Market Forces Drive Fuel Efficiency

Market forces should drive fuel efficiency and are. With high gas prices, new light duty vehicle purchasers are looking at smaller and higher mileage vehicles. CAFE regulations now being implemented will lead to further improvements in miles-per-gallon (MPG), but at a price–$1000.00 or more per vehicle. Before proposing post 2016 standards, the Department of Transportation should have an independent analysis conducted of how well the new standards are working and at what cost to consumers and manufacturers.

Using composites, roll resistant tires, variable cylinder technology, 5 and 6 speed transmissions, and smart fuel systems leads to increases in miles-per gallon. These technologies are gradually becoming standard on many vehicles as their costs are reduced. BMW has announced that it will soon be exporting to the US a version of its 320 series that gets 57 miles per gallon. There is no reason not to expect further improvements in engine technologies.

The challenge is not producing cars that get over 40 miles per gallon; those are available today. The challenge is to produce high miles per gallon cars that consumers want to buy. There can be big differences in tastes and needs based on demographics. People living in cities with easy access to public transportation are attracted to smaller, higher mileage vehicles. People who live in the suburbs or rural areas with families have a preference for larger cars and trucks. They accept lower gas mileage for convenience, needed mobility, and economic necessity. These buyers have the option of purchasing diesel powered vehicles which are about 30% more efficient but diesels are also more expensive that gasoline engines so demand has been limited.

The government is traveling a dangerous road in attempting to push transportation technology that is expensive and not market ready. Hybrid technology continues to improve and evolve but hybrids are at least several thousand dollars more expensive than their gasoline counterparts. Even at today’s gasoline prices, the pay back period can be very long for full size and SUV hybrids.

Electric vehicles being heavily promoted by the Obama Administration are simply not commercially viable except in niche markets. The Volt is not a true electric and the Leaf has limited range. Both are very expensive. The National Academy of Sciences(NAS) in 2009 produced a sobering critique of the state of battery technology. The cost per kilowatt hour is over 4 times greater than necessary for battery packs to be commercially viable. The NAS did not expect any significant breakthroughs that would significantly reduce costs for at least a decade.

The government does not have a good record in trying to force technology in the the consumer market or in forcing people to act contrary to their own self interest. Based on history, legislative and regulatory mechanisms will fall short of expectations and produce a range of unintended consequences. For example, adding to the cost of new cars will lead to slower turnover of the existing fleet meaning that less fuel efficient vehicles will remain on the road longer. People who have long commutes and who are induced to buy smaller, high MPG cars will be at greater risk as an abundance of data show.

If gasoline prices remain high, consumers will move to higher MPG vehicles and manufacturers will have an incentive to make technology advances that increase the MPGs in larger vehicles. If government uses the heavy hand of regulation to force manufacturers to produce vehicles that consumers don’t want, it will repeat the history of making manufacturers less competitive. We have been down that road before. The station wagon was a victim of CAFE and the SUV was the result of a loophole in the regulations.

While most people believe that we will face high gasoline prices for a far as the eye can see, they are being myopic. The history of oil prices is a history of cycles. Crude oil prices which drive gasoline prices are high for a number of reasons and those could change in the not too distant future. When they do, prices will once again start dropping and that will be in the best interests of consumers and the economy. Basing policy on $100 or higher crude oil prices is risky.

Originally published by the National Journal at

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