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.

UtahBill,

I don't have exact figures about what the impact would be if light trucks and SUV-type vehicles were not considered in the data. However, when it comes to the national interest, the need for energy efficiency, as one aspect of a larger national energy policy, trumps the narrower interest of given companies. The overall economy and also national security are put at risk if the supply of energy is not reliable nor reasonably affordable relative to available commercial, individual, and military finances.

Given past innovation and also the experience in countries in which more rigorous standards have been implemented, I have little doubt that the need for vehicles will be filled even if the U.S. were to accelerate its increased fuel economy standards. Arguably, the U.S. auto industry, largely because it repeated its approach of prior to the 1970s energy shocks, put itself in a position of vulnerability that is now wreaking havoc in the present environment of higher energy prices.

It should be noted that the return to complacency is not unique to the U.S. auto industry. Such a tendency seems to be inherent in human nature, as one sees such a pattern manifest itself time and again in economic affairs and markets. Smart regulation can't prevent such a tendency, but it can reduce prospects of its recurrence.

Also as you noted, if the auto makers are forced to retool to attain better fuel economy, there are existing tax laws that will help them pay for the transition. I would also like to see anti-trust laws relaxed to permit greater joint efforts in R&D. Prohibiting pricing collusion and other practices that harm consumer welfare is one thing. Those laws that protect consumers from such practices are entirely appropriate. However, overly blunt rules that also preclude the kind of collaboration that could benefit consumer welfare, as well as the national interest, constitute another matter.

"Men cannot escape being governed. Either they must govern themselves or they must submit to being governed by others."
- Theodore Roosevelt

Originally Posted by galenrox Gas prices have already done more to get companies to focus on developing high-fuel efficiency vehicles than all of our regulations combined

I believe the companies' production mix explains more about the mileage differences than technological differences. At least from a glance at the segmented financial statements of the U.S. manufacturers in the past, I suspect one has seen the following:

- heaviest emphasis on producing and selling larger vehicles (SUVs, etc.) in the U.S. market. These vehicles have a larger contribution margin (difference between selling price and variable costs per vehicle) than smaller ones.

- larger emphasis on selling smaller vehicles in Europe and Asia. Those vehicles have a smaller contribution margin.

In effect, the U.S. market was being "harvested" for cash. Given that the U.S. companies have, on average, a much higher fixed cost structure (some of which are legacy costs e.g., pension/health benefits) than their foreign rivals, such "harvesting" allowed them to compete in Europe and Asia. In effect, the U.S.-derived cashflow was subsidizing their ability to sell smaller vehicles in those outside markets. One also sees a similar strategy from the U.S. pharmaceutical industry. That's why that industry opposes reimportation of drugs so as to preserve differences in price across markets.

There is nothing illegal or unethical about such a strategy, though it can conflict with the larger national interest. In terms of competitive factors, such a strategy, as it fails to address structural cost disadvantages, can encourage rigidity. So long as relatively high fixed costs are covered to some extent, there is less incentive to make the difficult decisions necessary to tackle those cost disadvantages. At the same time, there is an increased tendency for such organizations to seek to preserve the status quo that makes it possible for them to avoid addressing those more difficult challenges.

Yet, once the economic environment changes, those firms that invested and essentially locked themselves into the status quo described above, have far greater difficulty in navigating the transition. Nevertheless, no economic order is permanent. Markets are dynamic. Economies change. In the end, rigidity is very hazardous. Even huge companies can fail when confronted by changes that exploit their competitive disadvantages.

At least for now, I am not suggesting that any of the three U.S. automakers will fail. GM's position is quite precarious given its technical insolvency. However, it still possesses some $20 billion in cash, but it may need to reschedule some of its short-term debt e.g., convert it into longer-term debt to preserve its cash. It also retains some valuable brand names.

Nevertheless, should the present energy environment deteriorate further, with the high price of oil and trend toward additional increases becoming persistent, I could envision GM's choices becoming stark: (1)bankruptcy/reorganization in a decade or less; (2) a federal government bailout (which I would oppose, as the forces responsible would not be a temporary phenomenon, the federal government is facing grave long-term fiscal challenges, etc.); (3) acquisition by another automaker, or; (4) liquidation. The first option might be the most attractive out of the list of bad options. The second would not assure success and given GM's size relative to Chrysler's, the magnitude of challenges would be far greater this time around. The third would entail some degree of risk, as it would be entirely plausible that the acquiring firm would mainly seek to buy brand names that still have value, while essentially eliminating a share of GM's older plants and infrastructure that are geared toward the production of large vehicles (to avoid overcapacity with respect to those vehicles, while retaining the newest facilities/upgrading others that would not require substantial new investments), as well as to avoid its legacy costs.

Normally, I would err on the side of lesser regulation. However, in the case of energy in which the U.S., among other nations, has made very little progress in crafting a coherent and credible policy (both on the supply- and demand-sides), the sad thing is that redundancy may offer the best prospect that necessary adjustments take place.

I do not see a gas or broader energy tax (even if the proceeds were used to finance energy-releated R&D or reduce income tax rates/provide a tax rebate, etc.) as advocated by some economists, including Gary Becker, Martin Feldstein, and Joseph Stiglitz, and former Federal Reserve Chairmen Paul Volcker and Alan Greenspan, being politically feasible in the current environment. Hence, if gasoline prices fall markedly, there would be danger that efforts to increase economic efficiency with respect to fuel consumption might well slow.

Originally Posted by galenrox I can see having emissions standards and mandatory emissions testing for cars on the road, but I don't like the idea of mandatory fuel-efficiency standards to sell a car or manufacturing a car, considering the fuel efficiency has no effect on the emissions impact of the selling or manufacturing of the car. On top of this, I find such regulations to be redundant. Gas prices have already done more to get companies to focus on developing high-fuel efficiency vehicles than all of our regulations combined, and so the only notable effect of such regulations is introducing more bureaucracy that makes it mean less if said progress is made because the firm making said progress is less competitive because of the resources they have to dedicate to navigating the excess bureaucratic nonsense.

Originally Posted by Navy Pride Hell I could probably beat McCain.....