Cheaper Gasoline and the Environment

Most consumers’ interest in better vehicle fuel economy is limited to saving money at the gas pump and the environmental damage associated with burning fossil fuels.  With significantly cheaper gasoline, the economic incentive to reduce fuel consumption is materially diminished.  The environmental issues remain the same.

With average U.S. fleet fuel efficiency approximating 25 miles per gallon, and gasoline well below $2.00 in most domestic markets, the typical motorist is probably paying more for a cell phone than for gasoline.  As a result, consumers have moved toward bigger and more powerful motor vehicles.  The auto companies love this and auto workers are probably happy with record profit sharing checks.  Environmentalists, not so much.

Investors should be watching this.  Mandated fuel efficiency improvements were always difficult to meet, but with cheaper fuel driving consumers to increasingly seek larger, less efficient vehicles, the auto industry is going to be in a real bind.  Without significant economic incentives, through much higher fuel prices or large price cuts on smaller vehicles, consumers are unlikely to voluntarily buy smaller, more efficient vehicles.

A material deterioration in auto industry fortunes would likely ripple through the entire economy in substantial and unexpected ways.

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA®