The Fuse

Rising Oil Prices, Geopolitical Risk Serve as Crucial Reminder on Fuel Economy

by Matt Piotrowski | March 27, 2018

The EPA is reportedly set to revise fuel efficiency regulations for model year 2022-25 cars and light trucks. The agency has completed its draft decision with its reasoning for easing standards and is expected to make the final determination public on April 1.

The EPA reopened the review of national fuel efficiency standards last year, after the Obama administration had moved the timetable forward before it left office. After being included in the comprehensive 2007 Energy Independence and Security Act, CAFE standards were strengthened in 2012 to reach a goal of 54.5 miles per gallon by 2025.

EPA’s decision to ease standards was widely expected because of shifting market conditions and consumer preferences since the standards were tightened in 2012.

EPA’s decision to ease the rules was widely expected because of shifting market conditions and consumer preferences since the standards were tightened in 2012. Sales of less fuel-efficient SUVs and light trucks have increased sharply since retail gasoline prices declined in 2014.

The rulemaking process is long and drawn out, allowing room for different parties to negotiate a solution that will modernize regulations. EPA will have to write its final rule, harmonize its findings with NHTSA, and also decide whether California should be allowed to establish its own standards. Under the Clean Air Act, California can seek a waiver to establish tougher standards, but the EPA must grant it.

After reports of the EPA’s draft decision of the mid-term review were released last week, SAFE’s President and CEO Robbie Diamond said: “Creating diverging standards between California and the federal government is a lose-lose for the auto industry, consumers, and our national security. Longer-term rules that incorporate new technologies is a win-win that benefits every stakeholder, and our country at large, so it is important that the federal government and California continue to work together. This will be a long journey, but the destination is worth the trouble.”

In light of the negative effects of oil dependence on economic and national security, flexibility is crucial in making sure CAFE standards that take into account new technologies materialize for the country’s longer-term interests. With current rules, improvement in light-duty fuel economy will save up to 2.6 million barrels per day in the coming decades, according to EIA estimates.

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The geopolitical events of today are a perfect reminder of why the nation must not come to an impasse over CAFE.

The geopolitical events of today are a perfect reminder of why the nation must not come to an impasse over CAFE. Oil prices are rising and are back to $70 per barrel, OPEC and its partners such as Russia are reducing output, global demand is continuing to grow, and major geopolitical risks—particularly Venezuela and Iran—threaten market stability. The situation could deteriorate in the coming years, some analysts argue. The country’s reliance on petroleum in the transportation sector could, as it has in the past, bring about acute economic and national security vulnerabilities. The entire economy will remain subject to fluctuations in global oil prices that are determined by national oil companies, OPEC, unforeseen geopolitical events, and emerging market demand. In the past decade and a half, the U.S. has sent approximately $1.4 trillion to OPEC members.

The mid-term evaluation represents a generational opportunity to revamp CAFE standards.

The mid-term evaluation represents a generational opportunity to revamp CAFE standards, which have served the country’s strategic interests since first implemented in the 1970s, so that they are modernized and robust. Longer-term improvements in fuel economy are necessary to cut imported volumes, strengthen U.S. leverage globally, and support a competitive car industry. CAFE regulations are and will remain one of the strongest weapons to combat threats from petroleum dependence.

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