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E85 – What You Need to Know

3rd December 2009

First, please understand that this isn’t a scientific journal, nor an economics one. This is an automotive website, so this discussion will only talk about E85 as it pertains to cars and driving. I will not discuss whether E85 is artificially cheaper because of government subsidies (it is) or whether or not the production of E85 from corn takes food away from people (I don’t know). I only want to briefly educate you about the pros and cons of buying a car that can use E85 and what you can expect when you do use it.

E85 is the abbreviation for fuel that is 85% ethanol and 15% gasoline. No vehicles for sale in the US can run on ethanol alone. You need at least that 15% gasoline. Vehicles that can run on E85 can run on any ethanol/gasoline combination with at least 15% gasoline. That’s why they’re called flex fuel vehicles (FFVs). You can fill up on E85 one day, then regular gasoline the next time without any problem. Flex fuel vehicles are more expensive to build than “regular” vehicles because of the special components that can withstand the corrosive nature of ethanol. There are only 2211 stations that sell E85 in the US, which means that most vehicles capable of running on E85 never do. So why do the automakers build them? They get CAFE credits for offering the FFVs, even if they never use E85 (can you say “loophole”?) and you get to feel good aboutmaybe helping lessen our dependence on foreign oil.

So what’s the difference when you use E85 instead of gas? The first thing you’ll notice is that E85 tends to cost less, though not always and the amount varies. e85prices.com says that the national average price is $2.22/gallon, while regular gasoline is $2.57/gallon. Great, right? Not so fast, my friend. Because of the differences between the fuels and the engine design compromises made to allow the engine to use either fuel (or any combination of them), using E85 results in lower fuel economy versus using gasoline in the same vehicle. The Slandy Report analyzed the differences in the EPA rating of every FFV sold in the US and found that the rating is approximately 27% lower for E85 use than for gasoline. We also found that the average range of a tank of gas is also more than 100 miles less on E85 than for gasoline, so you would need to refuel more often. When you combine the lower prices of E85 with the lower fuel economy, E85 still comes out more expensive by 16% compared with gasoline. In other words, gas is 16% cheaper than E85 if you look at cost per mile.

So why buy an FFV? Some things are not easily quantified in dollars, like the foreign oil point made above. While E85 is more expensive to use than gas, you will use 79% less gasoline per mile driven than if you use gasoline. Corn is also a renewable source, so theoretically, we would never run out. Buying an FFV vehicle is a matter of choice, of course, and so it the decision to use E85 instead of gasoline. You now have some real-world facts that will help guide your decision.

That’s what I think – how about you? Please leave your comments below.

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Mazda2 Coming to NA

21st September 2009

Mazda announced that they will bring the subcompact 2 to the US and Canada in late 2010.  “As consumers’ tastes and attitudes toward small vehicles have changed, we now believe strongly there is a place in our lineup for a car below our current least-expensive car, the Mazda 3,” Jim O’Sullivan, Mazda North American Operations president, said in a statement.  Mazda didn’t say where the 2 will be produced, but as it shares a platform with the upcoming Ford Fiesta, will they make it in Cuautitlán, where the Fiesta will be produced beginning next year?  It sure seems to make sense.  Mazda gets local production for the North American market, saving logistics costs of shipping from Japan.  Ford gets another vehicle for its plant, which helps ensure that the plant will be at a high utilization rate, which reduces the risk of discounting.  Customers get better choices and better prices, and North American workers get more jobs.  Everybody wins, right?  Maybe not.  Ford recently divested most of its stake in Mazda, which might make them hesitant to help Mazda sell cars.  They should ignore that kind of thinking and worry about making money for themselves, which producing the 2 at Cuautitlán will do.  However, if I know how Ford thinks, and I do, they probably have overly optimistic volume projections for the Fiesta and think they can’t spare the capacity for the Mazda2.  They should reconsider this (if I’m right) based on:

  • their spotty record of forecasting their own sales
  • the fact that the Mazda2 will likely be sold in VERY small numbers, even compared to the Fiesta, and
  • the lack of any coherent energy policy in the US means that gas prices will likely continue to fluctuate wildly, leading to further volatility in the sales of fuel-efficient vehicles -so they should hedge with this car and the Fiat 500 for the Cuautitlán plant.
That’s what I think – how about you?
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Chevy Volt Gets 230 MPG??

12th August 2009

Chevrolet announced yesterday that the upcoming Volt will achieve 230 MPG in the city, easily beating the Toyota Prius’ lame 50 MPG.  Chevy boss Brent Dewar was overheard saying, “nah-nah-nah…nah-nah…nah”  If nothing else, the announcement generated a lot of attention from the media.  At least 2 major networks, CNN and NBC, featured the story on the nightly news last night.  Both seemed very skeptical of the claim, which is based on preliminary EPA testing procedures for so-called extended range electric vehicles (EREV).  I read a little about the procedure and how it works.  Maybe I’m not the brightest bulb in the fixture, but it seems to translate as, “Trust us.  We plugged in a few numbers into a computer, and it gave us 230.  Woo-hoo!”

Basically, the fact that the Volt uses only grid-supplied electricity for the first 40 miles of use makes the EPA come up with a “miles per gallon equivalent” which it then combines with the fuel economy when it is using gasoline as the “range-extender.” That calculation is what resulted in the 230 city MPG.  EPA numbers are always a bit nebulous, but in this case, I think they are especially so.  In a “normal” car, you might be able to achieve the EPA numbers with conservative driving.  In this case, you have no chance, because apparently, 80% of us will never use any gas (if they plug it in every day).  What’s their economy, ∞?  And how, really, do you average ∞ with another number for the drivers who do use some gas?  These questions – and many others – will be answered in the next episode of Soap.

All of this is just preliminary, as the final numbers will depend on actual EPA testing closer to launch next year.  But if the 230 is real (and by “real” I mean what will show up on the label, not what you will actually get), it will certainly set the Volt apart from the rest of the crowd.  As NBC’s reporter pointed out last night, 230 is about 10 times the average car today.  It’s an eye-popping number that will get Chevy and GM a lot of attention.


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There have been many in the last few weeks who have openly cheered the impending collapse of the Detroit 3 (D3) and have stated that we would all be better off if they simply went away and left us all alone.  One of the more prominent has been an opinion piece in Saturday’s Wall Street Journal, written by David Yermack, a finance professor at New York University.  Among other points, he states, “Today, our government is being asked to put tens of billions of dollars in GM, Ford and Chrysler, but we would be much better off if Washington allowed these companies to go bankrupt and disappear.”  Mr. Yermack’s piece is so full of inaccuracies that it would be difficult to list them all.  But I think it would be helpful to discuss with real facts, what’s going on here.

How did the D3 get into this situation?  The reasons are long and varied, but the talking heads will tell you that bad products and resistance to fuel economy standards.  Let’s talk about each of these.

Products While I will never say that the D3 haven’t made more than their share of bonehead decisions and bad cars, most of that is in the past.  Today, although Chrysler lags, GM’s and Ford’s quality is every bit as good as anybody else’s.  While measuring vehicle quality is much more complicated than it may seem, J.D. Power publishes a report called the “Initial Quality Study” (IQS) each year.  It is widely regarded as the most definitive study of vehicle quality.  So what does JDP say?  While the top 5 spots are indeed occupied by foreign brands, most of the remaining spots rated better than average are American brands.  J.D. Power rates 16 brands better than average – 7 American, 4 European, 4 Japanese and 1 Korean.  But there are so many more American brands, you say, so that means nothing.  OK, what about those worse than average?  There are 20 worse than average – 6 American, 6 European, 7 Japanese and 1 Korean.  54% of the American brands are better than average, compared to 50% of Korean, 40% of European and 36% of Japanese.  Even if you include GM’s and Ford’s foreign brands in their totals, 47% of the American brands are better than average – still better than the Japanese manufacturers.  The same details by manufacturer are in the table below.  As for individual nameplates, Power rated the Chevrolet Malibu the highest-quality midsize sedan.  Both the Malibu and Ford Fusion scored better than the Honda Accord and Toyota Camry.  In the compact car segment, the top 2 cars are Japanese, but so are the bottom 2.  In large pickups, Power rated the Chevy Silverado the highest quality, ahead of the Toyota Tundra.  The Nissan Titan was last.  While there are nuances to all of this, and you can make statistics say whatever you want, this shows that it is absolutely incorrect to say that “foreign” cars are any better than American.

Maybe you don’t know about JD Power, and don’t care what they say.  OK, how about Consumer Reports?  Consumer Reports recently found that “Ford’s reliability is now on par with good Japanese automakers.”  Notice they said “good Japanese automakers.”  That means that it is just as wrong to say that all Japanese cars are good as it is to say that all American cars are bad.  You can get a bad Japanese car or a good one – the same as American cars.

The D3 are also no less efficient in their operations than the foreign makers.  According to the 2008 Harbour Report (again, the most respected study of manufacturing efficiency), the D3 “nearly erased the productivity deficit against their Japan-based competitors, despite declining production and shrinking market share.”  Chrysler’s labor hours per vehicle are equal to Toyota, GM recorded its 15th consecutive improvement, and Ford reduced its labor content per vehicle by 3.7%, despite producing 6% fewer vehicles than in 2006.  Ron Harbour stated, “Improving productivity in the face of lower production is a huge accomplishment, especially with the pressures created by rising gas prices.”  So, apparently, manufacturing efficiency isn’t the issue, either.

OK, but they build only gas-guzzling behemoths, right?  Wrong.  This one will surely surprise you (it surprised me when I looked up the figures).  In nearly every vehicle category, a D3 product has the best fuel economy.  Without boring you with lots of numbers and details, just look at this table:

Source: 2009 Fuel Economy Guide (www.fueleconomy.gov)

Source: 2009 Fuel Economy Guide (www.fueleconomy.gov)

Fuel Economy Standards This topic is tied up with overall government regulation and policy, so I will include those in this discussion.  The Corporate Average Fuel Economy (CAFE) legislation was enacted in the aftermath of the first energy crisis as a way to reduce our dependence on foreign oil.  We imported 35% of our oil in 1974, and this has increased to over 65% today.  The problems with CAFE are numerous, but for purposes of this discussion, I will focus on one.  CAFE takes a laudable goal – reducing our use and import of oil – and places its burden upon the manufacturers, not the consumers.  Auto manufacturers are forced to sell the more economical vehicles in sufficient numbers to offset the sale of the less economical vehicles.  But what if consumers don’t want the more economical vehicles?  Tough.  CAFE says you have to average a certain level of fuel economy regardless of what the consumers want.  Until this past summer, almost nobody wanted the vehicles with higher MPG, because gas has been so cheap – the cheapest in the industrial world.  The home markets of the foreign automakers place heavy taxes on gas to encourage the purchase of fuel-efficient vehicles.  Our government tells the producers what to sell.  Because of this difference, the foreign automakers have a built-in advantage.  They make smaller, more efficient vehicles for their home markets, because that’s what the consumers want there.  They have developed the expertise in small vehicles for many years.  Consumers also want smaller cars there because their home markets have less parking and have tighter roads.  US consumers want a vehicle that is comfortable to drive several hundred miles or more on vacation.  Our society is simply different that those others, and so therefore are our automakers.  Back to gas prices, though.  Do you think it’s a coincidence that sales of small cars went from 16.6% of the US market in 2007 to 23.9% this past spring (May – July)?  Hardly.  Consumers bought the more fuel-efficient vehicles because it made sense for them.  CAFE, by keeping fuel prices low, actually encourages more consumption and therefore defeats the purpose.  If we as a society want to use less fuel, CAFE is the exact opposite way to accomplish it.  The summer of 2008 saw a major and sudden shift to more fuel-efficient vehicles for those needing to buy a new vehicle and a marked reduction in driving for everybody.  This proves that they way to reduce consumption is to raise the price.  This is classic (and simple) supply and demand.  Our government needs to scrap CAFE because it simply doesn’t work.  Such disparate sources as the National Center for Policy Analysis and Popular Mechanics agree. The better and more effective solution is a higher gas tax, either a $/gallon or a floor on prices (which is used in Europe).

The other part of the government’s role in this mess is in trade policy.  The home markets of the foreign makers, especially Japan and Korea, actively support their industries, especially the auto industry.  They do this through trade barriers and the funding of collaborative research.  The trade barriers have a two-pronged effect.  First, there is no real opportunity for foreign makers to penetrate these markets in any significant numbers, regardless of how good the products are.  This results in the second issue.  Their closed home market provides unreasonable profits that they plow back into new and better products, processes and factories.  While I am a strong proponent of free trade, the rest of the world is using us (and our free-market nature) to take advantage of us.  Fair trade is a better policy unless and until the rest of the world joins us on the free trade side.  The US government should immediately change our policy to be reciprocal with all of our trading partners.  We should exactly match any and all trade barriers placed upon our products overseas.  If they relax their barriers, so would we.  It’s time we stopped being the world’s punching bag and started supporting our home industries – of all varieties.

Tax policy is also part of the equation here.  The Tax Code allows a write-off for SUVs that weigh over 6000 lbs.  This is a provision that was intended to allow farmers and other businesses to afford to buy new trucks for their businesses.  Including the 6000-lb. floor was intended to make sure people weren’t buying the vehicles for personal use.  then came the monster luxury SUVs.  People (and their accountants) quickly figured out that they could buy an Excursion or a Hummer and write off the whole thing in the year of purchase, saving them thousands.  Like CAFE, Congress made a law that had good intentions, but had bad side effects.

OK, now what?

So given all that, what should we do now?  Are the talking heads right, would we be better off without the D3?  It depends upon your definition of “better”.  The Center for Automotive Research (CAR) in Ann Arbor, Michigan published a study earlier this month that examines the doomsday scenario that so many would be happy to see.  I wrote about that study a week ago, but here is the summary in a nutshell.  If the D3 were to shut their doors tomorrow, the US economy would lose 3 MILLION jobs in the first year – “only” 240,000 of which are direct employees of the D3.  Why?  The auto industry has one of the largest economic multipliers in the US economy (this means that each automotive job supports more spin-off jobs than those in other industries).  Some of those 3 million lost jobs would be offset eventually by other automakers and some employees finding new work, but it would still be 1.8 million after 3 years.  The total loss of tax revenue for the government would be $156 billion over 3 years.  Doesn’t that sound a little better than the $25 loan that the D3 are requesting?  The auto industry is somewhat a victim of over-regulation and misconception and supports 3 million jobs.  The loan would include significant oversight.  This sounds better than a $700+ billion blank check for a financial services sector that is largely a victim of its own greed?

Lastly, we cannot forget national security in these dangerous times.  Our manufacturing base will be vital in the case of a future war.  Should we depend on foreign companies to supply us with tanks, planes and other needs in the event of war?  Or should we do all we can to keep that kind of expertise here at home?  The Detroit automakers converted their factories to producing war materials in World War II.  Without them, the outcome may have been very different.

The Detroit 3 have made their share of mistakes, but the present situation is not completely of their own doing.  The government should place whatever reasonable restrictions are necessary, but we cannot let our auto industry die.  They’ll take our way of life and our standard of living with them.

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The recent stock market decline, mortgage / credit crisis and gas price increase (the recent decline notwithstanding) have had a dramatic effect on the auto industry and the “Detroit 3” in particular.  Total industry sales fell 32% in October to 838,592 – the lowest level in 25 years.  General Motors’ sales were down 45%, Chrysler’s 35% and Ford 32% – overall the D3 were down over 250,000 units for the month or 39%.  They have met with congressional leaders asking for a cash infusion of up to $50 billion – yes, with a “B”.  It may take the form of low-interest loans, a government “investment” or a simple bailout a la Wall Street’s.  GMAC may convert itself into a bank to be eligible for part of the $700+ billion bailout.  GM and Chrysler’s parent, Cerberus, have been discussing a GM takeover of Chrysler.  Desperate times, indeed, are apparently calling for desperate measures.  Many voices from around the country have been critical of any help from the government.  At first, many in Congress and the Bush administration voiced the opinion that Detroit’s failed decisions should not be rewarded with taxpayer money.  When businesses make bad decisions, that can and should lead to that business’s failure, the thinking goes.  That’s capitalism.  Sometimes it doesn’t seem right, and sometimes it hurts.  But capitalism results in the most efficient allocation of scarce resources, and it works, ultimately, to the benefit of our society.

But what happens if the economy isn’t pure capitalism?  What if the government, in the interest of society, regulates this business and forces its costs higher?  What if the government policies lead to the evaporation of the credit that is required for its industry to function?  What if the government’s lack of an energy policy has led consumers to value gas-guzzling behemoths until a gas shock makes the bottom fall out?  What if the government’s lack of a coherent trade policy allows foreign competitors to have an unnatural advantage over the domestic industry?  Then the government must acknowledge its complicity in the situation and do something about it.

“Too big to fail” is a phrase we have heard often in the last few months.  AIG, Lehman Brothers (what happened to Shearson?)  and others were bailed out recently using this logic.  Some seem to think that GM, Ford and Chrysler are not too big to fail.  The reasons are too numerous to go into here, but include the lack of a trade policy mentioned above, and our national attitudes of “Who cares?” and “Whatever.”

The Center for Automotive Research (CAR) in Ann Arbor, Michigan published a study on Election Day called, “The Impact on the U.S. Economy of a Major Contraction of the Detroit Three Automakers”.  They looked at 2 scenarios: 1. the impact of all 3 domestic automakers ceasing operations in the U.S. and 2. a 50% reduction in all production and employment in the U.S.  CAR states that, given current circumstances, one of these scenarios is “probable” in the next 12 months.  The impact of either of the scenarios is devastating to the U.S. economy, as not only would the domestic automakers suffer, but so would the foreign makers.  The domestic supply base would crumble without the domestics as customers, so they would also be unable to supply the foreign makers here in the US.  Domestic production would fall to ZERO, and all of the nation’s auto needs would have to be supplied by imports.  Production of the foreign automakers would recover by the third year, and would make up for about 20% of the domestic makers’ lost production.

Scenario 1 results in a loss of 3 million jobs in the US in the first year, recovering somewhat to a loss of “only” 1.8 million in the third year.  This includes all supplier and “spin off” employment.  In economic terms, the cumulative effect for the 3 years studied would be a loss of $400 billion in personal income and a loss of $156 billion in tax revenue.  Scenario 2’s numbers are hardly encouraging either.  The year 1 job loss is 2.5 million, recovering to 1 million in  year 3.  The personal income loss totals $275 billion and the tax revenue loss is $108 billion for the three years.

Think that’s bad?  The study only considers the direct impact to the US economy.  A permanent contraction of the US auto industry would impact the Canadian and Mexican industries also, which would result in further negative effects to the U.S.  The failure of any of the D3 would also place a huge burden on the government in the form of pension plan failures that would have to be absorbed by the Pension Benefit Guarantee Corporation also.

Given all of this, it is naive to think that you will not be affected by the failure of any major part of the domestic auto industry.  The $50 billion mentioned at the beginning of this article seems like chump change compared to what the government will be forced to do if any of them fail.  The auto industry has the biggest multiplier effect of any industry in the nation.  The job losses may not be yours or your family or your neighbor – but they might be, even if none of you work in Detroit or for the auto industry.

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Gas is over $4!! The sky is falling, the sky is falling!! People are hurting, they can’t afford the gas to get to work. We all know that gas prices have increased about 40% in the last year, according to AAA. Oil is at a record, too. Why? Is it the evil “speculators” that I keep hearing about? Nope. Evidence and logic suggest that this is not an issue. Is is global warming? Nope. The answer, as it is for most pricing questions, is supply and demand. Despite the sluggish US economy, the world economy has been doing quite well, thank you. Several years ago, nobody really invested in production capacity for the raw materials required to sustain a booming China and India. The resulting shortage is why many raw material prices have increased so much in the last few years – including oil.

Now, for a little perspective. As mentioned above, the average gallon of regular unleaded in the US has increased from $2.96 to $4.11 in the last year, or about 40%. Not to minimize the terrible strain this has placed on most of us, but please take a look at the chart below. It shows 26 European countries’ prices vs. the US. If you’re having trouble reading the names, just look for the lowest bars – that’s the US. These prices are from May (before they hit $4 average), but the graph would look the same today. $4 is expensive, but every one of these countries were over $6, and 12 of 26 were at $8 or more – more than double the US price! It’s not much better for our friends north of the border (south of the border if you live in Detroit). According to ontariogasprices.com, the price of regular unleaded in Ontario ranges from about $4.88 – $5.61 per gallon after adjusting for exchange and metric.
I know none of this make it any easier to fork over the $60 – $80 to fill up your tank, but just be happy you don’t live in Europe or Canada!
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