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: 

1. 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.
2. 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.
3. 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. 
4. 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.