2005 August 24 Wednesday
Tougher Light Truck Fuel Efficiency Standards Proposed

The Bush Administration wants to raise standards for light truck and SUV fuel efficiency.

Under the proposal, fuel economy for the popular class of vehicles known as light trucks would be based on size and broken into six categories, with smaller vehicles required to get better gas mileage. By 2011, that would mean the smallest SUVs such as a Toyota Motor Corp. RAV-4 must get at least 28.4 miles per gallon, while larger models such as a Chevrolet Silverado pickup have a target of 21.3 mpg.

Currently, automakers must maintain an average of 20.7 mpg for such vehicles, which account for about 60% of passenger-vehicle sales.

By imposing fuel efficiency standards on light trucks which are more like the standards on cars this proposal narrow the price gap between cars and trucks when new. That, in turn, might shift preferences back a bit toward cars.

The costs versus amount of fuel saved are interesting.

Mineta estimated that the new rules would save about 10 billion gallons of gasoline over the life of vehicles built from 2008 to 2011. That is equivalent to about 7% of current U.S. annual consumption.

...

The government estimates that the proposal would cost automakers $6.2 billion for 2008 to 2011 models.

Presumably the manufacturers will achieve these goals without lessening the perceived desirability of the vehicles. Some of the costs will come in the form of lighter weight materials. Some might come in the form of fancier electronics to do things like turn off engines and restart engines automatically at stop streets. This wears starters and batteries more rapidly and so adds additional costs in maintenance. But all these costs will probably decline with time as materials and electonics become cheaper.

If the manufacturers can achieve higher fuel efficiency without sacrificing desirability then think about this: $6.2 billion to save 10 billion gallons of gasoline. That works out to an expenditure of $0.62 per gallon of gasoline saved. Granted, the costs are taken up front and the benefits happen over the life of each vehicle. So you have to factor in interest costs on the money. Therefore I'd guess that the real cost is 10, 20, 30 cents higher per gallon saved. But that is still a low price per gallon of gasoline saved.

The curious thing to observe here is that if manufacturers can lower fuel usage at the cost of less than $1 per gallon saved then the market is not optimizing vehicle designs for fuel costs. Gasoline costs almost $3 per gallon. One might expect many existing designs, developed when gaoline cost $1.50 to $2 per gallon, to have marginal costs for increased fuel efficiency on the order of something closer to $1.50 per gallon. But that obviously is not the case. Buyers do not rationally figure in fuel costs when choosing vehicles.

Share |      By Randall Parker at 2005 August 24 02:55 PM  Economics Energy


Comments
Engineer-Poet said at August 24, 2005 7:09 PM:

All in all, this is a do-nothing initiative; it will save negligible amounts of fuel.  (10 billion gallons over the next 10 years is less than ¾ of 1% compared to our current rate.)

The effects will be swamped by the consequences of the rising cost of crude oil.  Higher prices will put dampers on both per-mile vehicle consumption and vehicle miles travelled (the latter of which soared in the aftermath of CAFE standards), and will finally promote serious consideration of non-petroleum energy sources (mainly electric, I suspect).

All in all, just one more governmental attempt to appear to be doing something without becoming unpopular by goring someone's ox, ie. being effective.

Jim said at August 26, 2005 11:12 AM:

while I'm also sceptical of the minor improvements... the benefits of this include more than the first-order effects that are mentioned in your post, Randall. There are also second-order effects on the supply-demand curve for oil. As seen over the last couple of years, the market for oil is fairly inelastic, leading to big price increases (200 - 300%) for 10's of % change in the supply-demand situation.


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