High oil and gas prices could have a devastating impact on the American auto industry. That was the message delivered in a congressional staff briefing on Oct. 13, 2005, at the Hart Senate Building in Washington, D.C. In the event sponsored by Senator Richard Lugar (R-Indiana) and Senator Barack Obama (D-Illionois), panelists presented research demonstrating how higher gas prices will drive a consumer shift to more fuel-efficient vehicles—and how the American automobile industry is ill-equipped to handle this transition.
At the briefing, Walter McManus, director of the Office for the Study of Automotive Transportation and HybridCars.com blogger, said, “I’ve been an auto economist for 16 years, and in a very real sense, this research represents a significant evolution in my personal view. The old paradigm was that fuel prices for oil will be cheap forever, or that they will return to $25 per barrel. We had 100 years of relatively calm prices for oil. Now they are very volatile.”
McManus described a domino effect in which higher oil prices would create higher demand for fuel-efficiency, sending consumers away from the large SUVs that make up Detroit’s largest and most profitable segment. McManus said, “The traditional Big 3 headquartered in Detroit, would absorb 75% of those lost sales. And because their profits are so tied to those vehicles, they would lose $7 to $11 billion.” Studies that McManus and the University of Michigan conducted with the National Resource Defense Council (NRDC) estimate that between 297,000 to 465,000 jobs would be lost.
McManus posed the $64,000 question: “Is Detroit adopting technologies to improve fuel economy, especially in segments that are going to be necessary to make them competitive in the future?”
The Times Are Changing, Slowly
Roland Hwang, vehicles policy director at NRDC, said, “Detroit is not moving fast enough.” Yet, Hwang remained hopeful that the collapse of the SUV market would get previously unconvinced players to listen. “It’s not just environmentalists who are talking about reducing our oil dependency and raising fuel economy. There are a lot of groups that realize there’s a lot out stake here—from hawks to conservative Christians to labor to business groups. The time is changing, and the time is right to look for solutions. There’s a great urgency.”
For Hwang, and for Alan Reuther, legislative director of the Union Auto Workers, the solution is enhanced incentives for manufacturers. Reuther’s main concern was breaking a decades-long legislative stalemate over fuel efficiency standards and to focus the debate on enhanced incentives for industry. Reuther was not optimistic that the Bush administration would lead the charge for these changes. He said, “We have heard reports of top administration officials privately saying, ‘What’s the big deal if auto companies go bankrupt?’ They don’t seem to think it is a problem that hundreds of thousands of people could lose health care and pensions. And tens of thousands could lose their jobs.”
Hybrids as a Technology Solution
The briefing session on Capital Hill repeatedly returned to the issue of hybrid cars, and their rapid adoption by consumers. Hwang said, “One study by the Oak Ridge Department of Energy Lab estimated that it’s likely that 2.5 million hybrid units could be sold in this country by 2012. And that study was done prior to these high oil and gasoline prices.” He added, “Detroit is trying to play catch-up. But Toyota has had a hybrid on the market since 1997. That’s a long ways to play catch-up.” Japanese automakers dominate this market. In the first nine months of 2005, they earned 92% of the market.
The participants pointed to Ford as the only American automaker with a hybrid on the market. Ford has sold about 12,000 of its Escape Hybrids so far this year, representing less than 8% of the hybrid market. Reuther tempered any enthusiasm about Ford’s hybrid program as signs of change in the American auto industry. “We’re very glad they’re assembling the Ford Escape Hybrid in Kansas City. The truth is that not one of the components that make that vehicle a hybrid, rather than a traditional vehicle, is made in this country. And yet the company is saying that it’s an American hybrid. It’s absolutely is not an American hybrid.”
Tough Question from the Crowd
An unidentified attendee at the session extolled the virtues of hybrid technology. He said that a hybrid vehicle will out-excelerate a gas vehicle and get twice the gas mileage, and described Toyota’s plans to offer a hybrid option for nearly all its vehicles within five years. He asked, “The logic of the hybrid seems to have been lost on Ford, and G.M., and perhaps Chrysler. Why is that?”
McManus said that American automakers are not willing to spend the necessary money to produce hybrids. He estimates that the hybrid technology costs for the Toyota Prius at $7,000. He said, “Toyota is willing to accept those costs on the hope, that in the future, they’ll be the ones that have the low-priced hybrids. They way they’re going, they probably will be.”
Reuther added, “For a long time, the Big Three thought you couldn’t sell hybrids, but they can sell SUVs. That’s the way they went. Now, the market’s changed, and they have to play catch up.”
The moderator of the briefing, Daniel Lashof, climate center science director at the NRDC, questioned if the benefits of a hybrid unrelated to fuel economy may be a factor. He said, “The hybrids are attractive from a performance standpoint. What role does that play in this market really taking off, whereas another technology with only a fuel economy benefit might not take off?”
The unidentified attendee replied, “If Detroit plays to performance, as I do, why not go hybrid, have the fastest accelerating cars, and get twice the gas mileage? The logic is so compelling.”