The New Fuel Mileage Standards: At What Price?

Last Tuesday, Obama announced his plans for new CO2 emission reduction rates and increased mileage capabilities for all new cars to be sold in the U.S. as of 2016 (See Full Story). As usual, Obama has put ideology above true costs and we will all have to pay for that decision. While Obama touts the fact that it was his "auto industry" team that fought hard to come up with these new standards, it was, in effect, his succumbing to the mandates of California and 12 other extremely liberal state legislatures who had mandated the most severe gas mileage increases. Further, he seems to think that these new "2016 cars" will offset their higher costs and pay for themselves in just 3 years. A cost that Obama thinks will be only $1300 more than normal. But, like everything that Team Obama says and does, these are extremely rosy numbers and more science fiction than actual fact.

In order to meet these new standards, the car companies are going to have to employ all or most of the following strategies:

1. Lighter Body Weights. If the same materials are to be used in 2016 as are in use today; then, the only way to lighten cars in order to increase gas mileage is to use less of those materials. That means that cars will have to be smaller; and, generally, this means that they will be less safe. The issue of safety would be especially true in a collision between a subcompact or compact and a heavier vehicle like pre-2016 SUV's or standard sized vehicles or trucks. Because safety could keep buyers away from buying the tiny new cars, expect the auto companies to utilize more exotic materials like carbon fiber to reduce a car's weight. But, in doing so, the cost will go up substantially. If carbon fiber were used to replace half of the steel in an automobile's frame, the weight savings would be about 60% and the fuel economy increased by 30%. However, steel costs less than 40 cents per pound as compared to a cost for carbon fiber at eight to ten dollars per pound. In other words, carbon fiber is about 16 to 20 times more expensive than steel. That means that the cost of an automobile using 50% carbon fiber will probably go up by at least $3,000 and that, alone, is substantially higher than Obama's predicted cost increase of $1300 for the average new car being sold in 2016. Lastly, the auto companies may try to overcome safety issues with increased airbag protection. But, each airbag that is added to a car can cost upwards of $900. Once again, the cost will be high.

2. More Economical Engine Technology. Right now, hybrid technology is readily available but hasn't been easily applied to all vehicles because of the extra space requirements for batteries and the electric components needed for each vehicle. A Toyota Prius, as of today, can easily beat Obama's 35.5 mpg by 2016. As a true dual use, an electric vs. gasoline hybrid it gets mileage levels about a good as you can get with that technology at 51 mpg city for their latest, soon-to-be introduced new model. But there is a downside with all hybrids and that is that you are literally paying for two types of engines for the same car; and, one of those engines needs an expensive set of batteries to operate. Battery life is now estimated to be about 5 to 8 years. So, when those batteries do die, the owner will have to pay about $3,000 to replace them. Recognizing this, Toyota now warranties its batteries for 10 years. One of the few SUV dual use hybrids, the Ford Escape, is being produced by a U.S. auto manufacturer. The following is a screen shot from Edmunds.com which clearly shows the cost differential between a conventional, gasoline powered vehicle and it's hybrid brother:


As you can see, the costs difference from the cheapest Ford Escape and the Escape Hybrid is over $9,000. To be fair, though, the hybrid versions of the Ford Escape are upscale models of within the Escape model series. Therefore, the true cost differential is really only about $5,400 if you compare a truly comparable hybrid Escape to its gasoline-only brother. Even so, this is a hefty upfront price to have to paid to save the planet. Gasoline prices are going to be very high in order to offset this high cost. Also, the hybrid version of the Ford Escape only gets 32 mpg; which falls below Obama's 35.5 mpg target. That means that this vehicle will have to undergo some weight savings or technology improvements to up the mileage. This will either mean less safety or additional premium costs. Furthermore, hybrid technology may not be applicable to light trucks because the space required for batteries and the rest of the electrical components would seriously impinge on load space and weights.

Lastly on the subject of batteries, anyone who owns a cell phone knows that the amount of talk-time of the original batteries keeps slipping with every month of usage and recharging. The same is true with Lithium Ion batteries in a hybrid vehicle. As the battery efficiency comes down over time, the fuel efficiency also suffers because the vehicle is forced to use more of its "gasoline power" to offset the reduced electrical mode of operation. This means that the 51 mpg Prius that rolled off the showroom floor might have only 30 mpg after 5 years of operation. Eventually, the batteries will be totally unable to be charged and the car will run solely off gasoline. Does anyone think that some future Prius owners, faced with a $3000 expense to replace the batteries, won't just run straight gasoline, instead? My guess is yes. If so, the supposed savings in foreign oil that Obama espoused in his speech might not fully materialize.

3. Alternative Energy Vehicles. Other than electric cars, there are hardly any other non-gasoline technologies that could be implemented by 2016. So, expect the automakers to introduce small urban-only cars that are all electric to insure that their fleet average is well within the 35.5 mpg mandate. These will be commuter vehicles, a step up from golf carts, that will have limited range, limited storage space, and will have to be charged overnight. Like the lighter weight hybrids and gasoline powered cars, the weight and size of these vehicles may also jeopardize occupant safety. The full size electric cars like the Chevy Volt may also appear. These are reverse hybrids with an electric motor as primary and a 4 cylinder gasoline engine that will charge the batteries when power is low. The range of this vehicle is still too limited for long trips. Further, the drive components and batteries will eat up a lot of the car's trunk space. For sure, I don't see a lot of "common people" demand for a car that is projected to be upwards of $40,000. As with the hybrids, the Volt and other electric cars will all have battery life and battery replacement cost issues.

Anyway you shake it, the cars that will be made in 2016 to meet these new standards will be more expensive and, at the lower priced end of the market, less safe. I'm with those who believe that these new standards will add $6,000 to every car being sold in America. Right now, the average sticker price of all cars sold in America is a little over $28,000. With normal inflation and without applying the new mileage rules, the average sticker price should go over $34,000 in 2016. I'm betting that inflation coupled with Obama's mandated standards, the average sticker price is probably going to zoom upwards of $40,000. I would expect the American consumer to totally reject these new vehicles on the basis of price alone. Right now, the average car on the road is a little over 9 years old. Expect that number to rise significantly in the future as people try to extend the life of their pre-2016 cars, SUV's and light trucks. All of these things will mean that those rosy projections of less imported oil and higher gas mileage will fail at the cash register. Obama is completely clueless to this and to what sells automobiles in America. Since oil/gasoline prices have fallen, hybrid sales are down by half. As it was, only the green rich guys were buying them anyway. Believe me, Toyota and Honda didn't avoid bankruptcy like GM and Chrysler because a small part of their market was made up of hybrids. They avoided bankruptcy because of good resale values, a minimal amount of vehicle models and national dealerships, and competitive labor costs. But, Obama, not ever having run a business of his own, doesn't seem to understand that.

Please note: I used a nominal inflation rate of 3 percent to calculate the average price of a car, today, rising to $34,000 in 2016. With Obama's excessive spending, I expect inflation rates in the next 2 or 3 years to start moving into the realm of double digit hyperinflation. If that becomes the case, the average auto price in 2016 could actually be as high as $50,000 or more. Salaries will lag so far behind that kind of pricing that no one, except the very rich, will be able to buy one of these new cars and save the planet -- if it even needs saving.

Two last comments.

I find it interesting that Obama moved the mileage standards up from the year 2020 to 2016. Assuming Obama gets two terms in office, any new President that follows him will assume office with these new standards just taking effect. Obama has literally created a situation where his successor cannot reverse what he has done. If the new standards had been left in place to take full effect in 2020, as George Bush originally planned, two successive Presidents would have had a chance to reverse this mandate, if necessary.

Secondly, it was also very interesting that Arnold Schwarzenegger scrambled to go to Washington to witness the imposition of these new standards on the very same day that California voters went to the polls to soundly reject any new taxes to bailout his State from massive deficits. California is a State that has dug a hole for itself because of rules like these new mileage regulations and because of high taxation. California is no shining example of good governance. It is an example of governance run amok. Now, Obama has decided to follow California's stupidity of over regulation and spread that same disease across all of America.