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Fueling the fire?
Some say new efficiency rules could damage U.S. auto industry
Tuesday, September 22, 2009

Auto industry analysts think the Obama administration's proposed rules that call for a nearly 40 percent increase in fuel efficiency for cars and light trucks sold in the United States by 2016 could prove disastrous for U.S. automakers that already are struggling to regain profitability.

White House officials last week said the rules would raise new car and truck prices by an average of $1,100 but argued that the standard also would save about $3,000 in lower gasoline costs over a vehicle's life.

The Consumer Federation of America, a consumer advocacy organization, supports the changes.

"Extensive consumer polling and research indicates that Americans want and will buy fuel-efficient vehicles, but automakers have been slow to respond to this clear and pervasive market signal," said the federation in a prepared statement. The group said consumers, on average, want their next vehicle to be around 7 miles per gallon more efficient than their old one.

If gas prices are in the range of $3 to $4 per gallon when the new rules take effect, the federation calculated the average consumer would save around $500 to $650 per year at the pump.

One of the nation's largest automobile dealer groups also expressed support for the proposed new rules. "As an auto dealer who sells both domestic and foreign vehicles, I see the economic advantage of selling gas-sipping vehicles each time I walk out onto one of my lots," said Adam Lee, president of Lee Auto Malls, Maine's largest auto dealership group in a written statement.

"In a time of economic uncertainty, the last thing the average consumer wants is to buy a gas-guzzler. The least efficient pickups and SUVs that the Detroit 3 bet their -- and my -- future on are not selling."

He said the American auto industry must see the new rules as an opportunity to fuel its economic recovery. "Customers would be lined up around my block to buy a Jeep hybrid or a Ford Focus with a diesel hybrid engine -- if only I had one to sell them."

But auto industry analysts say consumers show a strong interest in fuel efficient cars only when gas prices soar.

"Manufacturers will have to meet those regulations, but there's not a natural consumer demand for vehicles at those fuel economy levels," said Tom Libby, an independent auto analyst based in Detroit. "The carmakers will have to offer incentives in order to sell them, which, of course, will affect profitability margins."

Mr. Libby said the problem was that the market wasn't being allowed to work on its own. If the car companies end up having to sell fuel-efficient vehicles at a loss, that would be a setback for the industry and the government that has been trying to help domestic automakers survive and thrive.

As with past fuel standards and other government rules, analysts said, a choice is being forced on consumers that they already have shown they don't want unless there's a special program like the recent Cash for Clunkers program in which old gas-guzzling vehicles were traded for smaller, fuel-efficient ones.

"I guess the good news is that Cash for Clunkers showed this can work, but I don't know of any car company that can offer $4,500 on a car that only sells for $18,000 or $19,000," said Jack Nerad, editorial director of Kelley Blue Book.

Another issue that would have to be tackled if the new rules are to work for domestic companies is a continuing lack of awareness of and confidence in economical U.S. vehicles.

"What we saw with Cash for Clunkers is that the imports did quite well, but unfortunately a large majority of Americans don't think of U.S. brands nearly as much," said Mr. Nerad. "GM has lots of high fuel-economy models but they certainly didn't seem to be the first choice with buyers. It's hard to change that in just a couple of years."

Mileage standards vary depending on the size of the vehicle, but car companies would have to achieve a fleet average of 35.5 miles per gallon in combined city and highway driving.

The standards will go through a 60-day public comment period before they are scheduled to become final next year. Auto companies already have expressed support for the standards.

The alternative might have been to force automakers to meet individual gas mileage rules for each state, which would have been a complex and costly proposition for car companies, auto analysts say.

Don Hammonds can be reached at 412-263-1538 or dhammonds@post-gazette.com.
First published on September 22, 2009 at 12:00 am