Opinion: Cheaper gasoline is knocking U.S. vehicle efficiency off course

Cheaper gasoline

Cheaper gasoline is encouraging customers to buy larger and more fuel-hungry vehicles.  Getty Images photo.

Cheaper gasoline reducing overall fleet fuel efficiency

 

By John Kemp

LONDON, July 20 (Reuters) – Substantial improvements in vehicle fuel economy are a centrepiece of the U.S. government’s plan to cut greenhouse emissions and meet commitments made under the Paris Climate Agreement.

In establishing new fuel economy standards in 2010-12, regulators predicted they would cut emissions by the equivalent of 6 billion tonnes of carbon dioxide and fuel use by 12 billion barrels of oil between 2012 and 2025.

Emissions and fuel consumption would continue to fall beyond 2025 as older, less fuel efficient, cars and trucks are retired from the fleet and replaced by new, more efficient models.

Emissions would be reduced by 180 million tonnes per year in 2020, rising to 380 million tonnes per year in 2025, 580 million tonnes by 2030, 860 million tonnes by 2040 and 1,100 metric tonnes by 2050.

The cumulative reduction was projected at 22 billion tonnes by 2050 (“Final Rulemaking for 2017-2025 Light Duty Vehicle Greenhouse Gas Emission Standards”, Environmental Protection Agency, 2012).

But the reductions risk being thrown off course as cheaper gasoline encourages customers to buy larger and more fuel-hungry vehicles than anticipated when the standards were finalised.

CHEAPER GASOLINE

The standards were based on projections which saw gasoline prices steadily increasing from $2.80 per gallon in 2011 to $3.40 in 2020 and $3.55 by 2025 (“Annual Energy Outlook”, Energy Information Administration, 2011).

The standards envisaged an average gasoline price of nearly $3.20 per gallon in 2016 while in practice prices have averaged just $2.20 so far this year.

The most recent projections show gasoline prices rising to just under $3.00 by 2025, 16 percent lower than at the time the standards were finalised.

ACTUAL AND FORECAST US GASOLINE PRICESThe standard-setters assumed the vehicle mix would shift decisively in favour of smaller, more fuel efficient passenger cars and away from larger light-duty trucks over the period.

By 2025, the car/truck mix was expected to hit 67/33 percent. But with lower prices the mix is now expected to be close to 50/50. And trucks are currently outselling cars by a large margin.

The large number of trucks being sold means the overall fleet will be less fuel-efficient by 2025 than originally predicted.

In 2014, the last year before oil prices crashed, the Energy Information Administration projected passenger cars and trucks would travel 2,977 billion miles in 2025 and achieve average fuel economy of 28.7 miles per gallon.

By 2016, the agency had revised its projection for travel up to 3,126 billion miles and its fuel efficiency projection down to 27.6 miles per gallon.

The result is that forecast gasoline consumption in 2025 has been raised from 7.13 million to 7.66 million barrels of oil equivalent per day.

FUEL CONSUMPTION BY LIGHT DUTY VEHICLES IN 2025The longer oil prices remain low, the more trucks will enter the fleet by 2025, and the further off course the fuel economy and greenhouse emissions targets will go.

FUEL ECONOMY

The interaction between gasoline prices, standards and fuel consumption is complicated (“Cost, effectiveness and deployment of fuel economy technologies for light duty vehicles”, National Research Council, 2015).

In general, consumers are more likely to buy fuel-efficient vehicles when gasoline prices are high and less likely when gasoline prices are low.

Fuel economy is rated as important or extremely important by a large majority of vehicle buyers, but it is not the most important attribute for purchasers.

Reliability, durability, power and performance, and value for money, comfort and safety all tend to be rated as more important than fuel economy in surveys of car buyers.

“While consumers value fuel economy, they do so in the context of other attributes they also value,” the National Research Council wrote.

“Consumers, therefore, may choose the most fuel-efficient vehicle that meets their needs and is in their price range, rather than the most fuel-efficient vehicle on the market.”

Available evidence suggests purchasers decide on the type of vehicle they want to purchase (passenger car, crossover utility vehicle or sport utility vehicle) and then buy the most-efficient version of that type.

When gasoline prices are higher, fuel efficiency becomes relatively more important as a consideration, but when they fall its salience fades in favour of other factors.

IMPROVING TECHNOLOGY

Vehicle technology improves at an average rate of around 2 percent per year, according to the National Research Council, which has allowed cars to become larger, more powerful AND more fuel efficient.

In the late 1970s and early 1980s, following the oil shocks and the establishment of the first fuel efficiency standards, almost all technical progress went into improving fuel economy.

US VEHICLE FUEL ECONOMYBetween the late 1980s and 2004, when oil prices were low and stable, almost all of the improvement went into boosting vehicle power. Fuel economy actually declined.

But as oil prices started to climb significantly from 2004 onwards, car makers started to boost fuel efficiency again. Vehicle power continued to increase, too, but more slowly than before.

Average fuel economy of new vehicles was increasing even before the government promulgated new standards between 2010 and 2012, as manufacturers responded to customer demand.

US VEHICLE FUEL ECONOMY (2)ECONOMY AND FLEET MIX

Since the government started setting fuel economy regulations in the late 1970s, there have been separate standards for different classes of vehicle, more stringent standards for cars and more permissive ones for trucks.

New regulations finalised between 2010 and 2012 added an extra layer of complexity by varying the standards within each class (car, truck) according to the size of the vehicle footprint (wheel base multiplied by track width).

Standards for cars are more stringent than for trucks, and within each class vehicles with a smaller footprint must meet stricter standards than vehicles with a larger one.

Standards for all vehicle classes/footprints become progressively stricter each year between 2012 and 2025 to encourage vehicle manufacturers to improve fuel economy in all parts of the vehicle fleet.

VEHICLE FOOTPRINT CURVESThe average fuel economy of new vehicles depends on the mix of vehicles sold and has proved to be sensitive to gasoline prices.

Between 1985 and 2004, there was a major shift from passenger cars to trucks and specifically truck-based sport-utility vehicles.

The shift from cars to SUVs accounted for a significant part of the deterioration in average fuel economy over the period.

US VEHICLE FUEL ECONOMY (3)From 2004 onwards, however, in response to rising to gasoline prices, vehicle buyers shifted from SUVs to smaller car-based crossover-utility vehicles (CUVs).

CUVs use more fuel than passenger cars but less than truck-based SUVs. The shift from SUVs to CUVs accounted for about half of the reported improvement in fuel economy between 2000 and 2012.

But the decline in gasoline prices is now spurring a big increase in sales of both trucks and CUVs at the expense of regular passenger cars, causing an underlying deterioration in fuel economy.

All classes and types of vehicle are becoming more fuel-efficient but the shift from smaller cars that must meet tougher targets to larger CUVs and SUVs with lower targets is blunting the expected effect of the regulations.

Researchers Michael Sivak and Brandon Schoettle at the University of Michigan Transportation Research Institute have shown that average fuel economy has been flat since late 2014 after increasing steadily over the previous seven years (“Average sales-weighted fuel economy rating of purchased new vehicles”, Sivak and Schoettle, July 2016).

The average age of vehicles on U.S. roads is currently 11 years and rising, so vehicles sold now will still affect economy and emissions in 2025.

The National Highway Transportation Safety Administration and the Environmental Protection Agency, which are jointly responsible for the standards, are now embarking on a legislatively mandated midterm evaluation of the greenhouse gas and fuel economy standards.

The agencies must decide by April 2018 how to finalise the standards for 2022-2025 or whether to revise them (“Draft Technical Assessment Report”, 2016).

On current trends, the standards will fall short of their fuel consumption and emissions goals, so the agencies will have to decide whether to tighten them or accept the risk of undershooting the 2025 targets.

John Kemp is a Reuters market analyst. The views expressed are his own.

(Editing by William Hardy)

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