Must-know: The fuel economy and its impact on the US oil industry (Part 3 of 6)
U.S. fuel economy standards
The Environmental Protection Agency (or EPA) and the Department of Transportation (or DOT) have established a National Program that further enhances the Corporate Average Fuel Economy (or CAFE) standards and consists of new standards for light-duty vehicles that will help reduce greenhouse gas emissions and improve fuel economy. Automobile companies that need to follow these standards include Ford Motors (F), General Motors (GM), Honda Motors (HMC), and Tata Motors (TTM). It’s important to note that most of these companies are a part of the SPDR S&P 500 ETF Trust (SPY) and the Vanguard Total International Stock ETF (VXUS).
This program applies to light duty cars and trucks in two phases—model year 2012–2016 and model year 2017–2025.
The first phase was effective from July, 2010. It was targeted to result in ~960 million metric tons of total carbon dioxide (or CO2) emissions reduction and ~1.8 billion barrels of oil savings over the lifetime of vehicles sold in model years (or MY) 2012–2016.
It’s important to note that according to National Highway Traffic Safety Administration (or NHTSA) estimates, MY 2011 standards would have required fuel economy levels of 30.4 miles per gallon (or mpg) for passenger cars, 24.4 mpg for light trucks, and 27.6 mpg for the combined fleet.
The previous chart provides average required fuel economy under CAFE standards for MY 2012–2016. The overall average CAFE level is expected to be 34.1 mpg in MY 2016. These standards represent a 4.3% average annual rate of increase relative to the MY 2011 standards.
In August, 2012, the EPA and NHTSA extended the national program further. They raised fuel economy standards for MY 2017–2025. This second phase of the program is projected to save approximately four billion barrels of oil and two billion metric tons of greenhouse gas (or GHG) emissions, with net benefits up to $451 billion. These savings and reductions come on top of those that are being achieved through the MYs 2012–2016 standards.
As shown in the previous chart, NHTSA’s estimated required CAFE levels for passenger cars would increase from between 40.1 and 39.6 mpg in MY 2017 to between 55.3 and 56.2 mpg in MY 2025. Required CAFE levels for light trucks are estimated to increase from between 29.1 and 29.4 mpg in MY 2017 and 39.3 and 40.3 mpg in MY 2025.
The estimated overall averages required range from 48.7 to 49.7 mpg in MY 2025. This represents an ~4% annual rate of increase, relative to the MY 2016 required CAFE levels.
Together, both the phases are projected to result in an average industry level of 163 grams per mile of carbon dioxide (CO2) emission in model year 2025, which is equivalent to 54.5 mpg if achieved exclusively through fuel economy improvements. According to the EPA, the program is projected to:
- Cut six billion metric tons of GHG over the lifetimes of the vehicles sold in model years 2012–2025
- Save consumers more than $1.7 trillion in fuel costs
- Reduce America’s dependence on oil by more than two million barrels per day in 2025.
Fuel economy in heavy-duty vehicles
In February, 2014, the Obama administration announced a timeline for issuing fuel efficiency standards for heavy-duty vehicles, which will take effect this year and last until 2018. In his speech addressing the proposal for new standards, President Obama mentioned that “Improving gas mileage for these trucks are going to drive down our oil imports even further. That reduces carbon pollution even more, cuts down on businesses’ fuel costs, which should pay off in lower prices for consumers.”
The EPA and NHTSA are currently working on this proposal, which is expected to come out in March next year.
To learn about the implications of fuel economy on petroleum, derived gasoline, and diesel products, continue reading the next sections in this series.
Browse this series on Market Realist:
- Part 1 - Must-know: A brief overview of fuel economy
- Part 2 - Must-know: The US Corporate Average Fuel Economy standards
- Part 4 - Why fuel economy requirements caused gas consumption to decline
- Commodity Markets
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