27 July 2017

Tough Lessons in Downside of Cheap Gas

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In recent years, the federal government required passenger cars and trucks to become much more fuel-efficient, with a goal to more than double average miles per gallon by 2025. More than a dozen states ordered auto makers to boost sales of electric vehicles, helped by billions of dollars in federal spending. And President Barack Obama’s administration increased spending on intercity passenger rail, joining states like California in planning for Asian- and European-style bullet trains.

Those policies now face a changed landscape: a steep slide in oil prices since June that has sent the average price of gasoline to around $2.40 a gallon, according to the U.S. Energy Information Administration. Americans are again favoring sport-utility vehicles and trucks, which made up 52% of all auto sales in October, up from 49% a year earlier and 44% in October 2008 after gas prices took an abrupt increase, according to Kelley Blue Book.

The developments highlight the difficulty of designing long-term policies around volatile crude-oil and gasoline prices. They also point to a long-standing reality in American energy policy: Even before the latest price drop, gasoline has long been far cheaper than in advanced economies in Europe and Asia, making it tough to promote alternatives.

Many economists expect oil to eventually climb back to previous highs based in part on expectations that growth in Asian economies will pick back up. But prices are projected to remain low throughout 2015. And government officials, environmental groups and other supporters say the policies passed in recent years are needed to conserve energy and combat climate change, among other things, regardless of oil prices.

But there are early signs of a return to old habits among consumers, many of whom had ditched larger cars and trucks when gasoline prices shot up in 2008. The average fuel economy of vehicles sold in the U.S., which had risen 26% over the past seven years, dipped in September to 25.3 miles per gallon from 25.8 a month earlier, according to industry data compiled by the University of Michigan’s Transportation Research Institute.

Average fuel economy held flat in October and November, despite the rollout of model-year 2015 vehicles that on average get higher mileage than prior model years, said Michal Sivak, the institute’s director of sustainable world-wide transportation.

For the auto industry, the low gas prices and consumer car-buying trends make it more difficult to meet tough new fuel-economy standards due in coming years; they face government fines if they don’t.

The Obama administration, under a law enacted under the Bush administration in 2007, required the average fuel economy of cars and light trucks sold in the U.S. to rise annually starting with the 2012 model year and hit 34.1 mpg by 2016. Obama officials estimated the rules would increase passenger-vehicle prices by an average $926 by 2016 but that consumers would save almost $3,000 in fuel costs over five years. Those projections were based on oil prices of an average $90 a barrel in 2015; it currently is trading under $54 a barrel.

The standards won’t get any easier to reach as federal rules require average fuel economy to reach 54.5 mpg in 2025. But the Obama administration built in a “midterm review” before the 2017 model year to determine whether to ease the standards based on consumer habits, gasoline prices and other factors.

Industry officials are already discussing whether to push for lighter miles-per-gallon standards during that review in light of the recent gas-price decline.

Noting that global oil prices fluctuate, a White House official said the administration was committed to higher fuel-economy standards to both reduce dependence on oil and combat climate change. In the first couple of years of his administration, Mr. Obama prioritized incentivizing electric cars, including extending a federal tax rebate of up to $7,500 that buyers of electric cars can receive and putting $2.4 billion in 2009 stimulus funding toward battery and electric-drive component manufacturing.

Low gas prices likely have counteracted some of the success of Mr. Obama’s policies. Overall sales of electric cars, including conventional hybrids, through November of this year are down by about 20,400 cars, or 3.7%, compared to the same time period last year, according to the association.

On a more local level, several Northeastern states have adopted a California policy requiring a certain amount of cars sold to be zero-emitting vehicles and officials remain optimistic that there will be minimal or only temporary impact on consumer habits.

Click here to access the full article on The Wall Street Journal. 

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