CAFE au Lait - Vehicle Fuel Economy Considerations in the U.S.

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Comments: 1

October 17, 2007

 

Since the devastating aftermath of hurricane Katrina there has been much debate in the US on the subject of vehicle fuel economy and the Federal Corporate Average Fuel Economy (CAFE) standards imposed on automobile manufacturers. With fuel prices escalading soon after Katrina hit the southern US, crippling the oil refining capacity, the Bush Administration and Congress rushed through legislation to raise the CAFE standards on light trucks.

 

Two years later the debate is getting even more heated with renewed focus on Global Warming, the continued problems in the Middle East, increasing demand for oil from China and India and the near term possibility that the world is facing soon peak oil production. With the Democrats now in control of both houses of Congress, there might be real action to upgrade the CAFE standard for passenger cars. The rhetoric from Washington, consumer action groups and the automotive industry is starting to get ugly and tiring as there are few new arguments and many old prejudices preventing a rational discussion.

 

Let me step back in time for a second to August, 28 2005, the day before Katrina hit Louisiana. The Ford Explorer (17 mpg) was on pace to sell close to 350,000 vehicles (down from peaks in 2000 of 400,000 sales) and yet retain its title as the Nation’s number “1” selling SUV with gas prices hovering around $2/gal. Two years later, the best selling SUV is the car based Honda CRV (25 mpg) crossover that will likely finish the year at around 200,000 sales. There have been similar changes in consumer buying behavior as the public switches from traditional light trucks to car based crossovers and smaller fuel efficient vehicles as gas prices have continued to be high. Recent reports have shown that US demand for oil has continued to go down, possibly driven by the gradual changeover to a more efficient fleet, reduced driving and possibly other recent economic factors in the US.

 

So, in many way the public is self correcting as fuel prices have fallen from their peaks but still remain high compared to pre-Katrina levels. This has supported the notion that the market will self correct with higher fuel prices and has supported a plan to raise fuel cost. This has also supported many of the manufacturers arguments which states they only build what the public wants.

 

Earlier in the year, the Senate approved a plan to raise CAFE for the entire fleet to 35 miles per gallon by 2020. The Automakers through their trade association have a less aggressive proposal that pushes back the effective date as well as separates out the car and truck fleet making the requirements less aggressive. This has included credits for E85, hybrids, electric vehicles, hydrogen vehicles etc. And, the House has yet to formally take on the debate with either their own proposal or compromise. To put this into perspective the passenger car CAFE standard is currently 27 mpg for the fleet and has not been upgraded since the days The Gipper was still in office and the recent upgrade will move the light truck standard from 22 – 24 mpg over the next few years.

 

The biggest wild card in all of this is the recent Supreme Court Ruling where the Environmental Protection Agency could in fact regulate CO2 emissions. This is important because the President can now circumvent congress and through Executive Order set the mpg fleet average without approved legislation. As one would expect, President Bush has been against the current Senate approved proposal.

 

Now what does this mean for the manufacturers? Lead time. The facts of the matter are, if the US public was willing to purchase the same type and size of vehicles that are sold in Europe, Japan and the rest of the world, the fleet CAFE average would come close to meeting or exceeding the aggressive Senate proposal. But if the public still demands larger cars and trucks, the vehicle manufacturers need time and flexibility to develop the powertrain technologies and lighter weight vehicle bodies to maintain consumer expectations and yet meet the newer fuel economy standards. In many ways as long as this is a demand driven economy, any CAFE legislation must be a long lead time program. This industry cannot move that fast while at the same time maintaining the status quo vehicle fleet in terms of size that to this day the market demands.

2022 or 2018 might seem a long way off but given the time it takes for a manufacturer to change over their fleet with advance technologies that would be only two product cycles away (5-6 years product cycle is average). This means in a year or two, the second product cycle due in the late teens will have to be on the drawing board if a law or regulation were passed today.

 

So what are the options? The government can raise taxes and artificially raise the price of fuel, forcing people into smaller more fuel efficient vehicle. Increasing demand for oil will continue to strain global oil production resulting in a market driven demand for efficiency as fuel prices continue to soar or there can be real compromise on this issue with legislation that helps expedite a reduced dependence on oil as a source for fuel which evenly distribute the burden on the vehicle manufacturers, energy producers and the public. In any case, my advice to the global manufactures, is prepare for the worst and hope for the best as circumstances can change in a day as August 29, 2005 has become a day that will live in infamy for some domestic manufacturers. 

 

Resources:

EPA Fuel Economy Guide

 

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Comments
Tue Oct 16, 2007 10:04 amExcellent insights into this issue. The Government is always the last to deal with matters of importance.

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