Long Term and Short Term Interests in the Automotive Market

In one of my previous posts, I was ragging on some automotive magazine editors about being part of the problem, and not stepping up to be part of the solution. That got me thinking again (I know, somewhat dangerous). It wasn’t just pig-headed behaviours that got the big three in trouble, it was listening to their customers!

A while ago, I was looking at the CAFE numbers for new cars sold in the US since 1975. I couldn’t find a nice graph that went past about 2004, so I went to the EPA web-site to get the raw data and crank the numbers… Anyway, from 1985 on, the numbers are basically flat. The drop in the averages was due to a shift from cars to trucks and SUVs.

CAFE Averages for new cars 1975-2008
CAFE Averages for new cars 1975-2008

What’s interesting here as well is that the rise in CAFE numbers happened as increasing engine efficiency was happening, and the ghastly low compression engines of the mid-70s went away, so not only was the fuel efficiency increased, but the specific energy (hp/cubic inch) was going up as well! Then, it all went flat…

That’s not to say that engine efficiency stopped improving, far from it in fact.

Usefull work extracted from gasoline by internal combustion engines, 1975 as a baseline. From EPA numbers.
Usefull work extracted from gasoline by internal combustion engines, 1975 as a baseline. From EPA numbers.

From 1985 to 2008, about 40% more useful work was being extracted from gasoline. It’s just with no more government mandates for increased fuel efficiency; all of this improvement went to things other than miles per gallon. So while engine efficiency (amount of useful work that you could get out of a gallon of gas) went up, cars became obese and much quicker.

Light Vehicle Fleet Average Weight and 0-60 Times 1975-2008. From EPA Numbers.
Light Vehicle Fleet Average Weight and 0-60 Times 1975-2008. From EPA Numbers.

So, after the oil embargo of the early 70s, our exposure to economic risk due to importation of oil was considered one of our largest national security risks. At that time, we imported about 1/3rd of our oil. After an initial increase in fuel efficiency of the light vehicle fleet, we seemed to have amnesia, allowed oil imports to grow to over 60% of domestic consumption. We wanted faster larger vehicles, and the car companies were happy to sell them to us. Then we hit an oil price spike and it looks like the car companies were caught with their collective pants down. Well, so were us buyers! The credit crunch and recession really pushed the auto industry to the brink world wide.

But after looking at all these numbers, I find myself asking a few questions:

  1. Seeing that the amount of oil the US imported was already considered both an economic and national security risk, should we have continued to mandate increases in CAFE standards after 1985?
  2. What is the proper method to deal with the fact that buyers of a long-term asset (vehicles) mostly use short term criteria when making their buying decision?
  3.  How does one incorporate the indirect costs of something (like the national economic and security risks, the cost of insuring free access to shipping lanes, or the consequences of tailpipe emissions) into the cost of a product (the car and the gas) to get a more accurate price point? Is it even appropriate to do so?

My answers are probably pretty obvious: 1) Of course! If we’d taken half of the efficiency gains in internal combustion engines into MPG since 1985, we’d still have quick cars but our oil imports would be much, much less (but still above the 30% or so from the 70s, just a lot less than what we import now.) 2) If the buyer or a long term asset doesn’t take long term issues into account when buying AND the consequence of their action affects many others, then the government has a responsibility to act. If the consequence of the buyers action doesn’t affect anyone but themselves, they should deal with the problem on their own. And for #3, I’m a big fan of carbon taxes. Jack up the cost of gas and you bet that people would think a lot more about poor fuel efficiency, and we’d have revenue streams that could pay for our carrier fleets steaming around the Straights of Hormuz and the like!

I’m sure that many feel differently than I do. Go ahead and post a comment about what you think we should have done/should do and why!

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