Thursday, February 4, 2016

Fuel Economy Matters

Pump prices are down and given the outlook of a weak global economy, a strong dollar and a lingering oil glut, they could drop even more as the year goes on. The U.S. average retail gasoline price fell below $2.00 per gallon in January and as of last week it averaged $1.93 per gallon. For over a year now, it's been significantly lower than the roughly $3.50 per gallon average of the previous few years, let alone the brief spike to over $4.00 per gallon in summer 2008. 

Consumers respond to gasoline prices and so it's no surprise that new vehicle sales are at a record high while the vehicle mix has shifted away from compact segments and back to trucks, larger SUVs and more luxurious cars. The amount of driving is back up as well. 

The fuel economy of the vehicle fleet doesn't totally backslide even when the price of fuel does. Most efficiency gains are due to improved technology; once such engineering refinements are made they don't get undone. Corporate Average Fuel Economy (CAFE) standards prop fuel economy up even when consumer interest fades, and that policy is now reinforced with greenhouse gas (GHG) emissions standards that limit the amount of carbon dioxide (CO2) and other GHGs exhausted from tailpipes. 

Average new car and light truck fuel economy (right-hand axis) 
compared to nominal and inflation-adjusted gasoline prices. 
The adjoining graph compares the average fuel economy of new cars and light trucks to the price of gasoline since 1970, shown as both nominal "dollars of the day" and inflated to 2015 ("real") dollars. It's clear how fuel economy ratchets up as fuel prices rise. We can also see the slow backsliding that happened from the late 1980s until a decade ago. Although fuel economy has been climbing since 2005, we may be in for a serious tug-of-war between the need to keep fuel economy heading up and weakened consumer interest due to lower gasoline prices. 

Because higher fuel economy translates to lower CO2 emissions, steady progress on fuel economy is crucial for reducing transportation's contribution to global warming. Although concern about global warming is growing, consumers don't necessarily think about it when car shopping. 

Traditionally, fuel economy was a pocketbook issue. With gasoline being a non-trivial expense for most households, it's only natural that interest in efficiency waxes and wanes as pump prices rise and fall. A generation ago, the need to economize on fuel became front and center during the energy crisis, which saw gas lines, "even-odd" rationing and a recession that high energy costs helped trigger. 

In 1986, the price of oil tumbled and it remained low for nearly another 15 years. For the vast majority of consumers, fuel economy no longer mattered. Fleet average miles-per-gallon peaked in 1988 and then began a slow slide through the "what me, worry?" 1990s, which saw the rise of the SUV and renewed horsepower wars. 

But by the turn of the millennium, commodity markets were tightening as Asian economies recovered and began growing -- and consuming energy -- more rapidly. Then came 9/11/2001, which again brought home the peril of the Middle East's grip on oil. By the time the United States conquered Iraq, petroleum prices were climbing steadily, fear of peak oil reared its head and fuel economy came to matter to consumers once again. 

But today, after the inevitable lag, oil production has once more overtaken the dampened energy demand. Fuel prices no longer signal a need for higher efficiency and consumers are finding gasoline to be more affordable than it was over a year ago. Nevertheless, CO2 emissions and the risk of future price spikes means that fuel economy should still matter even if consumers are no longer so pinched at the pump. 

So a question we face today is this: are there ways to bolster consumer interest in fuel economy for environmental reasons, even when fuel prices are low?  

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