Last week, a large number of automobile companies called on the U.S. to lower its proposed minimalist increases in its fuel economy standards. The Alliance of Auto Manufacturers, which is comprised of BMW, Chrysler, Ford, GM, Mazda, Mercedes, Mitsubishi, Porsche, Toyota, and Vokswagen, called the increases "excessive" and even beyond the limits of technology.

A look at international fuel economy standards shows otherwise. The proposed increases in U.S. fuel economy standards are the lowest among the world's leading developed countries. In an article in today's edition of The New York Times, there is a chart that compares U.S. fuel economy standards with those of the other leading developed countries:


Source: Pew/The New York Times

What is likely it play is that the auto manufacturers responsible for the call have long been accustomed to a lack of credible U.S. energy policy, including that which relates to fuel economy. Given those expectations, they likely believe that U.S. political leaders will prove pliable and retreat on a measure that might somewhat inconvenience the automakers.

I believe a retreat by the U.S. would be a terrible mistake. It would demonstrate that the U.S. cannot summon the political strength or will to make the tough decisions--including much tougher ones down the road--that will lie at the heart of a credible energy policy. If anything, whomever is elected President should seek to bring U.S. fuel economy standards closer into line with the United States' peers. A U.S. energy policy should be defined by leadership, not laggardship. The economic and national security risks of taking an overly timid response on energy policy, including aspects related to conservation e.g., fuel economy, far outweigh the benefits of further delaying the necessary push for reducing and, later, eliminating energy dependence.

In 1976, an article written by Engelhard Indusries Division of Engelhard President Peter D. Weisse and National Association of Recycling Industires, Inc., CEO M. J. Mighdoll in Harvard Business Review observed, "The mere mention of the word energy conjures up thoughts of unimaginable shortages, inflated costs, and uncertainty. The spectre of brownouts andblackouts still haunts us. The need to conserve energy has become the number one national priority." That was life in the U.S. during and immediately after the Arab Oil Embargo of 1973.

U.S. failure to provide energy leadership in the wake of two energy crises of the 1970s on account of the return of complacency once oil prices fell sharply during the early 1980s, contributed to the U.S. lacking substitutes some 30 years later when the U.S. is again faced by record high oil prices. Heeding the siren call of those who would seek to maintain a status quo approach to energy policy would be potentially even more disastrous down the road as demand for energy resources continues to grow rapidly in industrializing countries such as China and India. Without viable alternatives on the supply side (from increased domestic oil production and development of fossil fuel alternatives) and aggressive conservation on the demand side, U.S. access to a reliable and economical supply of energy will grow even more difficult, especially if nationalized energy resources in a growing part of the world are directed as per political objectives rather than market needs.

GM's present stuggles illustrate the dangers of the kind of status quo approach being peddled by the Auto Alliance. In spite of the 1970s-era oil shocks, GM, among other major U.S. manufacturers, clung tenaciously to a status quo that appears to be disintegrating in what may now be the early stages of a secular rise in energy prices. GM is now a practically worthless entity compared to its past valuations (<$6 billion market capitalization) with negative net worth (as of March 31, 2008, its liabilities exceeded its assets by $41.043 billion). Its stock recently fell to as low as $9.98 per share (its lowest valuation since 1954 and, after adjusting for inflation, that figure amounted to less than $1.50 per share).

After the energy crises of the 1970s, GM had as much opportunity as any company to try to leapfrog the competition by developing high mileage, alternative fuel vehicles. Instead, once the oil price fell, it pursued the manufacture of large vehicles with a vengeance. It also went on a buying spree, wasting capital on purchasing such companies as EDS and Hughes Aircraft, among others, that had very little to do with auto manufacturing. In effect, the company squandered precious financial resources that could have helped pave the way to vehicles that would be attractive in an environment of high energy prices. Now, the company is in many ways akin to a beached whale. Already, rumors of future bankruptcy are beginning to fly.

In short, there is no "free lunch" in fighting to preserve the status quo in a world that is continually changing. Instead, the costs of such a strategy can be enormous over time, as is evident from GM's example. Therefore, U.S. policy makers should dismiss the Auto Alliance's latest bid to lure them into a status quo-oriented strategy. Embracing such a strategy anew would have potentially grave long-term implications that would make the nation far worse off than would otherwise be the case.