Fuel Economy Standards: Is the Most Important Energy Policy of Obama’s Administration at Risk?

This post was written by James Coan, Research Associate at the Baker Institute Energy Forum.

Yesterday, President Obama announced the most important energy policy of his administration, finalizing fuel economy standards through model year (MY) 2025 that should roughly double the efficiency of new vehicles as compared to when he took office. This highly popular move is very important to America’s energy security and economic stability.

This announcement is the latest in a series of recent policies designed to increase fuel economy. Back in 2007, President Bush signed the Energy Independence and Security Act, which mandated vehicles get 35 miles per gallon (mpg) by MY2020 – or about 27 mpg when taking into account real-world conditions. Baker Institute analysis showed that this policy would reduce consumption by 4.3 million barrels a day (b/d) in 2030 relative to a case without a stricter standard. Such a figure is huge, equal to more than 40 percent of current gasoline use.

Since entering office, President Obama first basically accelerated the existing standards so they would be met four years earlier, using his power to regulate greenhouse gases under the Clean Air Act. The actions yesterday extended new standards through MY2025, when vehicles will be required to get 54.5 mpg – or 39.4 mpg in on-road conditions – assuming all the standards are met with efficiency improvements. These actions will result in additional gasoline savings, bringing the total savings from all the light-duty fuel economy standards to 6 million b/d or more by 2030, according to Baker Institute estimates.

Despite the huge benefits, Republican nominee Mitt Romney suggests he would weaken the standards, leaving our economy and citizens substantially more vulnerable.

As reported by the Detroit News,

Romney said he’d seek “a better way of encouraging fuel economy” than corporate average fuel efficiency (CAFE) mileage requirements “as the sole or primary vehicle,” he said. “The best approach is to try and build vehicles that people want, rather than having the government telling the companies what they must make,” he said.

“I would work with the manufacturers to find ways to encourage fuel economy on the part of the consumer.”

While it’s unclear how far Romney would go in abandoning fuel economy standards, these statements represent a rare attack on fuel economy standards, a policy that Pew Research Center in March found that 78% of Americans support, including two-thirds of Romney’s fellow Republicans. President Gerald Ford, a Republican, also signed the initial fuel economy standard legislation.

Romney’s logic ignores history in other ways as well. As the memory of the fuel crises of the 1970s wore off and oil prices stayed at consistently low levels, consumers began demanding huge gas-guzzling vehicles in the late 1990s and early 2000s. America’s gasoline consumption and oil imports steadily rose, but the party ended when gasoline first reached $3/gallon and later $4/gallon. If gasoline prices keep falling as America’s oil production keeps rising, consumers could easily start demanding bigger vehicles once again.

But policymakers shouldn’t get lulled back into complacency as well. Oil prices are cyclical. Low prices lead to greater use and lower investment in production and alternatives, setting the stage for future higher prices. The Middle East and many other major oil producers are still geopolitically volatile, and a political crisis that cuts off supply can lead to dramatically higher prices at the pump. With lax fuel economy standards, many consumers could be driving inefficient vehicles and feel the squeeze the next time prices jump, not to mention the economy could go into recession.

Arguably, if Romney’s main policy is to work “to find ways to encourage fuel economy on the part of the consumer,” his most important oil reduction policy could be to have good window stickers showing vehicle fuel economy, a completely inadequate approach. If elected, Romney should listen to the majority of Republicans and support strong fuel economy standards. The best energy policies seek both sources of supply – which Romney has already proposed to do in his energy white paper – and reduced demand.