From 2009 to 2015, Ford invested over $1 billion in research and development (R&D) to reduce the weight of its highly profitable F-150 light truck by 700 pounds. By replacing much of the truck’s steel content with lighter aluminum, Ford was able to improve the vehicle’s fuel economy by about 12%. The automaker made this improvement partly in anticipation of the Corporate Average Fuel Economy (CAFE) emissions standards, a 2011 agreement between major automakers and the federal government for vehicles manufactured over the next eight years.
President Trump recently called for a review of the CAFE standards and has publicly suggested scrapping them altogether.
In another regulatory move, albeit at the state level, the California Department of Motor Vehicles (DMV) recently proposed allowing driverless vehicles to use the state’s roads without a human present to grab the wheel in case of any error. Such vehicles hold the potential to drastically reduce per-mile transportation costs for commuters, profoundly altering American driving culture as it diffuses into society.
These regulatory maneuvers imply two very different visions about the future of the car industry. President Trump wants to recreate the U.S. auto industry of yesteryear at precisely the same time Silicon Valley is trying to destroy it.
Cars will become commodities if autonomous ride-sharing grabs a large chunk of the personal transportation market, and they are likely to be light, electric, fuel-efficient models, not all-steel, gas-guzzling Ford F-150s.
In the meantime, carmakers are gleeful about a reduction in the CAFE standards. The whole point of these regulations is to push producers away from the profit-maximizing path, which implicitly undervalues the external social costs of pollution. This change would allow them to avoid large R&D expenditures, like those costs of developing the lighter F-150.
Let’s assume for a moment that drivers still do all the driving in 2025. How might we expect things to change following a repeal of the CAFE standards?
When people shop for a new vehicle, they must choose between the vehicles offered for sale. On the face of it, therefore, manufacturers’ production choices have considerable potential to shape the nature of the fleet of cars on American roads. They do not, however, make such choices in a vacuum. Rather, they respond to shifts in consumer preferences in a bid to maximize sales of new vehicles.
Would Ford (F) have bothered to redesign the F-150 if the CAFE standards had not been so strict? Given that the image of the best-selling F-150 is tied to the truck’s ruggedness, Ford would likely be extremely wary of alienating the brand’s loyal fan base with a truck aimed primarily at fuel efficiency. Indeed, the redesigned vehicle has come in for considerable criticism regarding the ease with which the aluminum flatbed can be punctured by cargo.
Absent strict regulations, high gasoline prices would be the only thing that might prompt such a redesign. Bear in mind that average fuel costs fell from around $3.60 to $2.40 per gallon during 2014, and that fears of “Peak Oil” were high in people’s minds at the time the new F-150 was designed. Had fracking not been developed, and had oil prices climbed, Ford’s lighter truck would now be flying off the showroom floors.
The prospect of $4 gas now seems remote. Though many U.S. oil producers are currently idle, at $47 per barrel, the world price is below the breakeven point for North American frackers. It is understood that domestic production will ramp up if prices start to climb beyond $60. The net result is that gasoline prices are likely to remain at or below $3 per gallon for the foreseeable future.
Assured cheap gas and no fuel economy standards would be the worst possible outcome for environmentalists. As a proportion of all new light vehicles, trucks and SUVs have risen from 20% to 63% since the early 1980s, the trend abating only during the high oil price era from 2003 to 2014. Consumers prefer more fuel-efficient vehicles, at the margin, but they also tend to prefer more passenger space and towing power as well.
This proposed deregulation does not mean that electric car development will come to a standstill if CAFE is decaffeinated. There is a sizable niche market for vehicles that are extremely fuel efficient, and cash-rich consumers will continue to demand better electric cars. International markets with higher gas taxes and strict emissions controls will continue to drive the development of alternative powertrains, and these advances will be made available to U.S. consumers, should the tide turn during the next president’s first term.
Self-driving technology and rideshare are undoubtedly the wildcards in the development of the car industry. The push for driverless driving by 2025 will continue despite the state of fuel standards and the price of gas. The organization capable of providing the first safe, reliable, legal, driverless rideshare will accrue huge benefits. It would be folly to think that anything the Trump administration can do would slow progress toward this Brave New World in the auto industry.
Progress always wins.
Tony Hughes is a managing director at Moody’s Analytics.
