Blogs Car Info Our Show Deals Mechanics Files Vehicle Donation

New fuel-economy target aims for moon, may not cut oil demand

NEW YORK – While President Barack Obama’s plan to sharply increase fuel economy standards is a positive step to reducing America’s reliance on imported oil, the full benefits may not be felt for at least another 25 years.

Analysts called the plan to require automakers’ fleets to average 54.5 miles per gallon (mpg) by 2025 a brave move, but ultimately it may only offset the impact of a rising population on oil consumption, rather than slashing total demand.

“It’s a bold plan - it’s like ‘let’s go to the moon’,” said Sarah Emerson, president of Energy Security Analysis Inc. in Massachusetts.

“But there’s a lot more to this that needs to be worked out than just picking a number. The number implies a huge increase in the number of electric, hybrid and diesel cars in the vehicle fleet.”

The 54.5 mpg requirement would far exceed the current average, which is less than 30 mpg. It would also rise sharply from the initial target of 35.5 mpg by 2016.

Obama said the new rules would lower the country’s oil use by 2.2 million barrels per day over next 15 years and described it as “the single most important step we’ve ever taken as a nation to reduce our dependence on foreign oil.”

But that is less than a quarter of the roughly 9 million barrels of crude oil the United States imports every day, and does not account for a growing population.

U.S. oil consumption totals more than a fifth of global demand at around 18 million barrels per day, with around 11 million of that taken up by transport fuels like gasoline and diesel, those seen as the hardest to reduce reliance on due to the lack of easily viable alternatives.

Falling demand

High prices have already started to weigh on U.S. fuel consumption. with international crude prices above $115 a barrel and on course to average more in 2011 than they ever have before, including 2008 when prices spiked toward $150.

U.S. oil demand in May was down 2.46 percent from year ago levels, the Energy Department said earlier this week, falling by 464,000 barrels per day to 18.363 million barrels per day.

Timothy Evans, an analyst at Citi Futures Perspective in New York, said the U.S. fuel efficiency plan could ensure that kind of drop becomes the norm in the coming years.

“This could introduce a 2-3 percent decline in U.S. gasoline demand as an annual trend,” Evans said.

“I’m tempted to pencil in its start date as this year given the numbers we’re seeing, but really we should be looking at two to three years before the first standards are introduced in 2016. Manufacturers will be rolling these new vehicles out over time, not all in the same year.”

Others have argued that a growing population in the United States, unlike most other developed economies, could boost U.S. oil demand again if prices fall back.

The U.S. population is on track to increase by around 36.4 million people between now and 2025, according to the U.S. Census Bureau. That’s roughly equal to the population of Canada, a country that consumes more than 2 million barrels of oil a day.

Sander Cohan, an analyst at ESAI that has modeled the impact on fuel demand, said the eventual reduction would not be huge, though it would curb further growth.

“You’re talking about doubling the fuel efficiency of new cars over just 15 years. But you need to remember it takes a long time to work through the fleet as this only applies to new cars, and the vehicle fleet only turns over once every 10-12 years.”

The U.S. Energy Information Administration, the statistical arm of the Department of Energy, forecast in April that transport fuel use could increase by 2.9 million barrels per day between 2009 and 2035, met primarily by ethanol and diesel. While gasoline demand was expected to be relatively unchanged over the next 25 years, diesel demand is forecast to grow by almost 1 million bpd in the United States.

New vehicle fleet

The plan would mean that larger cars and pick-up trucks with lower mpg ratings would need to be offset in U.S. manufacturer’s vehicle range by smaller more efficient cars, hybrids and electrical vehicles.

“All the big manufacturers say it’s technologically feasible,” said Gary Silberg, KPMG’s Automotive National Sector Leader. “The big question is whether it’s economically viable.”

The Center for Automotive Research in Ann Arbor, Mich., projected bringing cars and trucks to a 56 miles per gallon CAFE standard would cost about $6,700 per vehicle. While the study has been criticized for overestimating the cost of technologies, there are concerns U.S. manufacturers won’t be able to absorb the costs or consumers won’t be willing to pay more for their cars.

But some analysts said the most important thing was that concrete steps have been taken that could change America’s approach to vehicle efficiency, that has historically lagged far behind Europe and Japan, where higher taxes have encouraged conservation.

Evans at Citi Futures Perspective said that while a tax increase on fuel would be a more “economically efficient” way to reduce the United States’ reliance on imported oil, it wouldn’t be politically viable.

“The optimum economic solution here clashes with politics being the art of the possible,” Evans said.

Fadel Gheit, a veteran oil industry analyst at Oppenheimer in New York was optimistic about the plan’s chances.

“Can we do it? Well we put a man on the moon; of course we can do this,” Gheit said. "It’s a win-win for the economy, consumers and the environment.

“U.S. oil demand will continue to decline in industry but this addresses the biggest slice - the use of oil for transportation. We can do this, we should do this. I am all for it.”

Read more:

It is inevitable that with the decrease in easy access oil reserves, cars get better mileage and the price per gallon goes up. The average guy will continue to pay x dollars per year for gas and the producers will continue to get as much $$$$$$ as before.

The reality is that more cars are going to hit the roads around the world in developing countries; China, Vietnam, African countries, etc. While the cafe standards might slow or even decrease demand for gas in the US and Europe, demand worldwide will increase as more people buy their 1st and then 2nd cars.

Higher standards for mpg will keep US car makers in the ballgame selling cars to the rest of the world. If there we no standards demand would simply increase at a much faster rate which helps our Saudi and Mid-East oil producing friends the most.