By John Mayes and John Auers
Only a few of us where born when Dinah Shore first voiced the title tune of today’s blog in the 1950’s, but surely even the youngest of you can hum it on command. It certainly popped into our heads as we thought about today’s blog on fuel efficiency and the changes in the U.S. auto markets over the last 50 years. Over the years, fuel prices have played a major role in consumer preferences, as the U.S. public has shifted from “gas-guzzlers” to more fuel-efficient options and then back again in tune with the roller coaster that is oil prices. Recently, the low prices enjoyed by consumers have shifted their attitude towards the importance of fuel economy when selecting a new vehicle. Sales of less fuel-efficient trucks, SUV’s, and high-performance cars have boomed, while those of hybrids and other fuel savers have tanked. If this were to persist, it would create a real problem for automakers in their attempt to meet the ever increasing fuel-efficiency standards mandated by Corporate Average Fuel Economy (CAFE) regulations. That was one of the findings contained in a recent report issued by agencies of the federal government as part of a required review of those regulations. Other parts of the report (called the Draft Technical Assessment Report or TAR) were quite positive on the progress automakers have had so far in improving fuel efficiency within their overall fleets. The purpose of the TAR is to provide input to policy makers and regulators as they debate whether to uphold the currently proposed vehicle mileage standards for model years 2022 through 2025. A final decision is expected to come early in 2018. If upheld, fleet average economy would have to increase to 54.5 miles per gallon by 2025, requiring significant changes and breakthroughs in everything from automotive technology, consumer preferences, driving habits, and even fuel standards such as octane levels. In today’s blog we provide a discussion of the background of the CAFE program and highlight some takeaways from the TAR. The policy debate, which will take place over the next couple of years on this subject, will ultimately lead to a final rule, which in turn will determine whether U.S. drivers will have to “see the USA” in a Volt or whether there will still be room for some Corvettes and Suburbans.
“America is Asking You to Call”
The modern era for the CAFE program began in 2007 with the passage of the Energy Independence and Security Act (EISA). This legislation set a mileage target for Model Year (MY) 2020 vehicles of 35 mpg (compared to the then actual level of around 25 mpg). The first increase was to occur in the MY 2011 vehicles. These targets were adjusted in 2010 (for MYs 2012 through 2016) with the adoption of the National Program and then broadened substantially again in 2012. The current finalized CAFE targets are the ones set in 2012 and are applicable for MYs 2017 through 2021.
While the focus of the EISA targets in the Bush Administration was on reducing the U.S. dependence on foreign oil imports, the establishment of the National Program realigned the initiative around environmental objectives of reducing greenhouse gas (GHG) production. The 2012 standards established the final targets for the MY 2017 through 2021 vehicles and set proposed targets for MYs 2022 through 2025. The 2025 target was to double the average vehicle fuel efficiency (compared to the existing MY 2012 average), cut GHG production in half, and reduce oil consumption by 12 billion barrels over the lifetime of the 2012-2025 vehicles.
While the new regulations were to be onerous for the automotive industry, they did solve one major problem. The state of California had already begun to adopt its own GHG standards, but these were not consistent with the U.S. requirements. The 2012 regulations were developed in cooperation with the California Air Resources Board (CARB) to arrive at a consistent program, hence the name National Program.
While the 2012 regulations proposed targets for the MY 2022 through 2025 vehicles, they also require the EPA to conduct a Midterm Evaluation (MTE) to determine if these proposed targets are still appropriate given any new information which may have become available. This MTE is to be completed by April 1, 2018. The EPA, in coordination with the National Highway Traffic Safety Administration (NHTSA) and CARB, recently released the TAR as a first step in the MTE process. The purpose of the TAR is to “examine a wide range of technical issues relevant to the GHG emissions and augural CAFE standards for MY 2022-2025, and share with the public the initial technical analyses of those issues.” The TAR further states, “This is a technical report, not a policy document. The information in this report, and in the comments we receive on it, will inform the agencies’ subsequent determination and rulemaking actions.” What then follows is over 1,200 pages of data, analysis and observations. The end result of the MTE will be the issuance the final targets for MY 2022 through 2025 vehicles.
The TAR points out that the automotive industry has been over-complying in the first years of the National Program. This occurred even as the industry was initially recovering from the Great Recession. In fact, automotive sales have increased for six consecutive years, reaching an all-time record in 2015 at 17.5 million vehicles.
“Performance is Sweeter, Nothing Can Beat Her”
The TAR evaluated numerous aspects of the various technologies used in setting the proposed standards in 2012. These included the cost, effectiveness, implementation considerations and lead-time requirements as well as any new information on the introductions of the technologies to determine if the base assumptions should now be altered from the original views in 2012. These technologies include:
- More efficient engines and transmissions;
- Aerodynamics;
- Light-weighting;
- Improved accessories;
- Low-rolling resistance tires;
- Improved air-conditioning systems;
- Higher compression ratio engines;
- Naturally aspirated gasoline engines;
- Greater penetration of continuously variable transmissions; and
- 48-volt mild hybrid systems.
The TAR acknowledged that it did not evaluate new technologies such as electric-turbocharging, variable compression ratio engines, skip-fire cylinder deactivation and P2-configuration mild-hybridization.
For the technologies of which there has been some introduction since 2012, the TAR asserts that positive evaluations have exceeded negative evaluations. The agencies believe this indicates that these technologies can be fully implemented without significant hidden costs. The TAR states that consumer responses to the early standard improvements have been generally positive. The TAR also states that initial assessments indicate that the operating cost reductions associated with fuel-savings from the early gains far exceed the initial vehicle cost increases. As a result, the up-front price increases are not expected to negatively impact vehicle sales or affordability.
The logic of this conclusion may be flawed, however. It is likely the automotive industry has implemented the lowest cost improvements first. As a result, early consumer reactions would be expected to be positive. As efficiency standards rise, however, the cost of each improvement will rise progressively and could create significant consumer resistance in the form of declining vehicle sales. This same trend has been evident in other environment initiatives. Early sulfur reductions in gasoline did not incur significant expenses, but later reductions to 30 ppm and now to 10 ppm became progressively more expensive.
“On a Highway, or a Road”
While the technology improvements have produced better-than-expected compliance results, the actual mileage gains have not followed. This is because the actual regulations are vehicle-specific. While each vehicle line has met its individual requirement, consumers are buying larger vehicles than was anticipated. This has skewed not only the gains since 2012, but also the expected improvements through 2025. Using the EIA’s Annual Energy Outlook 2015 (AEO 2015), the TAR has recomputed expected fleet efficiency for MY 2025. Because of the ongoing consumer preference to purchase larger trucks (SUVs), projected mileage efficiencies are now expected to be lower in 2025 than the 2012 forecast, while GHG production is expected to be higher. These results are shown in Table 1. The AEO 2015 has a reference case with a low gasoline price case and a high gasoline price case.
In 2012, the EPA estimated that 33% of the MY 2025 vehicles would be light trucks. The TAR now estimates that 48% of the MY 2025 vehicles will be light trucks. This has lowered the CAFE requirement from the 2012 estimate for MY 2025 of 48.7 mpg to a current forecast of 46.3 mpg. Similarly, GHG emissions will be higher, with a current estimate of 175 g/mi compared to the 2012 estimate of 163 g/mi.
The TAR also evaluated numerous other aspects of the National Program effects. Safety issues were noted and considerable data was provided which correlated the increase in deaths for lighter vehicles. This will likely be a key argument made by opponents of maintaining or even increasing the 2022 to 2025 standards. Potential impacts on employment will also be a point of contention. Although the TAR concluded that the total employment effects of the new standards are likely to be minimal, opponents could dispute this, arguing that the standards will put domestic automakers at a competitive advantage.
One issue not addressed in the TAR (except in passing) was the potential need for higher octane gasoline to be able to meet the higher level mileage standards. This is a subject of intense interest to refiners and we will address it in a future blog.
TM&C constantly monitors changes and proposed changes in regulations impacting all segments of the petroleum industry. Many of these are associated with transportation fuels, effecting not only demand but also production costs, compliance challenges, and other aspects of fuels production. We include our independent analyses of these impacts in our semiannual Crude and Refined Products Outlook (the latest version of which we released on July 15th) and our various other studies. TM&C also assists clients involved in all aspects of transportation fuel production and blending activities and compliance-monitoring and planning. Please contact us for our views on the latest developments and their potential impacts, or if we can assist in any way or answer any questions regarding the petroleum industry, product demand, regulatory impacts, fuels compliance issues or any other issues associated with petroleum refining activities.