Since President Donald Trump’s administration took office, the auto industry has been clamoring to have the strict fuel economy standards set by his predecessor reversed. On Monday, that process began with an announcement by Trump’s Environmental Protection Agency. But the automakers themselves could wind up seriously hindered if the standards are drastically weakened.
Consider the current environment of the auto market: sales, most observers agree, plateaued in 2017. Car buyers are already borrowing record amounts to purchase a car and average to loan terms exceeding 70 months. Many of those sales are driven by big SUVs, crossovers and trucks as gas has stayed cheap—for now.
And the bottom of the market—that is, subprime borrowers that were offered loose credit for years, helping automakers reach those record sales—are disappearing from the new car market entirely.
All signs sure seem to be pointing to shaky, precarious territory, and now, with the automakers’ blessing, fuel economy standards are being thrown into the mix.
If you ask the automakers, the official line is that better clarity is needed, and that the now-rescinded fuel economy rules implemented by the Obama administration were too expensive to adhere to. The standards mandated automakers to hit a 54 mpg average by 2025 for light-duty vehicles.
Automakers are indeed developing more all-electric and hybrid models, but that only constitutes a fraction of the market. It’s still unclear how long it’ll take for electric vehicles to catch on.
That’s partly why an array of groups have voiced opposition all week on the EPA announcement, which jumpstarts a joint process with the National Highway Traffic Safety Administration to reset the targets. The Obama fuel economy standards were an insurance policy, they say, so automakers aren’t caught flat-footed if gas prices were to spike and crossover fanatics find themselves in need of something more fuel efficient.
Granted, modern crossovers and SUVs are far more fuel efficient than the big trucks of old. But beyond all that, U.S. carmakers could find themselves at a competitive disadvantage as China and the European Union implement more stringent standards, while the auto supplier industry—which is already preparing for the 2022-2023 model years—may be thrown into disarray if the standards are seriously weakened.
If by chance gas prices were to spike—and they assuredly will at some point—the timing could be a serious detriment. Another wild card is the ability of California to set standards of its own, followed by 12 other states that follow California’s lead and comprise 40 percent of the auto market. Revising the standards could create a patchwork of rules that becomes a logistical nightmare for the industry.
“The thing about standards like the ones currently on the books is that they really do drive innovation,” said Sue Reid, vice president of climate & energy at Ceres, an advocacy group that promotes sustainable practices for businesses. “We’ve seen that in so many contexts. Most of the rest of the world seems to be in a race to the top in terms of strengthening vehicle emissions standards.”
Is It Really Too Costly?
One reason cited by automakers in their initial request to the EPA for reconsideration of the MPG rules was the cost to comply. The industry’s lobbyist estimated it would cost “$200 billion between 2012 and 2025 to comply.”
But Reid’s group found in a study conducted by auto analysts Alan Baum and Dan Lauria that the Big Three would remain profitable even if gas prices fell as low as $1.80 a gallon. And suppliers, which employ a workforce more than twice the size of major U.S. automakers, stand to net $90 billion increased orders from the new rules, the study found. That includes Tier One auto suppliers, which overwhelmingly said in a recent survey that they support the current Obama standards.
Chris Miller, executive director of Advanced Engine Systems Institute, which represents suppliers, said his group’s encouraged that the process is finally underway, but it’s putting some companies in a precarious position and creates a “level of uncertainy or risk.”
“Some of our members they’ve already invested in 2022- and 2023-kind of platforms and technologies,” Miller said. “So if those standards suddenly go away—they plateau, they stagnate, or they decline—then there is less need or interest on the part of our customers,” he added.
The Ceres study found if standards are significantly weakened and then gas prices were to spike, suppliers could lose up to $1.42 billion annually in sales of fuel-efficient technologies and the Detroit Three could lose over 300,000 vehicle sales.
Plus, with new car prices at an all-time high, does anyone actually think automakers will actively make their products cheaper? Good luck with that.
With China and the European Union pursuing more stringent standards, U.S. automakers could find themselves at serious competitive disadvantage. Put simply, China has a substantially larger market for autos, and the country’s pursuing far more stringent fuel efficiency standards.
China’s air pollution is out of control, and its government can unilaterally force a move toward EVs in ways ours can’t—and it is. The global car industry is expected to follow suit to chase China’s huge market.
“Bottom line is you see massive national jurisdictions moving to phase out internal combustion engines, really spur innovation, and the huge risk here is loss of market share and loss of global competitiveness for the auto manufacturers themselves,” Reid said.
The International Council On Clean Transportation last year said as much in a study that argued more fuel efficiency helps aid the industry overall.
“The present uncertainty is the antithesis of that, and could well ensure that the U.S. market lags behind Europe and China in technology innovation and adoption,” the council wrote. “The automakers and the White House could bring that about.”
This isn’t new territory for U.S. carmakers, to be sure. Back in the 1970s, U.S. carmakers balked at newly-implemented stringent EPA standards, only to be summarily smacked down by Honda who made it abundantly clear that it’s possible to adhere to.
Gas Prices Go Up
One point argued by EPA administrator Scott Pruitt was that Obama’s standards forced manufactures to “make cars that people aren’t going to buy.”
“And our focus should be on making cars that people purchase actually more efficient,” Pruitt said on Tuesday.
But what happens if gas prices were to suddenly spike like they did a decade ago? Adam Lee, chairman of Lee Auto Malls in Maine, which manages 19 dealerships, remembers the time vividly.
“We were flooded—literally overwhelmed—with people with big SUVs and trucks who said I can’t afford four dollar gas and drive 48 miles a day,” he said. The economic turmoil across the country during the late 2000s, of course, compounded the situation.
Without standards in place to ensure more cars are made that are more fuel efficient and affordable, the likelier it is that a gas price spike could send shockwaves through the economy again, he said.
“All we need is to roll these regulations back and have gas spike and it happens,” Lee said. “We our horrible at predicting the price of energy, nobody has been really good at that ever.”
“If American manufacturers do what they always do, they make what they make the most money on,” he added. “And they forget how dynamics in the market change, and they get caught short.”