Creating Market ‘Pull’ to Meet Tougher CAFE Requires Gas Price Hike, Chrysler Warns
By Eric Mayne WardsAuto.com, Jan 16, 2008 10:29 AM

DETROIT – Gasoline prices must quadruple to motivate consumers enough to demand the types of expensive technologies auto makers require to comply with upcoming tougher fuel-economy standards, a Chrysler LLC economist warns.

Assuming Americans will want the same utility and performance they enjoy in today’s vehicles, Chrysler ran a computer simulation of conditions required to generate market “pull” in 2020, when a federally mandated 35-mpg (6.7 L/100 km) corporate average fuel economy standard takes effect, says Paul Traub, senior manager-economics and industry analysis.

Factored into the scenario was the anticipated cost of the advanced technologies considered necessary to achieve the mandate.

The simulation determined consumers won’t demand the pricey powertrains until regular-grade gasoline reaches $13 per gallon – slightly more than four times today’s national average of $3.06.

“That’s how it was in Europe,” Traub tells Ward’s after presenting his findings to the Society of Automotive Analysts here.

European consumers favor diesel engines, which cost more than gasoline-powered mills but afford a 30% boost in fuel economy. However, European consumers were not moved to buy the pricier diesels until gasoline costs skyrocketed.

Chrysler used the North American International Auto Show this week to unveil three advanced powertrains – each of which features a lithium-ion battery pack, which still in early development for complex automotive applications.

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Industry assumptions suggest the per-unit cost of building vehicles will increase, on average, up to $7,000 to enable auto makers to meet fleet-wide CAFE by 2020.

Chrysler’s gas-price scenario was conducted as an exercise. The auto maker does not support increasing consumer costs, says Traub, whose remarks provide a backdrop to a discussion of U.S. sales projections for 2008.

While Traub declines to make a specific prediction due to Chrysler’s status as a private company, his cross-town counterparts at Ford Motor Co. and General Motors Corp. expect an industry light-vehicle sales total in the range of 15.7 million – a 2.4% decline compared with 2007’s 16.1 million, according to Ward’s data.

There are risks in 2008, such as lagging consumer confidence and the subprime mortgage mess. Regarding the latter, Ford’s Ellen Hughes-Cromwick says: “We’re probably going to be in the tank for awhile.”

But GM’s Ted Chu says trends such as the weak U.S. dollar and its positive effects on exports are mitigating factors.

“We can win the battle,” Chu says, noting numerous recession predictions have fallen by the wayside over the years.

emayne@wardsauto.com