Down Side of Low Gas Prices

The service station near me on Route 9 in upstate New York recently was selling gasoline at about $2 per gallon and diesel at $3 when I filled up.

In much of the U.S., folks are paying a lot less. There even is talk of gasoline falling below $1 per gallon.

Of course, we all expect prices will climb again, maybe to $3 or $4 per gallon. But what if they don't? What if the global recession and falling consumption keeps prices at $2 or less, with diesel 50% higher?

That's wonderful for consumers when they buy gas or fill home-heating oil tanks, and it's great for the economy because we have more money to spend on other things.

But what will the auto industry do? Auto makers are pledging to spend every extra penny they can get their hands on building hybrid-electric vehicles and electric cars. In Ford's case, it also will be spending big on downsized high-tech engines that combine direct fuel injection with turbocharging.

But who wants to pay thousands extra for a car loaded with expensive fuel-saving technology when gas costs $2? Who wants to pay thousands extra for a clean-diesel engine when there is a 50% price premium for diesel fuel?

Just when Congress is insisting auto makers sell more small, fuel-efficient cars as a prerequisite to receiving emergency bridge loans, consumers have less and less incentive to buy them as fuel prices plummet and sales of SUVs creep upward.

Electric vehicles such as the Chevy Volt will need at least $10,000 worth of lithium-ion batteries to have enough driving range. Add the cost of electric motors and everything else, and there will be a $20,000 premium on top of a $20,000 car. That's why the Volt is expected to cost more than $40,000.

If gasoline stays at about $2 per gallon, who will buy the Volt? Some dedicated greenies will, but their numbers are limited. Even sales of the Toyota Prius slow when fuel prices dip.

Because the government is pressuring Detroit to throw everything into HEVs, electrics and plug-ins and may even try to ban auto makers from building potentially profitable gas guzzlers, Congress should feel some responsibility for creating incentives and disincentives to steer consumers into making fuel-efficient choices. Otherwise, they are forcing auto makers to build cars people don't want.

High fuel taxes create demand for more-efficient vehicles; high taxes on big engines and limits on carbon-dioxide emissions discourage interest in gas guzzlers. That's how every other major industrialized country improves fleet-fuel economy.

The U.S. government could slap higher taxes on gasoline to push up the price. But it's tough to raise taxes in bad times, and President-elect Barack Obama already has said he does not want to do it.

A $5,000 income-tax deduction for buying any new car that averages more than 30 mpg (7.8 L/100 km) is another possibility, but it could end up costing the government too much.

Unless Washington really gets creative, all we can hope for in the short term is that gas prices soar again, and the new generation of small cars coming from GM, Ford and Chrysler, such as the Ford Fiesta and Chevy Cruz, turn out to be home runs.

Jerry Flint is a columnist for, and former senior editor of, Forbes magazine.