New Analysis Shows Keeping National MPG Standards Protects Profits of Automakers and Suppliers
June 27, 2016 /3BL Media/ - Even with wide-ranging unpredictable gas prices, U.S. automakers will remain profitable and suppliers will benefit under existing national fuel economy standards slated to be in place until 2025, according to a new economic analysis prepared by independent automotive industry analysts and commissioned by the nonprofit group Ceres.
The study, Economic Implications of the Current National Program vs. a Weakened National Program in 2022-2025 for Detroit Three Automakers and Tier One Suppliers, was announced just days before federal agencies are expected to release a new technical assessment report regarding a midterm review of light-duty fuel-efficiency and carbon emissions standards.
The analysts modeled five fuel price scenarios to project what would happen to automakers’ profits and suppliers’ orders if current fuel-efficiency targets requiring real-world fleet averages of 37 to 39 miles per gallon by 2025 were to stay in place, and what would happen if the government were to weaken the standards during the current statutory midterm review of the policy.
“In all of our fuel price scenarios (from Very Low to High), the auto industry would be profitable if current standards stay in place,” said Alan Baum, one of the brief’s authors and principal of the automotive forecasting and research consultancy Baum & Associates. “What’s more, according to our research, weakening the standards could hurt the bottom line for automakers and their suppliers because their vehicles may be less competitive than those offered by other automakers.”
The Ceres analysis shows that at fuel prices of $2.60 per gallon or higher, consumers would value fuel savings as much or more than any additional costs that might be passed onto them in the form of higher vehicle prices (though consumers’ valuation of fuel savings is less that the actual savings they would see).
When gas prices are higher, fuel efficiency is an even easier sell. Research shows that consumers will pay a premium for fuel efficiency when fuel prices are at or above $3 per gallon. So if gas prices reach that level, automakers can increase their profits by adding that premium to the price of their more fuel-efficient vehicles, according to the brief.
But even if gas prices tank, falling 25 percent below U.S. Energy Information Administration projections to an unlikely $1.80 per gallon, the analysts found that automakers and their suppliers would still make money under the current mileage and emissions standards.
“When gas is very cheap, people tend to buy bigger, more profitable trucks,” said co-author and independent auto industry analyst Dan Luria. “With gas at $1.80 by 2025, the automakers would still be highly profitable thanks to that shift toward trucks.”
Standards that encourage making more fuel-efficient cars also offer a hedge against gas-price spikes.
“U.S. automakers have been caught flat-footed before, when prices at the pump rose and they weren’t ready with the kind of fuel-efficient vehicles buyers wanted,”
said Carol Lee Rawn, who directs Ceres’ Transportation Program. “Strong fuel economy standards offer insurance against future gas price spikes.”
The analysts found that if standards were weakened such that they effectively stall at 2021 levels, the industry could be vulnerable to another gas prices spike. In that event, the Detroit Three automakers could lose 300,000 vehicle sales, $1.08 billion in profits, and 1.9 points in U.S. market share to other companies offering more fuel-efficient options. And suppliers could lose up to $1.42 billion in sales of fuel-efficient technologies.
Keeping standards in place offers certainty for businesses and consumers, which makes it easier for automakers and suppliers to plan and invest. As of April, 2016, automakers employed 214,700 Americans, while their suppliers provided more than two and a half times more jobs.
Ceres is a nonprofit group mobilizing many of the world’s largest companies and investors to take stronger action on climate change, water scarcity and other sustainability challenges. Ceres directs the Investor Network on Climate Risk, a network of over 120 institutional investors with collective assets totaling more than $14 trillion. Ceres also engages with 100-plus companies, many of them Fortune 500 firms, committed to sustainable business practices and the urgency for stronger climate and clean energy policies. For more information visit: www.ceres.org or follow on Twitter @CeresNews.