DEC. LCT: Following gradual steps can ensure cool heads and sound judgment prevail.
WASHINGTON, D.C. — The vehicles Americans drive got steadily bigger, faster and less fuel efficient for more than two decades, thanks to cheap oil and Washington's hands-off approach to regulation. If Congress passes the energy bill it is now considering, that trend is expected to reverse.
The deal brokered by top Democrats last week to boost average new vehicle fuel economy to 35 miles per gallon by 2020 means that American cars will get smaller, and possibly more expensive. The proposed bill would compel Detroit's auto makers to push into production advanced fuel-saving technologies such as gas-electric hybrids, diesels and gasoline direct-injection systems that boost the efficiency of internal-combustion motors.
One way to look at it is that American cars will become, over time, more like the cars General Motors Corp., Ford Motor Co., and Chrysler LLC sell in Europe, where high gas prices and tougher fuel economy rules have long forced auto makers to invest in smaller vehicles with more advanced fuel-saving technology.
However, sport-utility vehicle lovers and pickup truck loyalists won't necessarily have to squeeze themselves into subcompacts. Auto state law makers, led by House Energy and Commerce Chairman John Dingell, a powerful Michigan Democrat, have seen to it that car makers will have regulatory maneuvering room to continue offering larger vehicles, and potentially some federal subsidies to offset the costs of overhauling their factories and fleets.
To get a sense of what a 35 mpg standard would mean if applied to today's cars, consider the Honda Fit, a Japanese-made subcompact hatchback that's one of the smallest cars sold in America. Its tiny four-cylinder gasoline engine averages about 31 mpg in government tests for combined city and highway driving — not good enough to beat the proposed 35 mpg.
A Toyota Prius gas-electric hybrid beats the standard, with a current city/highway mileage rating of 46 mpg. But that comes at a premium price. The Prius hybrid costs about $7,000 more than a 32-mpg Toyota Corolla, and about $3,600 more than a base Toyota Camry, which like the Prius is classified as a midsize car, according to Edmunds.com, an auto-research firm.
The auto industry's acquiescence to the proposed 35-mpg target signals that auto makers — who've long warned of economic doom from stricter mileage regulations — believe they have the flexibility to meet the challenge. Moreover, the persistence of $3 and up gasoline prices, and popular concern about climate change and energy security, have begun to shift consumers buying patterns toward more fuel-efficient models anyway.
"There are tough, new standards contained in the energy bill before Congress that pose a significant technical and economic challenge to the industry," said General Motors Chief Executive Rick Wagoner. "But, it's a challenge that GM is prepared to put forth its best effort to meet with an array of engineering, research and development resources."
There's no question auto makers' fleets will change from the current sales mix offered today. Fuel-thirsty trucks made up 55% of October's light-vehicle sales. Manufacturers will face pressure over time to decrease vehicle size without sacrificing safety and invest in expensive technologies.
As manufacturers go about their product plans, the thinking will be "all mileage, all the time," says an official with one major auto maker. Emphasis on 0 to 60 performance, big engines and large horsepower numbers will decrease. The balance will tilt toward improving mileage, this person said. Powerful sports cars like Ford's popular Mustang could become endangered, economic-forecasting firm Global Insight says, though exactly how auto makers will recalibrate their product mix remained unclear.
For starters, that likely means more gasoline-electric hybrids in dealer showrooms. Hybrids garner only 2% of the U.S. light-vehicle market today, but the broad effect of the mileage deal reached on Capitol Hill late last week could push that market share to 25% by 2020, according to Global Insight.
Diesel engines — about 30% more efficient than their gasoline-powered counterparts and increasingly cleaner — could also jump in share during that time frame, from a minuscule slice of the market to about 27%, Global Insight predicts. The U.S. expects diesel filling stations to become more prevalent over the coming years. Auto makers also plan to use direct-injection technology, a more efficient way of burning fuel, to boost power to smaller, more-efficient internal-combustion engines. Ford is eyeing turbocharged direct-injection engines as a "high-volume" fuel-efficiency solution.
Assuming a 35-mpg target average, consumers could expect to save nearly $22 billion a year in gasoline costs, assuming a price at the pump of $2.55, according to the Union of Concerned Scientists. But the introduction of advanced technologies by auto makers to meet that target won't come without costs. Price premiums for advanced-technology autos could exceed $5,000 on average, car makers say.
A big challenge for Detroit's Big Three will be managing the likely decline in sales of large SUVs and pickups. Ford has grown accustomed to selling more than 800,000 pickups annually, for instance. GM's full-size pickups and SUVs account for a third of its capacity in seven assembly plants, Global Insight says, while more than 30% of Ford's capacity consists of its F-Series trucks and large Expedition and Navigator SUVs.
Those volumes will be hard to sustain as tougher mileage standards are phased in. But the auto lobby won an important concession: separate treatment for passenger cars and light-duty trucks. Regulators will likely set lower mileage targets for trucks and SUVs, allowing auto makers to maintain sales to some extent.
Another provision easing the burden for car companies: The fuel-economy compromise would set up a system under which regulators would assign mileage targets to specific vehicle classes, likely based on size.
For example, a large BMW 7 Series would count toward a mileage average for its size class, instead of all passenger cars. This potentially allows auto makers to keep selling larger vehicles without heavily discounting sales of efficient, but less profitable, small cars to meet the targeted fuel-economy average. The mileage measure under consideration does require auto makers to meet a minimum fleetwide average to prevent them from simply building nothing but large, thirsty vehicles.
Auto makers got another break with the extension of the so-called flex-fuel credit, which encourages companies to build vehicles capable of running on biofuels, such as E85, an blend of 85% ethanol and 15% gasoline.
The credit would eventually phase out under the proposal, but Congress has a history of renewing such industry-friendly breaks. The question remains whether consumers will pay for the higher ethanol blends. Currently the average price of a gallon of regular gasoline is about $3.08, whereas a gallon of E-85 on an energy-equivalent basis is $3.26, according to the Daily Fuel Gauge Report, a fuel information website sponsored by the American Automobile Association.
The proposed deal also offers auto makers a hand with the costs of overhauling their product lines and factories to build more-efficient vehicles.
Domestic companies and foreign manufacturers could shell out more than $100 billion to retool factories and implement new fuel-efficient technologies, according to some estimates. Detroit's auto makers would bear the bulk of that, upwards of $85 billion.
To ease this pain, Mr. Dingell says the government would likely use money from fines paid by auto makers who fail to meet mileage standards to finance subsidies for manufacturers trying to meet the new regulations.
SOURCE: Wall Street Journal
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