Dear Chrysler: 5 Reasons Oil Prices Shouldn’t Affect Fuel Economy Standards

, research and deputy director, Clean Vehicles | January 27, 2015, 11:10 am EDT
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Lately, low gas prices have been making headlines across the country. Having dropped by more than $1.50/gallon over the last 6 months, there is certainly reason to be talking about them. So it was no surprise when the topic came up at the North American International Auto Show earlier this month in Detroit. The CEO of Chrysler, Sergio Marchionne, used the opportunity to call for rolling back vehicle fuel economy standards. This is perhaps not surprising from a CEO who also tells people not to buy his company’s electric cars and who’s company has scored last in 6 out of 7 UCS Automaker Rankings. But his statements on fuel economy appear to be as volatile as oil prices. Just a couple of years ago he stood up with the President and supported the new standards.

Low gas prices do not mean it’s time to roll back clean vehicle standards – and here are 5 good reasons why:

1. We need cleaner cars AND trucks. Much has been made of recent vehicle sales showing a market shift toward larger vehicles, with last week’s WSJ article “Clash Looms Over Fuel Economy Standard” highlighting the pushback expected from automakers on fuel economy standards. Regardless of what’s causing the shift (and I dare say it is more than just low gas prices – since the increasing market share for trucks started in 2013 and was projected to grow in 2014 well before anyone knew gas prices were going to plummet), it’s important to understand what impact that will have on automakers ability to comply with federal fuel economy and greenhouse standards.

A vehicle manufacturer’s fuel economy requirements are based on the size of vehicles sold, as defined by the vehicle footprint (track width multiplied by the wheelbase). A larger wheel base means a lower fuel economy target.

In a word – none.

Increased market share of larger vehicles will lead to more oil consumption and emissions, but it’s no reason to rollback standards. In fact, the standards were designed to accommodate shifts in the vehicle mix. Instead of setting a single fuel economy or greenhouse gas emission number and making every manufacturer meet it, the standards are set based on the size (or footprint) of the vehicles that are sold by each manufacturer.

The fuel economy and greenhouse gas standards are often described as requiring automakers to meet a 54.5 mpg standard in 2025. In reality, this figure is just an estimate based on an assumption about the size of vehicles that are expected to be sold in 2025 across the entire US market. If the size of vehicles sold in 2025 differs from the assumptions, then so will the average fuel economy target for each manufacturer.

2015-ford-f-150-09

Can automakers meet fuel economy standards if they sell more trucks? Absolutely. If Ford stopped selling cars, and only sold F150’s with it’s new 2.7 liter V6 EcoBoost engine, Ford would not only be compliance with today’s standards, but would already be complying with standards as far out as 2021. (Photo: Courtesy of Ford Motor Company.)

Consider this. What if Ford only sold F150’s equipped with their new 2.7-liter EcoBoost engine and no other vehicles?

You might think they wouldn’t have a chance at meeting the fuel economy standards. In fact, not only would they be in compliance with this year’s fuel economy target, but Ford would be years ahead of the standard.

The two-wheel drive 2015 F150 2.7L is rated on government fuel economy tests at a combined highway/city fuel economy of 28.5 mpg (the actual consumer label value is 22 mpg – see more about the difference in this factsheet). The average footprint of the F150 is 65.67 sq ft assuming the shortest truck bed length option and the current market share of standard, crew and extended cab versions of the F150. The fuel economy target in 2015 for a truck with this size footprint is 24.83 mpg and doesn’t reach 28 mpg until 2021. Even the four-wheel drive version of the F150 with slightly worse fuel economy already meets the standard set for 2019.

So a shifting market share to trucks is not an excuse for a change in the standards, but certainly highlights the importance of implementing other policies to reduce fuel use and greenhouse gas emissions from transportation. Complementary policies include putting a price on carbon, consumer rebates to reduce the cost of cleaner cars or fees on higher emission vehicles, and low carbon fuel standards, among others.

2. Learn from history or be doomed to repeat it. Remember the sky-rocketing gas prices and subsequent economic crash of 2008? Fuel economy standards stalled in the 90’s and early 2000’s in large part due to automaker’s intransigence. As gas prices rose, U.S. automakers were particularly vulnerable given their inefficient product offerings and better positioning by their global rivals with more efficient vehicle choices. This ultimately led to bankruptcy for GM and Chrysler. Consumers were complicit as well, shifting their purchases to larger, inefficient SUVs and trucks when gas prices were low.

Making policy and purchasing decisions based on the assumption that current gas prices will stay low has been tried before with devastating effect. Calling for a change in in standards because of plunging oil prices is a classic example of short-term thinking that totally ignores that prices will rise and fall again, probably many times before 2025.gas prices

3. What goes down must go up. Gas prices are volatile and dependent on global supply and demand. The current oil market is being influenced by both (according to EIA analysis). Fuel economy standards are partly responsible as improving efficiency of U.S. vehicles has slowed demand for oil in the U.S. while a boom in U.S. oil production has led to increasing global supply.

However, oil companies are already responding to lower oil prices. Stories of oil field layoffs and reductions in oil company investments in oil exploration and development should be a warning sign. At oil prices below $50 a barrel, fracking for hard-to-get oil in the U.S. is likely an economically losing proposition. As investments wane in production, so will supply to the oil markets. There’s plenty of debate about how and when oil prices might change, but if history is any lesson volatile oil prices are here to stay.

Fuel economy standards remain an effective insurance policy against volatile oil prices. By 2025 new car fuel consumption will be about half compared to model year 2010. No matter if fuel prices are $3.00 or $6.00, keeping the standards in place means a vehicle owner’s fuel bill will be cut in half for the life of the vehicle, not just when oil prices happen to be low.

4. Fuel economy remains a top consideration for consumers. Fuel economy is by no means the only consideration when buying a vehicle. Passenger seating, cargo capacity, and others are key factors in car buying decisions. But most people want their vehicle to also use the least amount of fuel possible, as well as do everything else that’s important to them. This is true despite low gas prices, as seen by the results of the recent J.D. Power’s study which found fuel economy remains the most influential factor for new vehicle buyers for the fourth year in a row.

5. Electric cars are key to cutting oil use and climate emissions – now’s no time to slow down. Low gas prices are not helpful to boosting electric vehicle sales, but it doesn’t mean the sky is falling either. A quick look at the Department of Energy’s eGallon calculator shows the average fuel costs for an EV are about half that of a comparable conventional gasoline vehicle. In many states, charging on off-peak hours (when your car is parked overnight) means even lower fuel costs. Last year plug-in EV sales, both plug-in hybrid and battery-electric, grew by 23 percent.

California’s Zero Emission Vehicle (ZEV) program, also being implemented in 9 other states, is helping to propel the EV market forward and compelling automakers to invest in these technologies. This is important to make sure EVs, a key strategy to cutting our projected oil use in half by 2035 and slashing our carbon emissions 80% by 2050, become more cost competitive and a viable option for more consumers. Many of the states, including CA, that have adopted the ZEV program are also committing resources to making the roll out of these vehicles a success with state incentives, carpool lane access, infrastructure development, and other support. In other words, the automakers are not alone in this endeavor.

In terms of meeting the federal fuel economy and greenhouse gas standards for 2025, the vast majority of compliance will come from “plain vanilla technology” as Chrysler CEO Marchionne put it – meaning improvements in engines, transmission, and other conventional technologies. EPA’s estimates for compliance with the standards show only about 5% hybrids and 2% plug-in vehicles needed in 2025 to achieve a fleet average the equivalent of 54.5 mpg. Every EV a manufacturer sells in a ZEV state will help them meet the federal fuel economy and greenhouse gas standards, but there’s no requirement for automakers to be selling millions of EVs outside of ZEV states to comply with fuel economy standards now or in 2025. Of course that doesn’t mean there isn’t a market for them, like in Atlanta for example.

When supporting the standards in 2011:

Marchionne said the three Detroit automakers ended a “bad habit of crying wolf” and opposing higher standards. That’s largely because the companies’ current chief executives came from outside the industry.

“We looked at this and said this can be done, as business people who did not grow up and did not become conditioned by traditions of Detroit,” Marchionne said.

Perhaps Mr. Marchionne has spent a little too much time in Detroit.

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