How I Learned to Stop Worrying and Love CAFE

There are some headlines you just don’t think you will live long enough to see: “Industry Ready if Gas Prices Spark Small-Car Demand” on WardsAuto.com in February was one of them.

As the price of gasoline roared to new heights this March, fuel-efficient cars actually stimulated sales, pushing Q1 deliveries up 13.4% compared with last year. That’s another surprise. Soaring fuel prices usually kill consumer confidence, and vehicle sales along with it.

But General Motors sold more than 100,000 vehicles in March rated at more than 30 mpg (7.8 L/100 km) on the highway. That’s a record, GM says, and those deliveries prevented what otherwise would have been a lackluster March for the auto maker as Buick and Cadillac sales sagged.

Ford and Chrysler sales also were helped substantially by small cars such as the Ford Fiesta and Focus and the Fiat 500.

In my corner of the world, this is man bites dog. Something transformative is happening.

I’ve been a journalist for more than 30 years, and as far back as I can remember the industry, especially Detroit-based auto makers, always has been caught flat-footed when gas prices spiked.

It is the same bad movie over and over again: High-margin gas guzzlers suddenly are languishing on dealer lots; profits plummet; plants close; jobs disappear. Then every politician, pundit, and Wall Street analyst starts wagging a finger at Detroit and saying it should have known better.

After six or eight months, fuel prices typically ease and the American public goes back to buying big vehicles and sneering at hybrids. And the folks on Wall Street start pushing GM, Ford and Chrysler to build more high-profit trucks.

This time, the Detroit Three not only have small cars available, but they are attractive and safe with comfortable feature-laden interiors. The new Dodge Dart even is available with a heated steering wheel.

Perhaps most importantly, these small cars generate profits rather than losses.

A lot of credit is due to global platforms that are better engineered and less costly to build. And certainly it took courage on the part of many auto executives to keep supporting these car programs a year or two ago, when many critics were wondering who was going to buy all the subcompacts and fuel-sippers that were heading into production.

But the impact of corporate average fuel economy standards also must be recognized. They are forcing auto makers to build dramatically more fuel-efficient vehicles whether oil is expensive or cheap.

I have railed against CAFE standards for most of my professional life, and with good reason. For the majority of the 37 years they have existed, these fuel-economy rules have not worked. In many cases, they have caused consumers to move from cars to less-efficient trucks, just to get more interior space. That’s because until the latest rules were created, fuel-efficiency rules were far stricter for cars than light trucks.

Former GM Vice Chairman Bob Lutz likened CAFE to the government trying to solve the nation’s obesity problem by placing limits on the waistlines of pants.

But marketplace dynamics are changing. Light vehicle sales now are steadily heading upward, yet so is average fuel economy. According to the latest WardsAuto Fuel Economy Index, light vehicles achieved record fuel efficiency for the third month in a row in March.  

Because the U.S. does not, and will not ever, keep fuel prices artificially high with exorbitant taxes like most of the industrialized world, there has to be another mechanism to protect both consumers and industry from oil-price shocks that can happen overnight due to unrest in the Middle East or massive spills. Because of long product lead times, auto makers simply cannot respond fast enough.

Like it or not, tougher CAFE standards are becoming that mechanism. They now seem to be positioning auto makers well for an era of increasingly volatile fuel prices. If you look at the WardsAuto Fuel Economy Index and squint, you might even see the beginnings of a successful government energy policy.

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