Obama's New Mileage Standards: Let's Wait and See How the Final Rules Shake Out

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 |  Includes: F, GM
by: Tom Lindmark

The Obama administration is, according to the NYT and others, prepared to move forward vehicle mileage standards.

From the Times:

President Obama will announce as early as Tuesday that he will combine that state’s emissions rules with the existing corporate average fuel economy standard overseen by the Transportation Department, the officials said. As a result, cars and light trucks sold in the United States will be roughly 30 percent cleaner and more fuel-efficient by 2016.

The White House would not divulge details, but environmental advocates and industry officials briefed on the program said that the president would grant California’s longstanding request to implement its tailpipe standards. Thirteen other states and the District of Columbia have said they intend to apply the same rules. That request had been denied by the Bush administration but has been under review by top Obama administration officials since January.

Yet Mr. Obama is planning to go further, effectively issuing a single rule for both fuel economy and emissions that matches California’s strictest-in-the-nation standard.

Under the new standard, the new combined fuel efficiency standard for cars and light trucks will be about 35 miles per gallon by 2016, roughly in line with the California rule.

The first thing to keep in mind is that you need to wait and see how the final rules shake out. There are lots of ways to get to 35 miles per gallon for a fleet. The horse trading is just starting and it’s a long way to the end.

How these rules are written will determine a lot about how they impact the domestic manufacturers. Keep in mind that Ford (NYSE:F), GM (NYSE:GM) and Chrysler make their money off of trucks and SUV’s. They build more smaller cars in order to meet the overall fuel efficiency rules but tend to sell them at break even, if they’re lucky. So, the eventual mileage bogey that larger vehicles have to meet will be a very important part of the legislation. I expect that given that the government is now or will be by the time this bill passes a very significant shareholder in two of the three domestics, they will probably go easy on them. No sense cutting off your nose to spite your face.

The other big issue is whether the American driver will buy the type of car that gets 35 miles per gallon. We know from recent experience that with the price of gasoline at $2 per gallon the answer is no. When prices hit $4 a gallon SUV’s collected dust on auto dealers’ lots and smaller cars were in vogue. As soon as prices retreated the preference for big powerful vehicles reasserted itself. So unless the Obama administration has plans to manage up the price of gasoline or the market cooperates and it rises on its own, this policy move is going to be met with the same reaction it always gets. Consumers will forgo smaller cars in favor of larger ones.

Decades of trying to make this plan work have done nothing more than to drive GM and Chrysler to bankruptcy as they couldn’t make enough on their large vehicles to cover the losses on the small cars they had to manufacture to meet the mileage standards. If in making this move the administration were to eliminate the “two fleet”* rule it would go miles (no pun intended) towards both cleaning up the air and enhancing the domestics profitability.

Perhaps with the downsizing of Chrysler and GM the policy could be revisited but it’s doubtful that would happen.

*The “two fleet” rule requires that any manufacturer, domestic or transplant, must calculate its fleet mileage based upon automobiles manufactured in the United States. It’s not quite that simple but that’s the main effect of the rule. It was made a part of the regulations from the outset in order to protect jobs. It is pernicious as it, for example, would do no good for GM to import Opels that it profitably builds in Germany into the U.S. They are very fuel efficient and quite popular in Europe but GM would not be able to include their efficiency in its quota computations. It’s crazy but then so is the whole scheme.