Here's Why Cheap Gas Could Create A Political Battle In Washington

As the price of oil has plunged, so has the price of gas in the US. And while this sounds great, it has created a potentially major political problem.

Here’s some reporting from Bloomberg’s Jeff Plungis and Mark Drajem:

Data show consumers gravitating back to the pickup trucks, minivans and sport utility vehicles they shunned when gasoline was $US3 or more a gallon. Automakers had been counting on sustained demand for fuel-efficient cars such as hybrid and electric models to meet [President] Obama’s mandate for a nationwide average fuel economy of 54.5 miles per gallon.

That fuel-economy target was developed in those bygone, panicked days after the Financial Crisis, when the Obama administration sought to aggressively develop new, “green” technologies. The basic idea was the provide automakers with a strong incentive — a regulatory requirement — to invest in alternatives to low-mileage cars and trucks.

For a time, in appeared that the ambitious fuel-economy mandate was going to compel car-makers to go hybrid, electric, and smaller with their lineups.

But the thing is that big trucks and SUVs, not to mention large luxury sedans, are far more profitable than small cars. And while hybrids and electric cars have been a qualified success, they’re “low volume” vehicles — automakers simply don’t sell that many of them.

With the industry fully recovered from the dark days of the 2008-09 period, car-makers are now gearing up to ask for an extension this year on the increased fuel-economy targets, something that was baked into the 2012 agreement between automakers and the EPA.

They have something of a case. The recovery of the industry, coupled with falling gas prices, has created a perfect environment to make a lot of money. Car-makers are also able to comfortably build more of the type of vehicle that Americans in particular prefer: SUVs. The auto companies don’t want to expend the time and resources to convince Americans that they should change decades of ingrained buying behaviour and go small.

US Gas Prices FREDFREDDown, down, down.

That said, everyone in the industry knows that fuel prices are unpredictable. The problem is that no one wants to get stuck with the wrong mix of vehicles when buyers are buying and credit is relatively easy to come by. It’s entirely possible that gas prices will spike again over the next five years and it will make sense to have spent billions to develop smaller, more fuel-efficient vehicles.

But satisfying the government and satisfying the customer are two different not always compatible goals.

The best outcome would be for the automakers to see this time of profitability and restoration as something of an anomaly. Better fuel economy and vehicles that pollute less are what car-makers should be investing in. On balance, in fact, they have been making this investment steadily over the 100-year history of the industry.

So maybe the government should back off a bit on its fuel-economy mandate. But the automakers shouldn’t put the brakes on their own innovations.

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