Perverting Prices

The United States has witnessed a sudden decline in the price of gasoline since June. In some areas, the price has dropped as much as 40% to under $60 a barrel. The US Energy Information Administration (EIA) reports the price of gas in the first week of June was $3.765 per gallon while in the fourth week of December; it was $2.496 per gallon. The cause of this sudden drop in the price of gas is attributed to a decline in demand of oil and increased US domestic production and supply triggered by the shale oil and gas boom. Many drivers on the road have been overjoyed to have pressure lifted off their wallets; but for those in the market for a new(er) car, this can greatly affect their decision in purchasing a fuel efficient hybrid or flex fuel vehicle. This shift can have lasting effects on government initiatives to limit carbon emissions and the auto maker’s compliance with the Corporate Average Fuel Economy (CAFE) standards.

CAFE standards aim to improve the average fuel economy of light trucks and sedans over an auto maker’s entire fleet of vehicles. Auto makers must meet an average fuel economy of 34.5 miles per gallon (MPG) by 2016 and the Obama administration set a goal of 54.5 miles per gallon by 2025. As consumers buy more cars with lower MPG ratings, it makes it more difficult for the auto maker to meet the standard. If a company doesn’t meet the standard, they can apply credits – a system which works similar to cap and trade – or they can face a penalty. Nearly every auto maker has paid millions of dollars in penalties at one point as a result of failing to reach the standard.

In November, as gas prices continued to fall, car dealerships saw customers shifting away from vehicles with better fuel economy and moving towards light trucks, sport utility vehicles, and cross-overs. The National Auto Dealers Association (NADA) reported in November 2014 that 1.3 million light vehicles were sold in the United States and 14.9 million cars year to date (YTD). Cross-overs hold the largest market share of 26.9% YTD which is up from the year before. We can see the full breakdown of car sales by type and their market share in the table below with data provided by WardsAuto. Hybrid sales in November 2014 were down 11.0% and YTD sales were down 9.5%.The top five models sold in November contained three light trucks, The Ford F-Series (1st), the Chevy Silverado (2nd), the Ram Pickup (4th) and two sedans, the Toyota Camry (3rd) and the Honda Accord (5th).

Gasprices

As gas prices fall, hybrids are no longer economic and there is less urgency for drivers to consider fuel efficiency. This leads to more vehicles with sub optimal fuel economy making their way onto the roads, which hurts auto maker’s compliance with CAFE standards. If auto makers continue on this trend, drivers will consume more gas and add larger, unnecessary amounts of carbon emissions into the atmosphere. Based on information from fueleconomy.gov, a 2014 Ford F-150 Pickup with 2WD with an estimated combined 18 MPG will consume 18.3 barrels of petroleum in one year (11 of which will be imported) and will emit 483 grams of CO2 per mile or 8.0 US tons of CO2per year. The standard estimated by the EPA for light trucks in 2014 is 26.2 MPG, emitting 332 grams of CO2 per mile or 5.5 US tons of CO2 per year, meaning the Ford consumes and emits 32% more gas and CO2 than is called for under the CAFE standard. The penalty for not reaching the standard is $55 per mile below the goal set by the EPA, which is then multiplied by the entire auto maker’s fleet of vehicles produced for the US domestic market. In this case, the Ford F-150 will cost $451 per vehicle in penalties.

Gas prices are expected to continue to fall well into 2015, which will result in increased sales of light trucks and cross-overs. It is highly likely that auto makers will have to pay out larger penalties for model years 2015 and 2016; however, creating more incentives for customers to purchase vehicles with better fuel economy will reduce penalties and unnecessary carbon emissions.

Image Credit: A Syn via Wikimedia Commons

 

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