Just as the auto industry is beginning to bounce back from the Great Recession and boost earnings, vehicle manufacturers face yet another potential roadblock to profitability: dramatically higher fuel efficiency standards.
Automakers like Ford (NYSE:F), General Motors (NYSE:GM), Toyota (NYSE:TM) and Honda (NYSE:HMC) have embraced the concept of hybrid, electric and other fuel-efficient vehicles because it makes business sense to do so. But the White House and some lawmakers want them to take that commitment a step further.
The Obama administration is aggressively pushing a plan that by 2025 would require all new cars and trucks to average 62 miles a gallon. Today, the average fuel economy for U.S. vehicles is a mere 22.5 mpg.
But some lawmakers want to make cars and trucks even greener. Rep. John Shimkus (R-IL) last month introduced the Open Fuel Standard bill, which would require half of all car and truck production to be so-called “flex-fuel” capable — able to run on fuels that are either 85% ethanol or methanol by 2014.
By 2017, the bill would require 95% of all vehicles manufactured to be flex-fuel capable. Alternatives like natural gas, hydrogen, biodiesel, fuel cell or other greener technology approaches would also count for the requirement.
Recent crises in Middle East oil-producing nations are certainly enough to give lawmakers grave concerns about U.S. dependence on foreign oil. And even automakers are embracing the trends toward greener, more fuel-efficient vehicles. But with fuel prices costing consumers more at the pump and boosting the price of all consumer goods, the auto industry makes a pretty good whipping boy 17 months before the presidential election.
But what’s good for consumers at the pump could be horrible in the dealer’s showroom – and even worse for vehicle manufacturers’ earnings. Here are four reasons Washington’s push for tougher standards could hammer the sector’s profits and depress stock prices:
- The High Costs Of Higher Gas Mileage. Fuel-economy standards are “by far the most expensive regulations automakers face,” the Alliance of Automobile Manufacturers wrote in a recent letter to Congress. The industry trade group estimates that the proposal to hike fuel economy requirements to 62 mpg will increase vehicle prices by some $6,400, slashing U.S. auto sales by 25% and costing the sector more than 200,000 jobs.
- Researchers Paint A Worse Picture. A recent study by the Center for Automotive Research says the plan to raise fuel efficiency to 62 mpg by 2025 could add $9,790 to the cost of a new car or truck and would reduce U.S. sales by 5.5 million vehicles.
- We Still Need Oil. Although the big selling point behind the Open Fuel Standard bill is to reduce gasoline consumption, automakers note that there are more than 8 million flex-fuel vehicles on the roads today that are capable of operating either on gas or E85 (an 85% ethanol fuel blend). On average, those vehicles use less than one tank of E85 a year.
- Methanol Auto Fuel May Not Be Ready For Prime Time. Although methanol is touted as a promising fuel alternative to gasoline, its use as a vehicle fuel has been limited. Here’s why: although it packs a big punch, it’s a cooler-burning fuel that makes vehicles harder to start in cold weather. Methanol also is far more corrosive to metal auto parts.
Bottom Line: The auto industry is bracing for a fight over these and other green-fuel initiatives and the battle will get tougher if pump prices soar over $4 or if issues in the Middle East threaten to disrupt oil production or transport again.
The 18 months before a presidential election is the Twilight Zone, meaning politics can drive action on laws and regulations that otherwise would yield to higher priorities. Automakers’ fortunes – and stock prices – will do better if politicians shift their focus elsewhere.
As of this writing, Susan J. Aluise did not hold a position in any of the socks mentioned here.
