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.”