The year 2025 presents a mix of opportunities and challenges for car buyers—early-year tariff concerns drove record purchasing activity as consumers rushed to avoid potential price hikes. Supported by increased dealer incentives to stimulate sales, original equipment manufacturers such as Ford and General Motors reached historic performance levels in the first half of the year.
However, according to a recent Morgan Stanley report, economic anxiety this year stems from oil prices rather than tariffs, and sustained price increases could have serious implications for the auto industry.
The report suggests that if oil prices remain elevated for more than six months, consumers may delay vehicle purchases or opt for cheaper models instead of high-margin SUVs, which have supported automaker profitability for years.
Data from Good Car Bad Car indicates that SUVs accounted for 52% of new vehicle sales in 2025, up from 46% in 2021 and 38% in 2016. Full-size SUV market share has doubled since 2016, reaching 3.5%.
The growing popularity of SUVs has been a significant positive for automakers. Larger vehicles typically command higher prices while sharing many parts with smaller cars, leading to profit margins for SUVs and trucks that are on average 10% to 20% higher than those of compact cars.
At the same time, with rising production costs and shrinking margins for electric vehicles, the three major U.S. automakers are shifting production capacity from EVs back to SUVs.
But Morgan Stanley analysts believe this strategy may be difficult to sustain if high oil prices persist.
If fuel costs remain high, buyers are expected to move away from SUVs.
The conflict in Iran has entered its fourth week, with no end in sight after Iran’s leadership rejected the latest ceasefire proposal from former President Trump.
Iran has already closed the Strait of Hormuz, which handles about 20% of global oil shipments, and is now threatening to close the Bab el-Mandeb Strait, a key route connecting the Red Sea and the Gulf of Aden that carries 11% of the world’s oil.
Morgan Stanley analyst Andrew Percoco noted in a recent report, “The Middle East conflict is increasing risks across the global automotive supply chain. Heightened tensions around the Strait of Hormuz are amplifying energy price volatility and raising concerns about disruptions in the transport of upstream raw materials such as oil and aluminum.”
The firm stated that it is closely monitoring pressure on automakers and suppliers in a high-oil-price environment, along with the knock-on effects on pricing and demand.
Morgan Stanley analysis suggests that, assuming an average vehicle fuel efficiency of 27 miles per gallon and annual driving of 12,000 miles, each $1 increase in gasoline prices raises annual fuel costs by about $450 for conventional vehicles.
When gasoline reaches $4 per gallon, electric vehicles begin to show clear cost advantages. At that point, annual fuel costs for EVs are roughly 60% lower than for internal combustion vehicles, which may lead new-car shoppers to choose EVs over fuel-intensive SUVs.
For automakers heavily invested in SUVs, a pivot toward lower-margin electric vehicles could disrupt carefully laid plans. As a result, Morgan Stanley is reassessing its outlook for the auto industry as it faces potential pressure from sustained high oil prices.
Amid rising oil prices, Morgan Stanley has named General Motors as its top pick in the auto sector.
Morgan Stanley expects market volatility to increase if the conflict continues. In that scenario, the firm has identified General Motors as a stable and reliable choice, maintaining an “overweight” rating.
Morgan Stanley stated that General Motors “has demonstrated strong management and operational performance in navigating supply chain disruptions and volatile operating conditions. General Motors remains a core recommendation in the auto sector, especially after recent share price weakness. The stock currently trades at just 5.5 times our 2026 earnings per share estimate, with potential for a 30% rise to our $100 target price.”
Shares of General Motors closed at $76.61 on Wednesday.
Meanwhile, Ford, which has fallen 20% over the past month, declined another 1.5% on Wednesday to close at $11.67. Morgan Stanley rates the stock “equal-weight.”
The firm noted, “Recent share price declines at Ford also offer about 20% upside to our $14 target. However, we caution investors that an unfavorable shift in vehicle mix—such as consumers moving away from pickup trucks—could pose downside risk.”
If high oil prices continue, SUV sales may still have a lifeline.
Insurance companies adjust premiums based on vehicle type, with safer vehicles often qualifying for lower rates.
Analysts at CarInsurance.com pointed out that “vehicles with sturdy construction, strong safety records, and low repair costs typically have lower insurance premiums than sports cars, imports, or models with expensive repair histories.” The website’s ranking of the most affordable vehicles to insure found that SUVs now outperform sedans in affordability.
In fact, due to structural design differences and claims data, SUVs currently cost 10% to 15% less to insure on average than comparable sedans. Of the 20 least expensive vehicles to insure listed by CarInsurance.com, 16 are SUVs.
Zach Lazzari of Cross-country Insurance said, “Repair and replacement costs are major factors in determining insurance premiums. For example, some vehicles are extremely costly to fix after common minor accidents: some require full panel replacements, while others can be repaired with simple dent removal tools and a touch of paint.”
The five least expensive SUVs to insure have average six-month premiums below $1,172, while the most affordable sedan—unsurprisingly, the Subaru Legacy—averages $1,265 for six months of coverage.
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