The government has yet to require higher fuel efficiency from the auto industry, but some manufacturers are already bracing for much stricter standards. Chrysler Group even went so far as to scrap plans for a new luxury vehicle that had been in the works.
Industry insiders insist consumers should be bracing too -- for significantly higher prices and far fewer choices.
Last month the Senate passed a bill that would increase the Corporate Average Fuel Economy (CAFE) standards for all passenger cars and trucks by about 40 percent. That would require automakers to raise the average gas mileage of their vehicles to 35 mpg by 2020. A proposal in the House would hold manufacturers to those standards as early as 2018.
The legislature is far from putting such changes into law. But observers say stricter standards -- in some form -- appear to be inevitable.
And buyers, beware. The impact on consumers is likely to be more than just the ability to get farther on a gallon of gas.
Consumers will end up paying for the more expensive technology that makes achieving the standards possible, said David Alexander, principal analyst for automotive systems at ABI Research in New York.
Dave Elshoff, a senior manager at Chrysler, said some cars could end up costing as much as 50 percent more. "Bringing our most fuel-efficient vehicle into the standards being proposed would add $5,000 to $7,000 to its price. And this is a $14,000 car," Elshoff said. "Consumers are gonna think twice about buying cars that expensive, which will hurt us."
Choice is also going to dwindle, both Alexander and Elshoff predicted.
Just the threat of stricter standards is already having an impact on production -- at least for Chrysler.
The company is the first to order a change in its production schedule because of the possibility that stricter standards are on the way. It recently scrapped plans to build the Imperial, a large, luxury sedan that had been introduced as a concept vehicle at the 2006 Detroit auto show.
Elshoff gave two reasons for the decision: "One, volatile gas prices consistently well above $3 a gallon. Two, pending legislation in Washington."
Given those issues, Imperial's size made its demise inevitable, he said. "Any way you look at it, the concept car was based on our largest sedan. It was considerably big. Chrysler felt that there was no justifiable business case for a car like that with those two issues looming."
Ford spokesman Mike Moran said he thinks that car buyers are already making smarter, more informed decisions and are more willing to consider smaller, more fuel-efficient vehicles.
"Addressing this issue is kind of like a three-legged stool. It's the vehicles, the fuels and the consumers. With the consumers it's more about what they are looking for or willing to purchase," Moran said.
His company's statistics show a shift in consumer spending toward more fuel-efficient vehicles. "There's been movement from the SUV area to crossover vehicles," he said.
Traditional SUVs employ truck architecture, while so-called crossovers employ car architecture. The crossovers can be more fuel efficient, in cases where they are lighter than the truck-like SUVs. "Consumers are making better choices [with regard to fuel economy]," Moran said. "I think we've seen a shift ever since [Hurricane] Katrina and with gas prices spiking."
Crossovers on the Upswing
Ford's statistics show that crossover vehicles have been the fastest growing category in the U.S. Industry-wide sales are up 18 percent in the first half of 2007. Annual sales have grown from about 500,000 in 2000 to 2.4 million in 2006. This year, sales will reach about 2.8 million and may go past the 3 million mark in 2008, the company said. At the same time, traditional SUV sales have been declining. Ford said that industry-wide sales of traditional SUVs likely will fall below 2 million units for 2007. The last time sales were that low was in 1995.
George Pipas, Ford's U.S. sales analysis manager, attributed this shift in consumer spending to various factors. It's part demographics and lifestyle needs, and part fuel prices, he said. Pipas said that baby boomers, who popularized SUVs in the '90s, are becoming empty-nesters. The utility of crossovers is what they prefer now, he said.
"This trend started long before Congress started to talk about new regulations, and even before gas prices began to increase," Pipas said. "I think higher gas prices encouraged people to think about what they really need a particular type of vehicle for, and in doing so probably accelerated a trend that was already underway."
Ford's Moran said that Europe is thick with fuel-efficient vehicles that could potentially thrive as SUV alternatives in the U.S.
"If you look at the make-up of vehicles in Europe, it's vastly different from the United States, but they're pretty close to a 35 mpg standard over there," Moran said. "They don't do a lot of large commercial trucks or pickups."
He said that more than 84 percent of vehicles sold in Europe have four-cylinder engines, whereas only about 28 percent do in the U.S. Also, 51 percent of vehicles in Europe run on diesel, compared to about 1 percent in the U.S. "But they also have a gas tax there," Moran said. "So there are a lot more factors into play there."
Mike Omotoso, a senior manager at the market research firm J.D. Power and Associates, agrees that European vehicles can be a guide for American automakers grappling with stricter fuel-efficiency standards.
"One thing that's possible for the future, which they've already done in Europe, is to switch from, say, a V6 gasoline engine to a four-cylinder with a turbocharger," Omotoso says. "So you have better fuel economy but you still have the power with the turbo."
E85: Loophole or Credit System?
American manufacturers and the government have been touting E85, a fuel that is 15 percent gasoline and 85 percent ethanol, as a way to decrease dependence on fossil fuels and, specifically, foreign oil. Ethanol is made from organic material like corn or sugar cane.
Omotoso said some manufacturers are using E85 as a loophole to CAFE standards. "Manufacturers get extra credit for flex-fuel vehicles -- ones that run on 85 percent ethanol, 15 percent gasoline," he said. "There's a formula where they average out the gasoline and ethanol fuel economy, so the CAFE miles-per-gallon number is actually higher than the real number. That helps offset the gas-guzzling SUV figures. Even though they make a large number of trucks, they have the flex-fuel vehicles to offset those numbers." This is how certain manufacturers get around having to pay penalties for not meeting current CAFE standards, Omotoso said.
Max Gates, regulatory affairs communications manager at Chrysler Group, said that manufacturers do accrue special credit toward CAFE standards through certain calculations of fuel consumption by flex-fuel vehicles. He argued that it's not a loophole but a credit system. "The government does a lot of incentives. A lot of times they just give cash to people, like they give to farmers to grow corn, which is made into ethanol," Gates said. "We don't get cash for building flexible-fuel vehicles. The incentive for us is a capped system of getting some credits under the CAFE rules. And frankly, we think that cap might be a little low. So we couldn't build a million flex-fuel vehicles."
Gates pointed to the fuel industry dragging its heels as one issue that is keeping E85 and flex-fuel vehicles from truly helping offset oil consumption. "There are 170,000 retail outlets for fuel in this country, and there are about 1,000 that dispense ethanol," he said. "Because the fuel is not available in this country, it isn't running on E85 anywhere near as much as it should be."