Tuesday, January 13, 2015

Are falling fuel prices good or bad?

Yesterday in Automotive News, Richard Truett penned a piece titled, "Why falling fuel prices are bad, bad news."  His point was that lower pump prices make fuel-efficient vehicles a harder sell, risking the billions of dollars that automakers have recently invested in hybrids, electric cars and other alternatives as well as lightweight materials and advanced combustion engines.

The argument that high fuel prices are good for cutting oil use and carbon emissions follows directly from basic economics. Mr. Truett hopes that oil prices will head back up this year and, guided by economics, many conservation advocates have long called for higher taxes to address oil-related concerns. I'm certainly not one to argue with those principles, but I also believe that lower fuel prices are on balance a very good thing for American consumers and the economy.

So, what should we do to keep fuel efficiency heading up while fuel prices are heading down?  For one thing, policymakers will need to maintain the increases in CAFE standards that are already underway. Automakers, instead of fighting the standards when fuel prices fell (as happened just about 30 years ago now), need to maintain the momentum they've established in providing appealing designs that package the improved technology with new features that don't fight against fuel economy the way that the excesses of the big SUV era did. That type of "efficiency compatible" design strategy is an important complement to the technological strategy of engineering better engines and body structures.

As for the oil market, the only thing we can say for sure is that it will always be volatile. It can't be counted on it to provide a durable market signal strong enough to motivate the level of ongoing efficiency gains needed to cut carbon and reduce other oil-related risks. Raising fuel taxes is a good idea just for the sake of keeping our infrastructure in better repair. But realistically speaking, any plausible tax increase won't make all that much difference in consumer interest. It certainly can't match the kind of disruptive market motivation that the rapid swing up towards $4.00/gallon caused just a few years ago.

So other than staying the course on regulation, what is also needed is a concerted public education campaign that "fuel economy matters." That would be a useful new initiative on which industry, government and environmental groups can collaborate. Consumers now understand that fuel economy matters. It will be crucial to remind them that it matters not just for pocketbook reasons, but also for cutting carbon and for dampening oil consumption. And that in turn will reduce the risk and pain of the future fuel price spikes that will inevitably occur.

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