The Fuse

IEA: Low Oil Prices Make Fuel Economy Regulations More Important than Ever

by Matt Piotrowski | November 15, 2016

While it’s clear that corporate average fuel efficiency (CAFE) standards have saved energy and helped consumers reduce costs globally, their impact during the low-price environment has been mixed. As expected, weak retail prices have supported demand for bigger, less fuel-efficient vehicles, yet fuel economy standards put in place over the years by various governments have been critical in keeping oil consumption in check. In fact, last year consumers globally saved 870 million barrels of oil as a result of efficiency improvements since 2000. The savings reflect why it’s imperative that governments continue to make CAFE standards a critical priority in their agenda to reduce dependency on oil and imports from unstable countries.

Last year, consumers globally saved 870 million barrels of oil as a result of efficiency improvements since 2000.

The latest International Energy Agency’s (IEA) monthly report highlights the mixed results we’re seeing with regards to fuel efficiency gains, but it also points out how improvements in CAFE have slowed in key markets over the past couple of years, including the U.S. The IEA notes that fuel economy of light duty vehicles purchased in the U.S. improved by slightly less than one percent in 2014-15. That progress was only a third of the gains seen from 2008 to 2013. The weaker fuel efficiency gains have continued throughout 2016, and other countries such as India, Japan, South Africa, and South Korea are also struggling with similar trends. Governments in these markets will likely have to continue to tackle the issue of consumers wanting larger and less fuel efficient vehicles as long as prices remain low.

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China and Germany in particular have been able to buck the trend and see average fuel economy improvements actually rise over the past couple of years despite lower fuel prices.

But not all consuming countries have fallen into this trap. China and Germany in particular have been able to buck the trend and see average fuel economy improvements actually rise over the past couple of years despite lower fuel prices. The Chinese were able to boost fuel economy by three times the amount it did from 2008-13 (see graphic above). “The increased pace of improvements in China reflects the important role of well-designed CAFE standards implemented from 2012,” wrote the IEA. “These standards move China away from vehicle-specific standards to fleet average standards which are driving efficiency gains while compensating for the increasing consumer preference for larger less efficient vehicles.”

The outlook for electric vehicles

Besides fuel economy standards, electric vehicles are the other critical dynamic that can reduce oil demand and reliance on OPEC. But their impact so far has been minimal. According to the IEA, EVs sold in 2015 reduced demand by only 10,000 barrels per day. The agency also points out that with more consumers buying EVs—despite their small share of the overall global fleet—tax incentives for their purchases are putting stress on public budgets. The IEA is still optimistic about growth in EV sales even if government support were to fade away. “Consumer choices are influenced by a wide range of factors, from social status to changes in driving patterns…,” said the IEA.

IHS Automotive says that in order for EVs to hit 2 percent of the U.S. car market by 2020, government subsidies will be necessary.

The agency argues: “Likely reduction in EV battery costs will reduce the level of support necessary for achieving a meaningful impact on oil demand in the coming years and thus remain a critical element in the future of electrified transport, especially in the low price environment.” The IEA is correct in that factors besides tax breaks incentivize EV purchases, but in order to accelerate their adoption, particularly with oil prices so low, government policy is still needed to support EVs given their critical role in reducing oil demand, diversifying the transportation sector, and limiting reliance on OPEC oil supply.

In an article on Sunday, The Wall Street Journal points out the blurry outlook for EVs, noting that, despite their surge in sales this year, they will make up less than 1 percent of the 83 million light vehicle sales in 2016. IHS Automotive says that in order for EVs to hit 2 percent of the U.S. car market by 2020, government subsidies will be necessary.

CAFE, EVs needed to reduce dependence on OPEC

Even though oil markets currently have remained weak for more than two years and imports from OPEC producers have eased, it’s still important to keep CAFE standards tight and continue government support for EVs.

The importance of increasing fuel economy and adopting EVs became more and more apparent last decade as retail gasoline prices soared and the U.S. increased its reliance on OPEC by a third in just six years. Even though oil markets currently have remained weak for more than two years and imports from OPEC producers have eased, it’s still important to keep CAFE standards tight and continue government support for EVs. If not, the current upward trajectory of U.S. gasoline demand could continue. In the U.S., CAFE standards for model years 2022-25 are up for mid-term review next year. The IEA’s data shows why the country shouldn’t be complacent in this area. Similarly, the tax credit for EVs in the U.S. is another means to limit demand, and as the current data shows, EVs are still in need of a push to boost their penetration in the country’s automobile fleet.

 

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