The Battle Over Fuel Economy

The technical details behind corporate average fuel economy (CAFE) standards are complicated and controversial.  At an automotive conference held in Traverse City, MI, public sparring between regulators and industry representatives suggest that the path to the current goal of 54.5 miles per gallon (mpg) by 2025, is going to be bumpy.

Predictably, the auto industry is seeking to have the 2025 requirement relaxed.  Part of the manufacturer’s argument relates to the public’s increasing interest in larger and more powerful vehicles as gasoline hovers around $2.00 per gallon.  Regulators contend that the industry can still comply with tougher mileage goals and are not interested in backing off from the standards for future years, set in 2012.

Investors should be aware that this is not an argument about what can be done, but rather, what should be done.  Industry argues that meeting the standards would be costly and work against meeting the public’s preference for size and performance.  The regulators are generally not particularly concerned about such market related issues, but prefer to focus on environmental issues.

How all of this is resolved is likely to affect the price and availability of future models and industry profitability.

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA®