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How cheap oil is undermining Obama's fuel-economy rules

Love the color, but got anything more ... gargantuan?
Love the color, but got anything more ... gargantuan?
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One of the central planks in President Obama's climate plan is a rule to ratchet up fuel economy standards through 2025. New US cars and light trucks are supposed to get better and better mileage with each passing year.

At least, that was the dream. But now cheap oil is messing that up.

Recent data from the Transportation Research Institute at the University of Michigan shows that overall fuel economy for new cars, SUVs, vans, and pickup trucks sold in the United States has been stagnating ever since oil prices crashed last year:

(Transportation Research Institute)

This chart seems a little counterintuitive. How can fuel economy suddenly be flat if fuel economy standards are supposed to keep rising through 2025?

The crucial thing to understand here is that Obama's fuel economy rules — known as CAFE standards — are "footprint-based." That is, every new car sold in the US has to get steadily more efficient with each model introduced between 2011 and 2025. But bigger car models have looser mileage requirements than smaller car models.

So if consumers start shifting to larger vehicles with bigger "footprints," then overall fuel economy will rise more slowly — even if all models are getting more efficient.

There's evidence that this is exactly what's now happening. During the late 2000s, when crude oil prices were high, Americans started shifting away from gas guzzlers. But ever since the oil price crash last year, gasoline has been cheap, averaging less than $2 a gallon nationally, and SUV sales have soared.

Under the CAFE standards, even these SUVs still have to get more efficient over time. But they'll never have to get as good mileage as, say, Honda Accords or smaller Ford Fiestas. So if more people are buying SUVs, overall fuel economy will go up much more slowly than expected.

No one expected this when the rules were originally crafted

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The federal government did not expect this would happen when it originally crafted the CAFE standards. The agencies in charge predicted that the mix of new vehicles sold in the US would stay roughly the same between 2011 and 2025.

If that ends up being wildly wrong, then the fuel and emissions savings from the rule could be lower than expected. Early estimates were that the standards would cut US oil consumption by 2.2 million barrels per day in 2025. That may need a revision.

The question is how much this all matters. One recent discussion paper by Benjamin Leard, Joshua Linn, and Virginia McConnell of Resources for the Future tried to come up with a rough estimate of the impact of cheap oil on CAFE standards. Their bottom line is that it eroded the fuel savings in the short run, though the effect was modest:

[T]he recent gasoline price decrease had a relatively small effect on the overall fuel economy requirement. The requirement fell by about 0.1 mpg. This decrease eroded about 14 percent of the increase in the stringency of the fuel economy standards between 2014 and 2015, and 8 percent of the increase in stringency between 2011 and 2015

They do caution, however, that it's more difficult to model long-term impacts of low oil prices on both manufacturers (who may start producing a greater mix of larger vehicles) and consumer behavior. So this study isn't the final world.

As best we can tell, then, cheap gasoline is likely to chip away at Obama's fuel economy rules, but it won't break them. Over time, US vehicles should keep getting more fuel-efficient and use less gasoline per mile — but that journey's going to be a lot rockier than anyone anticipated.

Further reading:

-- Note that the CAFE standards come up for a midterm review in 2017. Some automakers have been arguing that the rules should be weakened in light of recent low oil prices and shifting preferences. A recent paper by Michael Levi and Varun Sivaram made the case that the standards still made financial sense.

-- As I've noted before, right now would be an excellent time to raise the federal gas tax. Not only would it alleviate the perennial transportation funding crises that pop up in Congress every two years, but it would prevent backsliding on fuel efficiency.