Cheap Gas Worries Auto Industry

Throughout the history of the automotive industry, car companies have worried about the impact of higher fuel prices. Today it’s the opposite. Now they’re deeply worried about the falling price of gasoline.

It wasn’t supposed to be this way. As recently as 2007, energy experts were still talking about “Peak Oil” and predicting global oil prices soon would soar to $150 a barrel. Instead, largely thanks to fracking, the world is awash in oil and prices are plunging, with a barrel of oil hovering around $80.

Meanwhile, automakers must meet stringent fuel economy and carbon-dioxide emission standards. To hit those targets, they need consumers to buy more fuel-efficient vehicles, especially hybrid-electric vehicles. But in the U.S., HEV sales have been falling all year. And while sales of electric cars are growing 50% annually, the market share for HEVs, plug-in hybrid-electrics and EVs taken as a group has not changed at all.

That means people are merely moving out of HEVs into battery-electrics, and the segment is not attracting new buyers. With the price of gasoline now under $3 a gallon in many places around the country, it’s likely this segment will shrink even more.

A very senior Toyota executive told me that if gasoline prices are around $3 a gallon in 2018, the company will not be able to meet Corporate Average Fuel Economy regulations. And if Toyota, the HEV sales champion of the industry, cannot meet CAFE, then who can?

Of course the price of oil has fluctuated wildly over the last four decades. And it’s entirely possible prices will soar again. But it’s more likely they will not. We seem to have hit a point where global calamities no longer spike the price of oil.

Oil supplies also are growing due to the weakened BRIC (Brazil, Russia, India and China) economies and possibly from a play by Saudi Arabia to grab more market share by pumping plenty of oil.

But there’s no question the game changer comes from new drilling techniques, namely hydraulic fracturing and horizontal drilling, commonly referred to as fracking. These technologies have transformed the U.S. from an also-ran into the world’s leading oil producer. And while fracking is highly controversial, there’s little doubt other countries will jump onto this bandwagon.

So even when the global economy gets back into gear, there’s probably going to be plenty of oil and natural gas to go around. And that’s why automakers are worried. The government is forcing them to build small, fuel-efficient cars and those dang pesky consumers just won’t buy enough of them.

In 2017, the U.S. government is committed to reviewing the CAFE standard in what’s commonly called the midterm review. At that time, cool and dispassionate heads are supposed to determine if the country will continue its pell-mell plunge toward a 54.5 mpg (4.3 L/100 km) CAFE standard, or if it makes sense to back off.

Politically, it’s probably going to be impossible to back off. Indeed, the environmental lobby already is emphasizing the need for CO2 reduction over any miles-per-gallon requirement. But the technology needed to meet these standards does not come cheap, and middle-class households already are starting to get priced out of the new-car market. We’re not going to make much progress if more people merely hold onto their old cars.

So what would make the most sense? Give the auto industry more flexibility. Instead of maxing out the CAFE limits in 2025, stretch them to 2033. Another eight years would allow for one more vehicle platform lifecycle, and that would help tremendously. Or maybe give automakers greater credits for fuel-saving technologies.

Something has to give. Unless consumers suddenly change their buying habits, automakers are going to need help. And who ever thought the automotive industry would need protection from falling fuel prices?

John McElroy is editorial director of Blue Sky Productions and producer of the “Autoline” PBS television show and “Autoline Daily,” the online video newscast.