President George W. Bush laid out some pretty ambitious plans in his State of the Union address in 2007. He largely focused on increasing America's energy independence, which was perfectly characterized by the "Twenty in Ten" goal, or the plan to reduce gasoline consumption by 20% in the next 10 years. The goal relied on two important catalysts: (1) the advancement of renewable fuels in the marketplace and (2) the ability of automakers such as Ford Motor Company (NYSE:F) to increase the efficiency of their fleets.
Well, 2017 is fast approaching. Renewable fuels have succeeded beyond many people's expectations, and President Obama has initiated even more ambitious goals for Corporate Average Fuel Economy, or CAFE, standards that automakers will have to meet. Can the United States reach its goal? What role will Tesla Motors (NASDAQ:TSLA) play in achieving the goal?
Catalyst No. 1: Renewable fuels
President Bush believed America could reduce gasoline consumption from 142 billion gallons in 2007 to just 114 billion gallons in 2017. The biggest reduction would come from a projected annual production of 35 billion gallons of renewable fuels, which would account for 75% of the goal. It may have sounded ridiculous at the time, but the Renewable Fuel Standard, created in the Energy Policy Act of 2005, got a big upgrade after the Energy Independence and Security Act of 2007 was signed into law.
The new Renewable Fuel Standard, or RFS2, called for 36 billion gallons of renewable fuels to be blended into the nation's fuel supply by 2022 -- five years after the 10-year deadline. Despite the more realistic timeline, there's no debating the legislation helped catalyze the ethanol industry. (RFS2 also spurred the development of the biodiesel industry, but biodiesel cannot be blended into gasoline.)
However, the U.S. Environmental Protection Agency recently proposed even more realistic guidelines for the renewable-fuel industries by slashing volume requirements. The original volume targets were simply too optimistic. To put it in perspective, look at the preceding graph zoomed out to the year 2022 (x-axis) and the volume requirement of 36 billion gallons (y-axis) of mostly first- and second-generation ethanol for that year.
Not only will it be impossible to produce that much ethanol by 2022; there's also nowhere for it to go. Consider that if the United States produced 20 billion gallons of ethanol to be blended into the nation's fuel supply at a 10% blend rate, gasoline consumption would have to soar to 200 billion gallons. That represents 140% of the nation's all-time high!
OK, so renewable fuels are probably not going to account for 75% of the reduction in gasoline consumption as originally intended. Can new CAFE standards make up the difference?
Catalyst No. 2: Fuel economy improvements
In 2011, Obama upgraded the CAFE standards, which now require automakers to achieve an average fuel economy of 54.5 mpg across their fleet by 2025. That's a steep climb up from the CAFE standards mandated by the Energy Independence and Security Act of 2007, which required an average fuel economy of only 35 mpg by 2020. The new standards have resulted in a booming investment cycle into new materials and better engines. The new 2015 Ford F-150 offers improvements in both -- dropping curb weight by as much as 700 pounds. Additionally, Ford has invested heavily in smaller vehicles across its fleet, as well as several hybrid vehicle technologies such as the C-MAX Hybrid and C-MAX Energi plug-in hybrid.
However, even when combining the most recent updates in the renewable-fuel market with the ambitious new CAFE standards, it's apparent that the United States cannot reach its "Twenty in Ten" goal. Gasoline consumption fell by just 5.5% from 2007 to 2013. In fact, consumption actually increased slightly last year and the first two months of 2014 saw even higher gasoline usage than in 2013.
The preceding graph tells us two things. First, there's no way America can cut gasoline consumption to just 114 billion gallons by 2017. Second, the new and improved Renewable Fuel Standard and CAFE standards are doing their part to reduce gasoline consumption. What happens from here?
What about Tesla?
While dates, renewable fuel volume targets, and fuel economy requirements have been shuffled around, the United States can still reach its goal of consuming just 114 billion gallons of gasoline each year -- just not by the original deadline. The new CAFE standards essentially doubled the fuel economy requirements for passenger vehicles by 2025. They may not halve gasoline consumption anytime soon (initially, newer vehicles simply dilute the existing vehicle population) or ever (numerous groups criticize if the standards will be met at all), but automakers are making real progress. Besides, America would slash gasoline consumption by 25% even if the standards only resulted in half of the expected real-world gains. That's in addition to the 5.5% reduction already achieved, too.
It's also important to note that the original goal did not account for an increase in diesel engine use among the nation's passenger vehicle fleet nor novel technologies such as the electric vehicles created and developed by Tesla. Sure, Tesla has a long way to go before it can produce anywhere near the same volume of vehicles each year as incumbent automakers. But replacing just 5% of the nation's fleet with electric vehicles would result in a nearly similar decline in gasoline consumption. Simply put, no one accounted for disruptors like Tesla in RFS2 or the original goals.
Foolish bottom line
America may not come close to reaching the "Twenty in Ten" goal, but that's not what's important here. President Bush got the wheels turning, President Obama greased them, and the next president will surely lend a helping hand, too. Similarly, automakers such as Ford and Tesla and the leading ethanol producers played a big role in the success achieved to date. When will America reduce its annual gasoline consumption to just 114 billion gallons, or the same as the nation's usage in 1993? I'm not sure anyone knows that answer, but the future sure is promising.
Reducing fuel consumption will pay dividends for America
Why go through all of this trouble in the first place? We may debate the best route from time-to-time, but most know that reducing gasoline consumption will help America sleep like a baby more easily in the future -- just like a great dividend portfolio. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.
Maxx Chatsko has no position in any stocks mentioned. Check out his personal portfolio, CAPS page, or previous writing for The Motley Fool, or his work for SynBioBeta to keep up with developments in the synthetic biology industry.
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