Detroit will dodge Obama’s fuel rules

It was, the president declared, “an extraordinary gathering”. Bounding into the White House rose garden for his latest policy pronouncement, Barack Obama this week unveiled his plan to limit US petrol consumption and reinvigorate the domestic motor industry.

Compared with what had preceded it, it was extraordinary, for not only did he unveil a rise in fuel efficiency standards after years of drift, but his administration had also hammered out a consensus among government agencies, states led by California, and auto companies.

In the sweep of history, however, it was very ordinary indeed. Yet again, a president was placing his faith in government regulation to limit his countrymen’s fondness for big, gas-guzzling vehicles.

Instead of the simplest, most obvious and least expensive way of achieving that end – raising the national excise tax on petrol – the president was again relying on a complex, dirigiste intervention.

The initiative has its good aspects. It provides one set of rules, covering efficiency and emissions standards, that car companies have to comply with, rather than a patchwork. In the old days, General Motors and Chrysler would still have fought back; they are in the president’s pocket now.

It is also the politics of the possible. Although a tax of $1 or $2 per gallon of petrol would be more effective in altering consumer behaviour and giving a clear demand signal to manufacturers to produce more fuel-efficient vehicles, it would not get through Congress.

But it is an inefficient – and probably ineffective – way of meeting the twin aims Mr Obama has set out for the motor industry and the US carmakers: to curb fuel consumption and dependence on foreign oil and to help the Detroit three “once more outcompete the world”.

The corporate average fuel economy (CAFE) rules that Mr Obama wants to tighten have a history of causing unintended consequences. They were passed in 1975, following the oil crisis, to get drivers to buy smaller and more efficient cars, but instead gave Detroit an incentive to make sports utility vehicles.

The basic problem with the CAFE standards is that, rather than altering patterns of demand, they attempt to ration supply. This flaw is exacerbated by the divide in the rules between standards for “cars” and for “light trucks”, which Detroit has ingeniously exploited.

By the 1980s, petrol was cheap again and drivers did not want to buy the lighter, less powerful cars that were fuel-efficient. Instead, they switched en masse to people carriers and SUVs that were classified as light trucks, and so could be thirstier.

“The rules ruined the big cars of the 1970s but are largely responsible for the light truck,” says George Magliano, an analyst with IHS Global Insight. Trucks including SUVs, people carriers and car/SUV crossovers made up 20 per cent of light vehicle sales in 1973, but peaked at 54 per cent in 2004.

The proposed new rules – raising the average fuel consumption of new vehicles to 35.5 miles per gallon by 2016 compared with 25 mpg this year – are more testing. They also close some loopholes, imposing a limit for each class of vehicle as well as the fleet, and making it harder for some passenger trucks to escape.

But they have the same design flaw of allowing trucks off lightly. They will also have the perverse effect of encouraging driving by making it cheaper, one reason Americans drive 1.7 times as many miles as in 1973 although the population is only 47 per cent bigger.

The conventional wisdom is that Americans like big vehicles and not much can be done about it, but the evidence is that they behave much like other consumers. When the oil price rose sharply last year, sales of light trucks collapsed and demand for hybrid petrol/electric cars rose. As it fell again, the old patterns returned.

Crucially for Mr Obama’s aspirations, this has also weakened the domestic manufacturers. The fact that the US market has been so distorted – and that the Detroit three have tilted towards high-margin light trucks, leaving Asian rivals such as Toyota the slimmer (in profit terms) pickings of cars – has sapped their ability to compete globally.

Toyota, having unwisely been lured into a face-off with Detroit in big pick-up trucks, now faces competition for leadership in fuel-efficient engine technology. But it comes from Honda, another Japanese company with an environmentally conscious domestic market, while the Detroit companies remain laggards.

If anything, Detroit’s prospects have been further impaired by the financial crisis. While Ford retains a global presence, GM is shedding Saab and Opel and reducing its ability to bring European cars to the US.

The peculiar nature of the US market means there is little prospect of Detroit’s following Toyota’s and Nissan’s success in exporting vehicles designed for their domestic market to other parts of the world. These rules are unlikely to alter that.

A petrol tax is a rare example of a policy that would be simple, let the market operate, and be likely to achieve Mr Obama’s aims. “This is a noble long-term goal, but a gas tax is an immediate incentive to change,” says David Gerard, an economist at Carnegie Mellon university.

Unfortunately, raising the federal petrol tax, which is currently 18 cents per gallon, to levels that would make it bite is not politically achievable in the US. Instead, the president has had to rally everyone around a clunky and leaky regulatory alternative. That really is extraordinary.

Write to john.gapper@ft.com
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