Tuesday, January 27, 2009

Obama and Fuel Standards

The President ordered the EPA to review a Bush determination that California could not implement fuel economy standards separate from those of the federal government. Additionally, the Administration is seen as moving toward raising fuel standards fairly quickly. Both moves are ill-timed, especially in light of the continuing question of providing aid to the auto industry.

Let's review the economics of the situation, shall we? Gas was cheap, Americans wanted big cars and SUV's. The federal government, wanting to raise fuel standards and lessen our reliance on foreign fuel, created CAFE standards which dictated to US automakers an average miles per gallon for their fleet of offerings in the US (only cars made in the US were counted, something I'll comment on later).

So in order to get their fleets in line with the ordered average, automakers made small, fuel efficient cars THAT NO ONE WAS BUYING. In order to move the inventory, they sold them at a loss in order that they could continue to build and sell highly profitable trucks and SUV's (also keep in mind that every vehicle they were making, irrespective of size) was $2000 more expensive than ones made in the South by non-union labor).

So then the fuel crisis of last summer hits....and they are stuck with a bunch of big trucks and SUV's...which they sell off at fire sale prices as their collective financial fortunes wane. They don't have the time or resources to re-tool their plants to build more of the small fuel-efficient cars that were suddenly in demand again.

But wait...fuel prices then crashed again....sales of hybrids are in the TANK right now....aren't we glad they didn't re-tool?

Here's the problem...US automakers make plenty of fuel efficient cars...they just don't make them here. They make and sell them in Europe and Asia. But they are not allowed to count those cars in their fleet fuel efficiency averages. Raising the fuel averages nationwide (or even worse, applying a patchwork of fuel efficiency requirements with each state making its own rule--a la California's and 14 other states recent actions), makes the problem even worse. Just at the time that the federal government is thinking about injecting capital into the auto industry to "save it" (and its unionized jobs), it is administering a death cocktail of higher fuel standard requirements. Put another way, the feds have put a hole in the bottom of the bucket they are about to fill.

Conservatives should oppose any aid to the ailing auto industry...but they should get especially fired up about aid that that is sent WITHOUT a concomitant decrease/suspension of fuel efficiency requirements. Without this, we'd be throwing good money after bad.

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