Feds Raise Fuel Economy - Again; Cali Backs Down

19th May 2009

The Obama administration today announced the biggest and most expensive increase in fuel economy ever. Flanked by 10 auto executives, UAW President Ron Gettlefinger and others, Obama announced the plan in the Rose Garden.

The new standards will commonize the various regulations governing the sale of vehicles in the US into 1. In return for the stricter standards, the state of California agreed to drop its attempt to institute its own fuel economy standards and the automakers agreed to drop lawsuits aimed at forcing them to drop the attempt. This is the only good part of today’s announcement. The threatened patchwork of regulations would have made doing business extremely difficult and MUCH more expensive.

The plan:
• Requires yearly 5 percent increases in fuel efficiency from 2012 through 2016, resulting in an average fuel economy standard of 35.5 miles per gallon in 2016. The previous plan had the standard at 35 in 2020.
• Cuts oil consumption by an estimated 1.8 billion barrels over the life of the program.
• Cuts greenhouse gas emissions by a projected 900 million metric tons.
• Supported by 10 car companies and the UAW.
• Sets one clear, national policy for all automakers, instead of standards from the EPA, Transportation Department, and a California standard that would apply to 13 other states.
• Gives automakers clarity, predictability and certainty about the rules, as well as flexibility to meet the expected outcomes.

The oil savings and emissions cuts are spurious at best. CAFE has been on the books for about 30 years, and has not resulted in any fuel savings. Why? Because by forcing fuel economy gains without any increase in fuel price, CAFE encourages more driving. The increase in driving miles has more than offset the decrease in fuel consumption per mile. Also offsetting the increases in economy has been a shift towards pickups and SUVs, which has also been driven (pun intended) by CAFE & other government policies.

So why did 10 automakers, including the 2 divisions of Government Motors, say they are in favor of this? 2 reasons: the political winds are blowing in such a way that they risk significant negative PR if they are seen to be unsupportive and 2. the commonization of the standards is a real benefit of the plan, as discussed above. You can bet, though, that GM and Chrysler were told that they will be there and they will look happy.

Obama at least did one thing that has been noticeably absent in previous discussions on fuel economy: he admitted that this will increase the price of cars and trucks in the US. He also stated that the price increase will be made up in 3 years of fuel savings. The government numbers assume that gas prices will be $3.50/gallon for the life of the program (2012 - 2016). One thing about cost increases in a competitive market is that there is no certainty that the OEMs will be able to increase their prices to make it up. And with the current state of the economy, raising prices is anything but certain. The cost increase, however, is very certain.

With every major automaker losing money, now is about the worst time possible to be adding at least several hundred dollars to the cost of the average vehicle. This is where I would normally say, “I hope the government knows what it’s doing.” But clearly, they do not.