and more consumers buying more automobiles, we need more gas to power them and more crude oil to manufacture the tires those cars and trucks ride on—so prices increase on oil and we feel it those effects when we purchase our tires, gas, etc. Crude oil isn’t manufactured in a factory, it is a finite natural resource. Less supply + more demand= higher prices for you.

More Choices, More $:  In 1977, 10 tire sizes covered 89% of the market (according to the Tire and Rim Association).  In just five years (2003 to 2008), the number of tire sizes increased by 42 percent to 519 different tire sizes for cars and light trucks.  When you’re only making ten different tire sizes, it’s much easier to produce large amounts of tires in the same process and keep your costs lower, but if you’re producing 519 different sizes (individual tire makers would not take on all 519, but you get the point), you’ve significantly increased the amount of effort, resources, etc. expended in production.  Ka-ching.  Factor in the increased inventory that tire sellers are required to stock, as well as storage space for all of those tires and you can see why having more choices equals having more expenses.

Emerging Markets:  Population rises in countries like China, India and Japan fuel jobs and economic growth within those countries, and hopefully a rise in the middle class.  What else comes from all of this growth?  A need for automobiles, and thus, tires.  Demand, demand, demand (and supply!) are at work again, and the price of tires will be affected accordingly.

So, there’s a rough breakdown for you, Callie.  All of these factors combine and fluctuate in tire prices, as in everything else, and it’s difficult (if not impossible) to tease them apart and put the blame on one or the other.  The tire tariff increases of 2009 caused a rather dramatic increase in tire prices, but certainly the price of oil, the supply of rubber and the other factors we’ve discussed have played a significant role in the pricing of tires, as well.  The long and short of it is this:  We all need tires and we all want the best price for the safest tires available (and a nice, long tire life, too!).  We do our best at RNR to offer our customers the most competitive prices that we possibly can, along with the variety of size and performance that they want (and we offer a Rent-N-Roll program with convenient payments and 120 days same as cash program to make buying that new set of tires more feasible!).  A lot of factors go into choosing a new set of tires, price definitely being one of them; come see us at RNR and let’s talk about your options!

 

Bree