Study Says Aggressive CAFE Increases Would Pay Big Dividends for Detroit

On the same day President Barack Obama announced his administration’s goal of reducing America’s foreign oil dependency by one-third over the next decade, an article in the Detroit News revealed that the auto industry is gearing up for a major fight over the next wave of federal fuel economy standards—which are expected to be announced in September. The industry says that increasing the Corporate Average Fuel Economy of vehicle lineups to 35.5 mpg by 2016 will cost carmakers an estimated $51.5 billion, and groups like the Association of Automobile Manufacturers argue that proposed increases to 42 mpg by 2020 and 60 mpg by 2025, threaten the recovery of a sector that is just beginning to show signs of life in the aftermath of the global economic downturn.

But Ceres, a non-profit investor group, has released a study in conjunction with Citi Investment Research that calls into question many of the assumptions underlying those cost estimates. Ceres analyzed data measuring consumer vehicle preference as it relates to gas prices, finding that as long as gas prices in the United States remain above $2 per gallon, the auto industry’s transition to higher-MPG vehicle lineups will actually provide a net benefit—and the boost will be twice as high for domestic carmakers as for foreign car companies.

In a phone press conference yesterday morning, Walter McManus, an economist at the University of Michigan’s Transportation Research Institute, told reporters that added “consumer value” for more fuel efficient vehicles—resulting from gasoline cost savings associated with those vehicles—will boost sales and profit margins for the industry, even if gas prices remain steady between now and 2020. “Our research indicates that increasing industry average fuel economy to 42 miles per gallon by 2020 could raise industry variable profit by $9.1 billion, or 8 percent,” said McManus. “Most of the added profit, $5.1 billion, could go to the Detroit 3.”

If fuel prices were to rise as high as $7 per gallon, McManus said the higher standards would provide twice the benefit.

The debate surrounding the cumulative social and business costs of upgrading vehicle efficiency is unlikely to be resolved by a single study, but the Ceres findings provide a positive assessment of those considerations. In response to questions over the additional sticker costs that typically accompany higher-MPG cars like hybrids and plug-ins, representatives of the group pointed to less-expensive internal combustion improvements that have drastically increased the efficiency of gas-only cars.

Averaged between a relatively small percentage of hybrid and electric vehicles—which the study projects to represent a combined 5 percent of the vehicle market in the United States by 2020—and less expensive technologies designed for gasoline and diesel vehicles, Ceres estimates that the additional up-front cost to drivers under the proposed 42 mpg target will be less than $1,000 per vehicle.

“Consumers will save money as long as fuel prices [are] above $2 per gallon. The higher the fuel price is, the greater the savings and the more cost effective the program becomes,” added Dan Mezsler, of Mezsler Engineering Services. “A 42-mpg fuel program will not only reduce petroleum imports but also save consumers money.”

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  • MrEnergyCzar

    If they don’t raise the CAFE standard, people in the states will just buy foreign cars that are more efficient. The U.S. auto companies need to think long term.


  • George T.

    “the auto industry is gearing up for a major fight over the next wave of federal fuel economy standards”

    Are they brainless or simply evil?

    In what world do they live? Like we have a choice? It looks like most people already understand the many evils of oil dependence but not the auto industry!!! High gas prices jumps create recessions and depressions and by words of U.S. Senator Lamar Alexander oil dependence “Sends Money to People Trying to Blow Us Up”.

    Shame on those from auto industry who fight over the next wave of federal fuel economy standards!

  • JJJJ

    MrEnergyCzar, not really.

    Look at the Fiat 500. In Europe it gets 50+mpg, as the engine gets 62hp.

    But when bringing it to america, they had to americanzie it. And don’t you know it, we americans demand more horses. So now the fiat 500 gets 102hp….and 30ish mpg.

  • Dr.CAR


    well the Ford Kuga gets about 41-47 mpg on the UK cycle. this is the european equivalent of the ford escape which barely gets 30 mpg as a hybrid. The kuga also gets about 197hp. theres no reason why can’t have this SUV here in the states except that automakers don’t want to unless we voters demand it!! they would rather spend all their money lobbying against having to change their ways. apparently, automakers think that Americans like to pay more for gas. check it out

  • caffeinekid

    Don’t fall for these shenanigans people. Automobile manufacturers are totally in cahoots with government AND these mandates. They are members of the central banking cartel (GE, Xerox, Chase, Ford, Microsoft, et al), which in turn controls the governments who in turn dictate policies that stand to benefit the interests of the cartel. Its like the study points out- increased standards lead to increased profits for the CEOs and shareholders of automobile companies as they charge more for the vehicles.

  • Van

    The most “profitable” action we as a nation can take is to shift our transportation vehicles from being “foreign oil burners” to ones that consume domestic energy.

    We need the second generation battery, supposedly on track for 2013 right now. A battery with the same size and weight and cost as the Leaf 24 KWh battery but has a capacity of 42 KWh. This vehicle could replace 50% of our foreign oil burners.

    This path would reduce consumption and price and put American in a competitive advantage over those fighting over oil.

  • Dom

    I still think the solution would be much easier if they just made it legal to sell European models here mostly unmodified, without having to have them Americanized and certified etc. all the costly things that really limit our options. Two things would happen: first we’d have loads of great fuel-efficient choices, and two, we’d really get to see if people will go for fuel-efficient cars. I’d be jumping for joy if I could buy a VW Amarok or Toyota Hiluk (small diesel pickups) here… it’s really a crime what is kept out of this country due to stupid politics and regulations.

    But maybe, just maybe, these CAFE increases will encourage more of the great cars the rest of the world gets to come here.

  • cld

    “well the Ford Kuga gets about 41-47 mpg on the UK cycle. this is the european equivalent of the ford escape which barely gets 30 mpg as a hybrid.”

    Are you sure you’re not comparing apples to oranges? Imperial gallon is 120% of U.S. gallon; i.e., 41 – 47 mpg translate to 34 – 39 gallons stateside (Note: according to European Motor News, the 41 and 47 mpg Imperial are for the automatic and manual Kuga coupled to the 2.0-L Durotorq TDCi diesel engine. The Escape is not offered as a diesel in the U.S.). Also, not sure about the European cycle vs. EPA 5-cycle; but from what I’ve seen, the European cycle runs a little higher. Safety-wise, I don’t think there’s a huge difference between EU and US standards. Other than the obvious difference between U.S. EPA and EU diesel requirements, I imagine most of the difference in fuel efficiency ratings are due to slightly large vehicle size for comparable U.S. ranges, and subtle differences in the testing protocols.

  • George T.

    “Study Says Aggressive CAFE Increases Would Pay Big Dividends for Detroit”

    You do not need a study to confirm that. Plug-in cars right now are more expensive – more works goes into making them – hence auto industry will need more people to produce those cars. On the other hand people in USA need cars – the whole infrastructure is build for car owners – so not much less cars will be sold – people still need cars.

    So indeed there are big dividends for Detroit. Why are they gearing up for a major fight? May be it is OPEC speaks?

  • Anonymous

    From Mar 28 2011 Autonews:
    ‘On the Super Bowl telecast, also last month, a Chevrolet commercial showed a group of senior citizens who have difficulty hearing and believing the Cruze’s 42 mpg.

    But while Chevrolet and Ford tout their 40-mpg models in advertising, only a small percentage of Cruze, Fiesta and Focus models hit that mark.

    Ford’s optional Super Fuel Economy package, SFE for short, is available only with the SE trim. The Cruze Eco requires a manual transmission to reach 42 mpg on the highway. All of the 40-mpg or better Chevrolets and Fords are expected to be low-volume players.

    IHS’ Handler says Chevrolet and Ford “are using that advertising to get people in the door.” […]

    Rich Brusky, new-car sales manager at Heiser Chevrolet, also in West Allis, says buyers don’t care about the fuel economy difference. “The Eco has had quite a bit of interest, but they have been kind of hard to get. People who buy the automatic still get good gas mileage.”

    Ford, meanwhile, is touting its 40-mpg versions of the Fiesta and Focus. That’s 2 mpg higher than the regular models with automatic transmission. Most of the 2 mpg increase stems from low-rolling-resistance tires, included in the optional SFE package.

    Jim Heutel, president of Sunset Ford in St. Louis, says the 2 mpg increase is unlikely to sway a buyer. His challenge is Fiesta allocation — he needs more cars. He does not have a Fiesta with the SFE package, nor is he sure he wants to order that model.

    Heutel says: “When you only get a couple offered to you, which ones do you stock? Which one is going to be the fast turn?
    “Would I really rather have the one that gives me two more miles to the gallon than the one that has the brighter color and a few more accessories?” ‘

  • Charles

    Dom, the biggest difference in safety requirements between the US and the EU, is that the EU lets stupid people be killed in their cars. We have requirements to protect the unbelted passengers, that the EU does not.

    I would like to see convergence between the EU and US on auto requirements. I think the auto industry agrees.

  • Anonymous

    Regarding the Autonews story, forgot to mention [from the same article]:

    “the [Chevy Cruze] Eco with an automatic transmission gets 5 mpg less on the highway.” [when compared with 42 mpg from manual transmission model]

  • Anonymous

    March auto sales is in

    LEAF sold 298 units and Volt sold 608 and thats 900 +.
    Meanwhile Prius sold 18,000 + while CT200h sold 2,100 + – superb start.

    Lincoln MKZ Hybrid reached a record 615

  • Anonymous

    I think in mid-March, Nissan announced that ‘more than 1,500 Nissan LEAF vehicles were either in transit from Japan or at port in the U.S.’

    So, if not delivered in March, then shouldn’t all of them be delivered in this month?

  • Anonymous

    Toyota reported sales of 24,739 hybrid vehicles in March, +42.5%.
    Toyota div. 20,839 +44.1%
    Lexus 3,000 +34.8%.

    Factoring out Prius, of which sales increased by 52%, I estimate that sales of the other Toyota hybrids actually fell by about 500 in MArch.

    By similar measure, if sales of the newly launched CT200h is taken out, sales of Lexus hybrid actually fell by over 1,300.

  • Anonymous

    Honda Fit sales +43%, Insight +62% both achieve new record sales for March;
    CR-V sales +43%, all time record sales for the second straight month.

    Total hybrid sales +112%.

  • Dom

    Anonymous said “The Cruze Eco requires a manual transmission to reach 42 mpg on the highway. “

    You say that like it’s a bad thing…

  • Anonymous

    @Dom, that’s how Automotive news reported the story.

    BTW, a Cruze Eco with A6 is rated 36 MPG, for highway driving, ‘only’.