What New Gas Mileage Mandates Mean For You

This week, President Obama announced plans to raise auto gas mileage standards and cut the emission of greenhouse gases in what he called the start of the “clean energy economy.”

This means a lot of things, but there are many other factors that will affect gasoline prices, up or down. And I’ll get to the unintended consequences in a bit. First …

I agree generally with President Obama’s goals. I think he’s trying to lower (not eliminate) America’s dependence on foreign oil.  I think we are on a collision course with Peak Oil, a collision made all the more dangerous by the recent downward spike in oil prices.  As the Wall Street Journal reported today, energy investment is “plunging” because of the recession. This is  paving the way for oil price to surge within three years, according to the International Energy Agency.

Why?  Because oil companies and investors have canceled or postponed about $170 billion of investment equivalent to roughly two million barrels a day in future oil supply. An additional 4.2 million barrels a day in future oil-supply capacity has been delayed by at least 18 months.

Sure, the IEA expects global oil demand to fall 3 percent year over year to 83.2 million barrels per day in 2009 – “the sharpest single year’s fall since 1981,” the IEA said in its monthly oil market report.

But longer-term, the IEA expects oil demand to rise. In fact, if the global economy recovers, and oil demand growth returns to historical trends, we could add 36 million barrels per day of NEW demand growth over the next 15 years. The problem is that for every car Americans AREN’T adding to the roads, people in China and India are adding two … or three.

But the crisis won’t wait 15 years.

“Around 2012 the impact of this big recession on oil investment and capacity, if current trends continue, could be severe with much higher oil prices,” IEA chief economist Fatih Birol told the press.

So this makes our energy future all the more perilous – and makes the energy decisions taken now all the more critical.

However, I don’t think the new CAFE standards will do what many Americans hope it will do:  Lower gasoline prices. 

Here’s some background:  The new federal vehicle policy will require fleets to scale up to an average fuel economy of 35.5 miles per gallon by 2016. This breaks down to 39 mpg for passenger vehicles and 30 mpg for light trucks.

Administration officials say a 30% increase in the fuel economy  of new vehicles (from 27.3 mpg in 2011 to 35.5 in 2016) should increase average U.S. fuel mileage by 5 percent over five years,  That should reduce our oil imports by 1.8 billion barrels, between 2016 and 2020.  That the equivalent, they also say, of all the oil imported during a year from Saudi Arabia, Venezuela, Libya and Syria, OR the equivalent of taking 177 million vehicles off the road.  It will also curb greenhouse gas emissions by roughly 900 million metric tons.

Obama says the better mileage will pay for the average $1300 increase in the cost of a car in a few years.  Over the life of a vehicle, drivers will each save about $2,800 though better gas mileage, the president said.

The difficulty will come in getting big SUVs like Chevy Suburbans to average 30 miles a gallon, which will be the requirement for their class. That’s nearly twice as much as many of them get right now and it’s likely to cost a lot of money to increase their efficiency that much, meaning the price of an SUV is likely to jump a lot more than that of a smaller car.

As a result, owning an SUV in the future may become more prestigious because they’ll be more expensive.  Also, there is the potential for current, late-model SUVs to better hold their value because they’ll be more expensive to replace.

THE LAW OF UNINTENDED CONSEQUENCES

This all came about because the automakers sued California over the state’s stringent carbon dioxide and fuel efficiency regulations. One of their arguments was that there should be a single national standard — states can’t force automakers to produce 50 different kinds of cars.  The court and the Obama adminstration agreed with the automakers … sort of.  Now, EVERYBODY will adopt California’s strict standards.

Result:  According to Bloomberg News, US automakers face more than $21 billion in annual costs to meet the new standards by 2016. Bloomberg cites a study that estimates there may be 16.8 million vehicles sold in the U.S. in 2014. If that rate held until 2016, automakers would face $21.8 billion in added annual costs, based on the White House estimate that the policy will carry a price tag of $1,300 per vehicle for 2016 models.

You wanna bet that Detroit wishes it never raised the subject?

Also, new CAFE standards will raise the price of new cars. Folks will be unwilling/unable to buy a new car as soon as they would otherwise, ESPECIALLY if we are in an extended economic downturn. That means that A) people will hang on to their cars longer and B) this will further delay Detroit’s recovery.

And now — RIGHT NOW — might be a good time to buy a new car, if you are open to owning a Chrysler.  In fact, it might be the sale of the decade.  There’s a June 9 deadline for these dealerships to unload their inventory either to other dealers or customers. Ordinarily, Chrysler would buy back the excess cars but since its in bankruptcy, it can’t.

According to a pricing analysis by the website Truecar.com, Chrysler dealers’ anemic profit margins have grown a bit and they have some room to bargain.  So if you’re ready to haggle, get out your checkbooks.

WHAT YOU WON’T BE DRIVING IN THE FUTURE

Forget the Hummer — the  Lamborghini Murcielago is the king of the gas guzzlers. Its 640 horsepower engine sucks down a gallon of gasoline for every 8 miles it travels in the city and 13 on the highway for a combined EPA rating of 10 mpg. Then again, with a price tag of $350,000, it’s unlikely you would be driving a Lamborghini Murcielago anyway.  But you can expect the price of other gas guzzlers to go up as well … potentially out of your reach.

WHAT DOES IT MEAN

More gas sippers: Cars that already get 39 mpg include the Kia Rio,  Honda Fit,  Toyota Corolla, Volkswagen Jetta Diesel, Toyota Yaris (42.3 mpg!) .  The MINI Cooper is rated at 42.3 mpg, but it takes premium gasoline (ouch!). 

Cars that use regular fuel will get lighter and smaller.  You can probably expect some production-line, made-in-North-America models to crack the 80 mpg barrier in the next few years.

More hybrid vehicles.The Toyota Camry hybrid gets 45.9 mpg.  The Toyota Prius gets a combined 50 mpg fuel rating.  The Chevrolet Impala flex fuel gets a credit for burning ethanol and is rated at 46.3 mpg.  The Honda Insight hybrid is rated at 40/43 by the EPA, but real-world tests give it fuel economy of over 60 mpg.  The Nissan Altima hybrid gets 46.7 mpg.  And the new Chrysler Sebring hybrid gets 47.8 mpg.

More all-electric vehicles.  Nearly all the coming hybrids are “plug-ins”. That means their batteries can be recharged from an ordinary power socket. Almost nobody disputes that hybrids are a bridging technology, however, and that eventually most cars will be powered by batteries alone.  Renault-Nissan wants to have all-electric cars ready for mass production by 2010. What’s more, Nissan plans to launch an electric car in America in 2010. It should have the performance of a V6 gasoline engine, a range of 100 miles and should be capable of an 80% recharge in one hour.

Can Nissan deliver on its promise? We’ll see.

WHY IT WON’T LOWER GASOLINE PRICES

If using less gasoline and oil lowered prices, the price of oil would be below $40 a barrel and gasoline would be under $2 a gallon.  We are swimming in oil now — the drop in stockpiles announced by the EIA today doesn’t make that big a difference – and the  only reason we aren’t swimming in gasoline is because refiners aren’t making more of it.  

Inventories of oil are up. Oil stockpiles today amount to over 62 days of current refinery demand.  That’s eight more days of supply than we had a year ago and the highest for this time of year since the early 1990s.

Miles driven are down from last year at this time — as they have been in just about every month since the beginning of 2008.   That means we’re using less gasoline.    Gasoline consumption in April was 2% below last year — and dropped by a 4% in the first week of this month compared with a year ago.  So gasoline prices should go down, right?

Instead, gasoline price surged, rising by more than 16 cents.
The national average price for regular gasoline surged more than 16 cents to $2.24 per gallon.

This basically boils down to product supplied by refineries.  They are supplying less even though refining capacity is about half a percent higher than what it was last year at this time. And you’ve got gasoline demand that is running 2 to 2.5 percent lower than a year ago.

But refinery utilization rates are running at about 84 percent of capacity, with the blame falling on recent maintenance work and economic run cuts.

As for the recent price spike – fire forced shut a gasoline-making unit at Flint Hills Resources’ oil refinery in Corpus Christi, Texas just days after an explosion struck at Sunoco’s refinery in Marcus Hook Pennsylvania that also impacted a gasoline unit. These two problems triggered the 8 percent spike in U.S. gasoline futures prices, a spike that is likely to filter down to the retail pumps in the coming days.

So the White House can legislate till the cows come home, but if refineries don’t supply gasoline in sufficient quantities, the price will go higher.  I think this will be the defining force in gasoline prices going forward, not raised fuel economy standards.

But Obama’s plan is a good one because it will push Americans, kicking and screaming toward hybrid and all-electric vehicles.  Those are the vehicles we will want when we run headlong into the next oil crisis, which could hit as early as 2011 or 2012.  Personally, I’m waiting for all-electric vehicles to start rolling off the production lines before I buy my next car.  And that’s by no means assured — we’ll have to see if car-makers can actually deliver on their promises.  So, while I wait, I’ll drive my 2001 Honda CRV until its wheels fall off.

Interestingly, my wife drove her Chrysler PT Cruiser until a wheel fell off.  She drives a Honda now.  And that brings up the other question — can American automakers emerge from bankruptcy as makers of quality cars that we all want to drive?  I don’t blame the autoworkers for this — there has been a lack of imagination and innovation at the management level. We can only hope that this is the kick in the pants they need to get back in the fast lane as we head toward our post-oil future.

Do the new CAFE standards offer investment opportunities?  Sure. I plan to explore some of those in Red-Hot Global Small-Caps and Red-Hot Commodity ETFs.

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