Higher Mileage Cars Can Send Message to the Market

Includes: F, GM
by: Dana Blankenhorn

When the administration acknowledged it wanted a 56 mpg corporate average fuel economy standard for 2025 recently, some headline writers duly trotted out stories about industry opposition. But the actual reaction of Ford (NYSE:F), GM and Chrysler was pretty muted.

Sure, dealers complained, but dealers always complain. Mostly what was heard from Detroit this week was crickets.

Why? Consider that Ford plans to triple its supply of hybrid and electric vehicles in the next two years. Consider that GM is ramping up production of its all-electric Chevy Volt. Consider that used cars with good gas mileage have actually gone up in value 30% this year – that's practically unheard of.

Simply put, the government is only pointing the car companies toward opportunity. It's all part of an effort to create a renewable stimulus. Consider what happens when people save or produce the equivalent of one gallon of gas:

  • Consumers and business both spend capital to produce the saving.

  • New energy is created, or energy is saved, which pays back the investment.

  • Downward pressure is placed on oil prices.

The higher the current price of gas and oil, the greater the stimulus. Given that the U.S. consumes 25% of the world's oil with 4% of its population, we have more room to save more than other economies; hence, more room to grow.

The aim is to break the market psychology of the oil complex. Right now producers assume that the value of proven reserves will continue to climb, that pumping oil even at current prices is a sacrifice of future profits. Once they believe prices are headed down permanently, prosperity will arrive.

The real “peak oil” refers not to production but to price. Getting past that “peak oil” requires massive investment in higher-mileage cars, in renewable energy, and in technologies for reducing energy demand generally.

But the economic value of that stimulus is clear. If someone with a 20 mpg car trades it in for a 40 mpg car, they cut their gas costs in half, and those savings can help pay for the car. Seizing that opportunity is how GM will pay for the bailout, and how Ford will continue to grow. Which means investing in the auto industry now makes sense, for the first time in decades.

Disclosure: I am long F.

Additional disclosure: I bought 400 shares of Ford for my IRA in 2009, at $4/share.