The Fuse

Examining the Proposed Fuel Economy Rule on Safety, Vehicle Prices, and Oil Demand Implications

by Leslie Hayward | August 02, 2018

The Trump Administration this morning released its proposed fuel economy rulemaking for model years 2021-2026, with a controversial and sweeping effort that recommends freezing standards at 2020 levels, challenges California’s independent waiver, and does away with many flexibility provisions currently offered to automakers in through off-cycle and credit trading programs.

The rule has significant implications across the transportation system and today’s announcement kicks off a 60-day comment period, during which industry, safety,  and environmental stakeholders will submit comments on the 978 page document. A few significant provisions underpinning the analysis regarding safety, vehicle purchase prices, and oil demand warrant examination.

Safety

In response to the administration’s assessment that lightweighting vehicles is detrimental to the safety of road users, SAFE’s March 2018 briefing memo outlines the general consensus between the National Highway Traffic Safety Administration (NHTSA), the Environmental Protection Agency (EPA), and independent experts that lightweighting, when done properly, poses no overall increased risk to safety.

NHTSA and EPA’s own analysis has found that lightweighting, when done properly, poses no overall increased risk to highway safety.

NHTSA’s own 2012 analysis acknowledges that reducing mass in the heaviest of vehicles, while leaving the mass of smaller vehicles unchanged, will reduce the overall risk of fatalities. The same analysis found that “any reasonable combination of mass reductions while holding footprint constant in MYs 2017-2025 vehicles—concentrated… in the heavier [pickup trucks] and limited in the lighter cars—would likely be approximately safety-neutral; it would not significantly increase fatalities and might well decrease them.”

A 2015 National Academy of Sciences (NAS) study contracted by NHTSA found that making vehicles lighter, while keeping the size of their footprints constant, will increase safety for society as a whole—particularly if the greatest weight reductions come from the heaviest vehicles.

The NAS panel agreed with the NHTSA findings that there would be some risk associated with the transition between the current fleet mix and the period where most lightweighting was incorporated into the larger vehicle classes. This risk would be due to the greater differences in the weights of two vehicles involved in two-vehicle crashes, if one is down-weighted while the other is not. The NAS study suggested NHTSA design ways to mitigate any possible safety threat through this transition period.

To achieve the goal of mitigating vehicle crashes while reducing oil demand, regulators should provide incentives for automakers to incorporate new crash-avoidance technologies (such as forward collision warning, lane departure warning, and automated braking), which have been shown to reduce crash frequency, and therefore lower the risk of injuries and fatalities.

A list of these technologies, which could generate system-wide fuel savings of 18 to 25 percent, can be found in SAFE’s April 2018 report, Using Fuel Efficiency Regulations to Conserve Fuel and Save Lives by Accelerating Industry Investment in Autonomous and Connected Vehicles. This report also cites independent research from the Boston Consulting Group finding that universal adoption of existing crash-avoidance technologies could save 9,900 lives annually.

Have fuel economy standards deterred new vehicle purchases?

Today’s proposal is based on the assessment that rolling back fuel economy standards is necessary to encourage new vehicle sales and stimulate fleet turnover, despite the fact that in recent years, record U.S. auto sales have coincided with significant fuel efficiency gains. On a call with reporters this morning, NHTSA Deputy Administrator Heidi King called the original standards “unrealistic” and said that so far, automakers had been capturing the “low-hanging fruit” in increasing miles per gallon, but conceded that the main factors driving increased vehicle prices are labor and material costs, rather than fuel economy compliance.

In recent years, record U.S. auto sales have coincided with significant fuel efficiency gains.

The rulemaking argues that fuel economy standards have increased vehicle purchase prices, deterring consumers from making new vehicle purchases, and keeping older vehicles on the road for longer. The current NPRM estimates that the compliance costs of the fuel economy standards, issued through model year 2025, would eventually increase the purchase price of a vehicle by about $1,500 – $2,100. This is significantly higher than a January 2017 EPA estimate that forecast tailpipe emission standards would add a cost of $875 per vehicle, and another estimate from the Alliance of Automobile Manufacturers that approximated cost of compliance at $1,249 per vehicle.

It’s important to realize that on a relative basis, cars have remained affordable. New vehicle purchase prices have fallen by three percent since 2013 even as the total Consumer Price Index has risen by eight percent. Housing has increased by 15 percent, food has risen by seven percent, and prescription drugs have risen by 19 percent over the same period.

Furthermore, any increase in vehicle purchase price from efficiency improvements is offset by a reduced burden in gasoline spending—motorists break-even within 2-4 years. For a vehicle with a 20 mpg fuel economy rating which is driven 15,000 miles per year when gasoline is $3 per gallon, an increase to a 25 mpg vehicle will save the driver $450 per year. This will offset high estimates of purchase price increase in 3-4 years. When gasoline is $3.50 per gallon, the difference between a 20 and 25 mpg vehicle results in savings of $525 per year. At $4 per gallon, savings are $600 per year.

For a vehicle with a 20 mpg fuel economy rating which is driven 15,000 miles per year when gasoline is $3 per gallon, an increase to a 25 mpg vehicle will save the driver $450 per year.

Furthermore, proposed vehicle import tariffs will have a greater impact on vehicle purchase prices than fuel economy standards. Estimates from the Peterson Institute indicate that the average price of an entry-level compact car will increase between $1,409 and $2,057. The price of a new compact SUV/crossover, the most popular vehicle in America, will rise by $2,092 to $3,066. More upscale versions of the compact SUV/crossover will rise by $4,708 to $6,971. The Trade Partnership estimates that the proposed 25 percent import tariff on foreign vehicles will add $6,400 to the purchase price of a $30,000 vehicle.

Tariffs are also expected to slow adoption rate of new vehicles—research firm LMC Automotive has concluded that a 25 percent duty on imported vehicles would result in domestic sales falling by one to two million units per year.

The NPRM also states that cars are staying on the road longer, with the average age of cars on the road approaching 12 years, a historical high. This has coincided with surging new vehicle sales and a new record in the total number of vehicles on the road, estimated at 257,900,000 units. Improved durability of vehicles is understood to play a role in why motorists are holding on to cars for longer.

Oil Market Implications

The NPRM estimates that freezing the standards at 2020 levels will add approximately 500,000 barrels per day of gasoline demand in the United States by the early 2030s. Half a million barrels per day is a significant increase in gasoline consumption—volumetrically equivalent to over half of current crude oil imports from Saudi Arabia—that will impact the U.S. balance of trade and undermine trends to reduce the oil intensity of the U.S. economy.

Upstream oil investment is approximately half of what it was in 2014, as decline rates have doubled and global demand continues to increase. Projections from Goldman Sachs, Bank of America, RBC Capital Markets, and others predict a return to $100 per barrel, likely within the next 18 months.

If the preferred choice is the final decision, it will exacerbate the current trend toward higher petroleum consumption. From 2015 to 2018, total Organization for Economic Cooperation and Development (OECD) gasoline demand, which includes 36 member countries, increased by approximately 500,000 barrels per day (b/d)—350,000 of that demand increase comes from the US. Most of the OECD is improving the efficient use of gasoline.

The NPRM states that oil prices will remain low through 2050, mitigating the need for fuel economy increases to insulate Americans from oil price volatility.

Assuming that oil prices will remain low through 2050 ignores both current market dynamics and historical precedent. Upstream oil investment is approximately half of what it was in 2014, as decline rates have doubled and global demand continues to increase. Projections from Goldman Sachs, Bank of America, RBC Capital Markets, and others predict a return to $100 per barrel, likely within the next 18 months.

The American economy remains vulnerable to oil price volatility. SAFE analysis based on IHS metrics shows that while the extent of economic damage would depend both on the size and duration of the price increase and on how quickly prices rise, a sudden and enduring $50 per barrel oil price increase would likely cause, at the minimum over two years, GDP to be $452 billion lower, inflation to be two percent higher, real disposable income per capita to decline by almost $1,000, 1.4 million fewer vehicles would be sold, and two million fewer workers would be employed. Depending on this volatile commodity has real-world costs and consequences.

 

 

 

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