Is 56.2 Miles Per Gallon Too Much For Detroit?

The fuel efficiency debate is raging in Washington, DC, again after the Obama administration proposed fleet averages for car and light trucks at 56.2 mpg by 2025. Environmental groups were happy with the proposal, but auto groups will likely argue that higher costs would hurt consumers.

The debate
The biggest question the industry has to answer is how much is fuel efficiency worth. The 56.2 mpg proposal is a 64.8% increase from the current agreement of 34.1 mpg efficiency by 2016, a big jump by any standard. The increased efficiency is estimated to cost anywhere from $2,100 to $2,600 per vehicle, putting a burden on the upfront cost for consumers. But, the administration argues that the additional cost will be recovered in 2.5 to 3.5 years through lower fuel costs. No matter what the perceived costs, there are companies that will benefit from the increased standard.

The big winners
Efficiency leaders Toyota (NYSE: TM  ) and Honda (NYSE: HMC  ) are the easy picks to benefit from an increased standard, but Ford (NYSE: F  ) is improving efficiency the fastest among car manufacturers. The problem with drastic changes like those being proposed is the fact that it will probably take more than an eco-boosted engine and some lighter materials to reach 56.2 mpg. Manufacturers may have to lean on high-tech battery manufacturers to help build electric, hybrid electric, and plug-in hybrid electric vehicles, which help improve fleet efficiency.

A123 Systems (Nasdaq: AONE  ) makes batteries for auto manufacturers in the electric car market, such as Fisker and BMW, and could be the biggest winner of a new standard. With competitor Ener1 (Nasdaq: HEV  ) on the ropes A123 and LG Electronics should take an even more dominant position as suppliers of batteries.

Along the same lines, Tesla Motors (Nasdaq: TSLA  ) should benefit from increased emphasis on fuel efficiency as it vies to become a supplier in the EV market. Toyota is already working on using its technology in the Rav4 and more vehicles could follow.

Are there really losers here?
Oil is obviously the biggest loser if an increase to anywhere near 56.2 mpg becomes the rule. But, I have a feeling growing demand in emerging markets would more than make up for any decline in U.S. demand because of efficiency.

As far as vehicle manufacturers go, General Motors (NYSE: GM  ) and Nissan have the furthest to go to improve car and light truck efficiency. But, both are on the leading edge of electric vehicles in the way Honda (remember the first Insight?) and Toyota led the hybrid charge a decade ago.

The market can sort this out
While I value rules that will reduce oil consumption, I find it ironic that we wouldn’t just let current market conditions play out to get a similar result. Smaller more fuel-efficient vehicles are back in style again as anyone who has tried to buy a used compact car or sell a pickup truck will tell you.

Has it come to this?
Is this really as far as we’ve come? It’s pathetic how little we’ve improved fuel efficiency in the last 30 years -- now we are paying for that complacency. The first car I owned was a manual 1982 Honda Civic that regularly got 40 miles to the gallon. Even a 1.1% annual increase in efficiency over 30 years would have gotten that same Civic to 56.2 mpg by next year. Yes, vehicles are heavier, safer, bigger, and full of features my old Civic didn’t have, but that’s the context in which I see this debate. Why didn’t we do this before with smaller increases?

Foolish bottom line
Emerging companies like A123 Systems and Tesla Motors have the most to gain if efficiency standards are increased dramatically. While GM and Nissan may have more work to do than Ford, Toyota, and Honda the pain car manufacturers feel should be spread across the industry.

This Fool would love to see a 56.2 mpg standard, but how do you Fools feel about it? Take the poll below and leave your thoughts in our comments section below.

Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

The Motley Fool owns shares of Ford Motor. Motley Fool newsletter services have recommended buying shares of Ford Motor and General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 29, 2011, at 4:16 PM, BaabSlaab wrote:

    Something wrong with the math. The breakeven time at $4/gal, a vehicle cost increase of $2,600 (probably way too optimistic), and annual miles driven of 13,000 is closer to 4.5 years. However, the real point is that if this is such an economical thing to do, why do we have to be forced to by these vehicles?

  • Report this Comment On June 29, 2011, at 4:36 PM, EGTalbot wrote:

    You ask "why didn't we do this before?" Easy. Americans didn't want to buy more efficient cars, so market conditions dictated that automakers not focus on them enough for us to do it before.

    The free market is good at eventually resulting in the most efficient outcome. It is terrible at doing so in a non-disruptive manner, for all the reasons one learns in Econ 101 about how the invisible hand breaks down.

    Not to say government is good at it, either, which leaves us with no good options.

  • Report this Comment On June 29, 2011, at 6:13 PM, ramon123 wrote:

    Why not propose 75MPG? Gas mileage haven't gone up for reasons that have nothing to do with technology - people want big cars and SUVs. Setting high mileage requirements simply means building small cars or cars that use electricity for some of their energy and cost a lot more. result : if gas prices stay where they are, people simply won't buy any new cars - they will do what I will do - keep what they've got. Funny, but I don't think that will increase the fleet mileage any.

  • Report this Comment On June 29, 2011, at 6:28 PM, ramon123 wrote:

    Well, at least our brainless leader isn't raising taxes for once. Doesn't cost the govt anything to make silly regulations for the distant future. These regulations will likely severely shrink the auto industry, if they should happen to ever be carried out.

  • Report this Comment On June 29, 2011, at 6:55 PM, lagunagreg wrote:

    Hi Travis,

    Your math may look funny to some at $4/gallon. How will it look at $5/gallon. Dont' say we won't get there. 6 months ago, people refused myopically to even discuss $4 gas, and look where we are now. How foolish!

    And while you're at it, how will it look at $6/gallon, or more? It is inarguable that petroleum is a wasting asset. We're running out, so escalating prices are inevitable.

    From EGTalbot- " Easy. Americans didn't want to buy more efficient cars, so market conditions dictated that automakers not focus on them enough for us to do it before."

    That's only one side of the whole story. Auto makers went out of their way to make alternative fueled vehicles ugly, impracticable and inaccessible. Who wants to buy that? When a real, viable EV came on the market in the early 90s, the public fell absolutely in love with it here in CA and couldn't wait to buy it. How did industry and public policy react to that? By removing the vehicle from the retail marketplace after a 9-month test market, and also by paralyzing with litigation the state's clean air regulations that forced car makers to produce it in the first place, and against their dire markting forecasts that it would never sell, even in CA. Well, they were just lying to us, for whatever reason.

    I would hardly call that a free marketplace!

    More domestic drilling isn't the answer either. Oil producers might be allowed to drill more here, but they are not obligated to sell the end product here and will ship it to the most lucrative market...which is anywhere but the US! Watch the fur fly when this becomes more widely known. Then retail "market forces" will certainly make fuel efficient vehicles even more attractive than they have now become.

    And speaking of market forces, why is it that every published analysis only considers manufacturing logistics but never the retail consumer's interests? Today, the retail public thinks their gas comes from the Middle East, even though most of it doesn't. They already don't want to send their dollars there, and they don't want to fill up the tank once a week at $4/gallon. When prices go up more, they're going to be even less inclined to do so.

    Auto makers should embrace the inevitable and start producing more models of viable fuel-efficient vehicles. The engineering is already in place to do so. There's no good reason to wait.

  • Report this Comment On June 29, 2011, at 10:02 PM, TdotSteve wrote:

    Achieving a design for a compact or mid-size sedan that reaches 56 mpg is not really the problem. Getting a full range fleet to average that is probably impossible without major sacrifices. This becomes a problem of pure physics - of energy and weight and speed and power.

    To get a fleet average of 56 mpg would require vast numbers of compact family size vehicles that get something more like 84 mpg to balance work trucks and utilities that will never get much more than maybe 30 mpg. Trucks that try for more would have to have virtually no payload or towing capacity, and greatly weakened frames that would preclude off-road and farm use. Now, if The Government wishes to essentially ban sales of trucks and utilities to the public, then this would be a fine way to accomplish it.

    For now, a state of the art or near term next generation advanced 1.0 liter class turbo diesel or 1.0L class hybrid electric powertrain in a compact sedan or crossover can probably get into the mid-50 mpg range. Plug-in diesel hybrids can probably get into the 65-70 mpg range without too much "trickery" (eg: GM initially quoting the Chevy Volt at an absurd 250 mpg, until the EPA clarified the calculation methods for plug-in hybrids).

    In any case, to achieve 56 mpg fleet average, full line auto manufacturers would have to sell millions of small electric vehicles and hybrids, and relatively very few conventional trucks and utilities to specially licensed customers and commercial users. That is the inescapable consequence of such legislation.

  • Report this Comment On June 30, 2011, at 11:49 AM, Brettze wrote:

    A gallon of gas is more than enough to propel you toward the Moon , 200,000 miles away.. 56 mpg average fleet is not really that difficult to achieve..

  • Report this Comment On June 30, 2011, at 11:50 AM, Brettze wrote:

    If you carpool with someone, you immediately DOUBLE YOUIR MPG, STUPID!

  • Report this Comment On June 30, 2011, at 2:09 PM, Brisking wrote:

    ....and on the other side of the Pond, we're paying £1.38 per litre which works out at $8 per US gallon.

    (I'm long A123 but wish I wasn't at the price I paid for the stock last year!)

  • Report this Comment On June 30, 2011, at 9:25 PM, rfaramir wrote:

    "why do we have to be forced"?

    Why indeed? What right does anyone have to tell a producer what characteristics his wares have except the prospective customer?

    If the federal government wants to buy nothing but 56.2mpg cars for its fleet, and is willing to tell the auto companies years in advance to help them get there, fine. Telling them them that they have to make such cars for ME? and YOU? and everyone else? Where do they get off doing that???!

    While they owned GM (had they come into that ownership morally, which they did not), they had the right to dictate what it produced. No more. It is acting as if it owned all car companies in the US.

    As gas prices rise, tastes will change. They have already. Auto makers will adjust to the changes (and the best ones will predict them), or go out of business, selling their factors of production to entrepreneurs with better insight into what we consumers desire. That's the way the free market works.

    But we don't have a free market. Auto makers cannot make what we want, due to regulations. They cannot be innovative with light materials and a wider range of optional features, because so little is allowed to be optional. There is a lot of mandated dead weight. Let us consumers decide whether various bits of a car are worth their weight (number one factor in gas mileage). Let the producers decide how to put together a car that will please the consumers. Leave us alone, State. Laissez faire, laissez passer!

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