There are many reasons why small, fuel-efficient cars often sold poorly in the US market from the mid 1980s until relatively recently. Cheap gas was certainly one very important reason. Once the memory of the last energy crisis of the 1979-80 period faded, there just wasn't much of an incentive to drive fuel-efficient cars.
The other problem is that domestic cars in the small car category just weren't very attractive to customers. Small cars from the domestic manufacturers have always had a reputation for being cheap, usually not in a good way. They have generally had hard plastic interior panels, often with visible parting lines from the molds. Switchgear often has stiff operation again with poor feel. Mechanically, these cars have regularly had components a generation or more behind their counterparts from foreign based brands. Even more annoying is that the comparably sized cars from the same car-makers, over-seas operations have been built to a much higher standard than the domestic models. The difference between a late 1990s Chevrolet Cavalier and a comparable Opel Astra is like night and day.
There's more after the jump.
Beginning in the late 1990s small cars, especially in the European market, really began to pick up a lot of new technology that had previously been reserved for larger, more expensive cars. One particular incident that precipitated this was the bungled launch of the first generation Mercedes-Benz A-Class. Shortly after the initial launch of the A-Class some auto journalists conducted an "elk test". This is a common test for new cars in Sweden where elk are fairly common on the roads particularly in the northern part of the country. The test is essentially an obstacle avoidance test with a double lane change. The A-Class did not fare well in this standard test. It ended up wheels up. Mercedes went back and did a crash program to add electronic stability control, to the A-Class and the smart fourtwo which was due to be launched just a few months later. Less than a year later, all the early production A-Class cars were retrofitted with ESC.
Since then virtually all small cars in the European market have had technologies like ESC, engine-drag-torque-reduction, brake disc cleaning, and other features added at least as an option and in many cases standard equipment. In the European market, B and C class cars (e.g. VW Golf, Opel Astra, Ford Focus) make up a large proportion of the total market and with the quality and equipment levels these cars have, they are actually quite desirable cars to drive.
The latest generations of C-Class cars in the US market are finally starting to catch up to the technological and refinement levels of their European and Japanese counterparts. The Chevrolet Cobalt is essentially the same as the current generation Opel Astra. The new Dodge Caliber has a style all it's own, but its refinement is way ahead of the Neon. The Ford Focus, although it was ahead of the domestic class at its debut, has stagnated somewhat and missed out on second generation update that the European Focus got. Clearly high gas prices have played a big part in the sales resurgence among these cars in the past year. However, creating small, efficient, refined, technologically advanced cars has definitely helped. When people check out these cars and compare them to the import brand counterparts they can actually see something desirable to own. Now if the car-makers would just accelerate the power-train development, and offer even more efficient options like diesels and hybrids we might see a real surge in demand for domestic brand, small cars, to the point where they could attract higher prices and be profitable.