Obama's Sweeping Changes for America's Cars

Includes: F, GM, HMC, TM
by: Rick Newman

The usual practice in Washington is to issue marginal new rules and declare them revolutionary. President Obama’s new fuel-economy standards for automobiles, by contrast, may be even more sweeping than Obama himself acknowledges.

The president’s goal is to improve America’s collective gas mileage, cut emissions of carbon dioxide and other greenhouse gases, and reduce U.S. imports of foreign oil. To do that, Obama aims to limit the amount of tailpipe emissions cars can spew, the first such federal regulation. And he’ll raise gas-mileage standards by 40 percent, basically accelerating new rules put in place during the Bush administration. Those rules were considered aggressive when passed in 2007, but now Obama will bring them into effect four years sooner. It’s an “epoch-changer,” says Jack Nerad of car-research site kbb.com. “It will markedly change what Americans drive.” Here’s how:

Cars will cost more. Raising fuel economy so quickly will force automakers to fast-track new technology that might otherwise evolve over years or decades. That will be expensive. The new rules start to get phased in for the 2011 model year, which will include many cars appearing in showrooms in 2010. By the time the rules are fully implemented for the 2016 model year, the auto industry estimates that meeting the new requirements could add $1,300 to the cost of a car. The industry has overstated such estimates in the past, yet even environmentalists who have pushed for the changes expect car prices to increase $1,100 or so by 2015.

The price increase will probably be less for cheap cars and more for luxury models. On a typically priced $25,000 car, the hike could amount to an extra $25 per month or so over the course of a 5-year loan.

Mileage will be better—on virtually all cars. The new rules will directly mandate higher fuel economy. For passenger cars introduced as 2016 models, fleetwide mileage must be 39 miles per gallon or better. SUVs and pickup-truck fleets must average 30 mpg. Combined, that’s an average of 35 mpg for all cars in an automakers’ lineup.

In the past, required mileage increases have been structured in a way that allowed automakers to offset low mileage vehicles like SUVs by building lots of higher-mileage economy cars, even if they were unpopular and the manufacturers took a loss on them. That’s one reason the Detroit automakers became overreliant on big vehicles. But the new rules will be different, and will basically require every vehicle category to become more efficient. The details aren’t yet final, but an SUV that currently averages 16 mpg may have to average 19 or 20 mpg by 2015. A minivan averaging 19 mpg now may have to get 23 or 24 mpg. A small runabout getting 30 mpg may be required to average 36 or 37 mpg by 2015.

Fillups will cost less. Drivers will save money at the pump. If gas costs $2.50 per gallon, for instance, the typical driver of a Honda (NYSE:HMC) Accord with a four-cylinder engine would spend about $1,250 to drive 12,000 miles in a year. If the Accord got 40 percent better mileage, the same driver would spend about $890 on gas each year, an annual savings of $360. “They day you drive off the lot you’re going to start saving money on gas,” says David Friedman of the Union of Concerned Scientists, which favors the new rules. “Prices will be higher, but savings will be higher too.”

The only caveat is that gas prices could be a lot higher than $2.50 or even $3.50 per gallon by 2015. Some analysts and industry officials think $5 or $6 gas is plausible within a decade. If that happens, obviously consumers won’t be saving money on gas, they’ll be paying more. But they’ll probably be thankful to have more efficient cars in the driveway.

Some states will face much tougher rules. To get the automakers to sign up for the new rules, the Obama administration cut a deal with California, which for years has enforced emissions rules that effectively require cars sold in California to get better mileage than those sold elsewhere. The Golden State (and 13 other states that have adopted its standards) will now abide by the national rules. That’s a huge break for the automakers, since they’ll be able to build cars that meet a single set of standards, instead of tailoring vehicles to a patchwork of different rules.

In the 14 states that abide by the California standards, forthcoming changes will seem relatively gradual as the new rules start to go into effect in 2010. But in the 36 other states, dealers may start selling cars built to meet rules that are suddenly a lot tougher—which means price hikes could be more severe. Buyers in those states may need to strategize about how to get the best deal, once it’s clearer how the manufacturers plan to deal with the discrepancy. (The “California states” already abiding by tough emissions rules include Arizona, Connecticut, Maine, Maryland, Massachusetts, New Jersey, New Mexico, New York, Oregon, Pennsylvania, Rhode Island, Vermont, and Washington, plus the District of Columbia. The other states are the ones that may see unusually large price hikes.)

There will be a lot of new technology under the hood. Just when you thought you understood how fuel injectors work, you’ll have to start understanding direct injection, dual clutches, continuously variable transmissions, and other technologies that automakers will use to squeeze an extra mile or two or three from a gallon of gas. Many of these systems would have arrived over time, but now they’re likely to be rushed into development—one big reason car prices are likely to rise. Most car buyers won’t need to understand exactly how the new technology works, but they will have to educate themselves about what’s worth paying for, especially in the early stages of the rollout, when newer systems are still likely to be optional.

Many people will drive very different cars. Manufacturers will have to come up with lots of newfangled vehicles to meet the new standards, which means more hybrids in every category and price range, more “clean diesels” like those being introduced by European automakers such as Volkswagen and Mercedes, faster development of mass-market electric-powered cars like the forthcoming Chevy Volt, and probably some innovations that haven’t entered the mainstream imagination yet.

Hybrids, for instance, won’t just be a marginal part of an automaker’s lineup, reserved for environmentalists. There will be hybrid minivans, crossovers and SUVs, and automakers will have to sell enough of them to get volumes up and costs down. Friedman estimates that hybrids could constitute 20 percent of the entire U.S. fleet by 2020, a much higher proportion than we’d see without the new rules.

And some vehicles will stay more or less the same. The Obama administration insists that its new rules won’t drive pickups and SUVs onto the endangered species list, and that car buyers will have all the choices in 10 years that they have now. That may turn out to be true, but it’s also a lot less likely that an 8-passenger SUV a decade from now will be powered by a huge V-8 engine. Instead, it might be powered by a turbocharged V-6 that still has plenty of power but maybe offers less towing capability. A typical family sedan will probably be powered by a high-output four-cylinder engine instead of a V-6, and so on down the line.

Disclosure: no positions