When President Obama five years ago proposed to double the CAFE mandate to 54.5 mpg (4.3 L/100 km) by 2025, cheap gas seemed the last thing that would stand in the way.
Skyrocketing oil prices sent the U.S. auto industry into a tailspin in 2008 and hastened the bankruptcies of truck-dependent Chrysler and General Motors.
Since then, U.S. automakers have revamped their portfolios dramatically to include a wide array of fuel-sipping small cars and efficiency-enhancing technologies such as electric and hybrid-electric powertrains, lightweight materials and 8- and 9-speed transmissions. Many more innovations are on the way, including improved EVs, HEVs and even hydrogen-powered fuel-cell vehicles.
But now, sluggish global economies and booming North American shale oil production – and a strong U.S. dollar – have created a global oil glut and depressed prices. With the cost of gasoline predicted to average just $2.60 nationwide in 2015 – compared with $3.37 in 2014 – consumers once again are flocking to larger, less-efficient cars and trucks.
The market shift is turbocharging sales and profits at producers that offer a rich mix of SUVs, CUVs and pickups, but it also has many worrying it will be impossible to meet future U.S. CAFE goals if the trend goes on too long.
Sales of battery-electric vehicles have been climbing, but their market share still is too tiny to make a significant impact on CAFE.
HEVs and plug-in hybrids lost market share in November in favor of conventional gasoline-powered vehicles, according to WardsAuto data, and the average fuel economy rating of new light vehicles sold in the U.S. in November was 24.8 mpg (9.5 L/100 km), representing the first year-over-year decline in the WardsAuto Fuel Economy Index in four years.
This creates a serious hurdle for automakers trying to steadily improve average fuel economy to meet U.S. CAFE rules, which are sales-weighted. The U.S. government can force automakers to make high-mileage vehicles, but if consumers don’t buy them, the standards can’t be met.
Ford CEO Mark Fields alluded to the issue recently, saying the effect of falling pump prices will be a topic of discussion during the midterm review of U.S. CAFE regulations set for 2017.
“We think (the midterm review) is a great opportunity to talk about the feasibility and the timeframe to meet those requirements,” he says, pointing out Ford is on track to hit the 54.5 mpg (4.3 L/100 km) requirement in 2025. “What I expect is we’ll have a very robust midterm review and be very data-driven around it.”
Industry Believes Low Prices Transitory
But because of the auto industry’s long lead times, new product and technology strategies already are locked in for at least the next three or four years, and Fields and most other automakers do not see oil prices staying at depressed levels for an extended period.
Steve Kiefer, the former vice president-Global Powertrain at General Motors and recently promoted to vice president-Global Purchasing and Supply Chain says sinking fuel prices are transitory. “There are many global factors that can impact the outlook. The actual timescale for these changes is impossible to forecast or predict,” he says.
Analysts say the oil glut mostly is due to sluggish global demand, which eventually will rebound and push prices back up.
“I’m pretty sure (automaker) economists are telling them that in the longer term fuel prices will increase, especially if China, India, Russia and Brazil come fully online,” says Bruce M. Belzowski, managing director-Automotive Futures at the University of Michigan’s Transportation Research Institute.
Belzowski says the Chinese vehicle fleet is expected to increase from 126 million today to 300 million to 400 million by 2030. “Those are very big numbers,” he says.
“We (believe) the price of oil will continue to go up,” Fields says. “We’ve ratcheted (our near-term forecast) down in light of the recent dynamics, but our point of view is still that the cost of a gallon of gas is going to go up over time, so it doesn’t change our plan.”
Why CAFE Targets Won’t Change
Some automakers no doubt are privately hoping the U.S. government will postpone or roll back the daunting 54.5 mpg fleet target for 2025 during the 2017 midterm review, but the increasingly global nature of the auto industry and emissions regulations all but rule out major changes.
Automakers want to globally standardize powertrains and platforms as much as possible to achieve maximum economies of scale.
Europe isn’t budging on its tough carbon dioxide emissions-based rules, and making changes strictly for the U.S. market could end up costing more money than it would save, especially during the next few years when programs already have been finalized.
The California Air Resources Board’s mandates and credits also are based on tailpipe emissions, not fuel-economy numbers, further limiting possible wiggle room in meeting future CAFE requirements.
“The midterm assessment provides the industry an opportunity to make their case for lower CAFE goals for 2025 (the goals are already in place for now until 2021 or 2022), but to meet even the short-term goals, they have to make significant changes to their fleets,” Belzowski says.
The industry likes a clear path and goals, and changing those goals complicates their business plans, Belzowski says.
What’s more, the government, and especially California, will not be interested in reducing the goals if they see companies are making good progress (with technology) in meeting them, especially because numerous loopholes and special credits already have been built into the legislation.
“We don’t think there will be change to the 54.5-mpg goal,” says Samir Salman, CEO-NAFTA Region, for auto supplier Continental.
“The reason is that all stakeholders are so heavily invested we feel the point of no return already is there. Many companies are global. They want common engines, common this, common that. It gets complicated if you want to make changes. If you would change it now it would create more sunk cost than anything else.”
Special Headaches for Car-Centric Automakers
Cheap gas and the rejuvenated popularity of CUVs, SUVs and pickups is creating a special hardship for automakers with the most fuel-efficient, car-centric fleets. Volkswagen, Honda and Hyundai all are losing sales and market share because they do not have enough CUVs and light trucks in their U.S. portfolios to keep pace with shifting buyer tastes.
Hyundai Motor America CEO Dave Zuchowski recently told reporters the big margins currently being made on light trucks also allow automakers with stronger truck portfolios to afford bigger incentives on their slow-selling subcompacts and sedans than their competitors, which puts Hyundai at a disadvantage.
Competitors offering larger incentives is a key reason the new Hyundai Sonata has not had a stronger launch, he says.
Sales of the Toyota Prius, which accounts for about 50% of all HEV sales, have been trailing year-ago levels by double digits, presumably because of lower prices at the pump, but Jim Lentz, Toyota’s CEO for North America, tells WardsAuto low gas prices should not hurt demand for the next-generation Prius or Mirai fuel-cell-powered car in 2015.
Lentz predicts early adopters fascinated by advanced technology will be drawn to the Mirai and a loyal base of 2 million current Prius owners will pump up sales of the all-new ’15 Prius when it debuts next year.
Lentz points out that gasoline priced in the $1-per-gallon range did not stymie the success of the first-generation Prius when it was launched in 2000.
– with Byron Pope and Christie Schweinsberg
