At The CAFE, The Prices Are Out of Sight

I am too young to recollect 1973-74, but that was the beginning of the modern age of the oil markets. Or, simply put, that was when we figured out that an oil embargo by producers in the Middle East had a serious and negative affect on our society. In an effort to not let a crisis go to waste, Congress passed the CAFE (Corporate Average Fuel Efficiency) standards. This law established fuel efficiency rules for auto manufacturers.

Very simple, eh? Price of transportation fuel goes up; implement new rules requiring vehicles to be more efficient, thereby offsetting (in theory) the cost per mile traveled by the vehicle. Of course, no law is without its unintended consequences. In 1975, the average price of a new car in the US was about $4250. In 2010, the average price of a new car in the US was $28,500. Based on an inflation adjustment, the average price of a new car should have been $18,500. That’s a $10k difference. Please understand that I am not saying that the $10k increase over the baseline was due entirely to CAFE. We’ve added (based on a number of other laws) primary and secondary restraint systems, etc. However, there is little question that CAFE has added to the price of vehicles. We have more fuel efficient vehicles today, which burn much less fuel per mile than the behemoths of 1975. At the same time, we have to pay quite a bit more in real (inflation-adjusted) dollars for the privilege of doing so. The technology which has been developed to squeeze more mileage out of a gallon of fuel does not come without a price.

Unhappy with how things stand today, the EPA and NHTSA are getting ready to lay down the new rules:

The Environmental Protection Agency (EPA) and the National Highway Traffic Safety Administration (NHTSA) intend to announce the new regulations by the end of September, and the four scenarios currently being discussed range from yearly increases in mandated fuel economy of between 3 and 6 percent. This past weekend, the government told automakers that it is leaning towards a 5 percent increase, which would mean 56 miles per gallon by 2025. But the feds could choose to be even more aggressive; the 6 percent increase translates to a fuel economy standard of 62 mpg.

62 mpg. Because we can. No thought given, apparently, to whether this is feasible.

According to a new study issued by the Center for Automotive Research (CAR), adopting the most stringent fuel economy standard of 62 mpg by 2025 could increase the price of a car by $9790 and cause the loss of 1.7 million jobs. CAR says that the only way to meet such a standard would be to have 64 percent of the U.S. fleet be plug-in electric hybrids (like the Chevy Volt), the most expensive technology. According to the study, today’s low-hanging fruit—less expensive high-efficiency gasoline engines and conventional hybrids—would not be sufficient to meet the standard, and the range limits of pure-electric vehicles prevented their inclusion. “There’s no other distribution of vehicles that would be practical in the market,” CAR president Jay Baron says. And Baron argues that having two of every three cars on the road be plug-in hybrids simply isn’t realistic. “It would be way too expensive and the industry would collapse or implode,” he says, “so we don’t see 62 miles per gallon as being viable.”

Imagine that. Given that with massive government subsidies, cars such as the Volt are failing to catch hold, should it come as any surprise that the desired outcome may not be doable? Let’s suppose, for a moment, that one could actually flip almost 2/3rds of US vehicles to electric hybrids. How will our strained and badly aging electrical grid handle tens of millions of plugin autos? Will our government simply mandate that power generation facilities be more efficient?

What if the new CAFE rules are meant to be unattainable? What if the rules are intended to drive the prices of personal automobiles out of reach of most consumers? What if we are going to “end our dependence on foreign oil” by telling everyone that they should simply live in the cities and walk, bike or take public transportation to get around?

In short, what if CAFE is simply a very big nudge to make all of us unenlightened ones do the proper, ecologically-friendly, human-not-so-friendly thing despite ourselves?