Do Low Oil Prices Undermine US Passenger Vehicle Fuel Economy Standards?

Do Low Oil Prices Undermine US Passenger Vehicle Fuel Economy Standards?

Fuel economy standards lie at the center of US efforts to reduce oil consumption and greenhouse-gas emissions. A new report published today by the Center on Global Energy Policy examines the effect low gasoline prices are having on this policy lever. Co-authored by Benjamin Leard, Joshua Linn, and Virginia McConnell of Resources for the Future, the report finds that, during the study period from June 2014 to August 2015, low fuel prices had only a modest effect on meeting the federally required level of fuel economy. If that finding continues beyond the study period, the authors conclude, then low fuel prices will not have a substantial effect on the average fuel economy of new light duty vehicles sales. However, the report cautions that low fuel prices may cause consumers to choose more powerful cars than if fuel prices were higher. Automakers would have to make up the difference if so, which raises the cost of complying with the regulations. 
 
The executive summary is below and the complete report is available here [PDF]. It is also available via RFF
 
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Do Low Oil Prices Undermine US Passenger Vehicle Fuel Economy Standards?
by Benjamin Leard, Joshua Linn, and Virginia McConnell 

Executive Summary

Fuel economy standards lie at the center of US efforts to reduce oil consumption and greenhouse-gas emissions. In 2010, the Environmental Protection Agency (EPA) and Department of Transportation (DOT) set standards for model years 2012 through 2016. The fuel economy requirement that manufacturers have to achieve depends on the size of the vehicles they sell, whereas previous standards set uniform requirements for cars and light trucks. Because of the new structure, the level of fuel economy required by the standards depends on the proportion of cars to light trucks sold, as well as the size of those vehicles. If sales shift from smaller to larger vehicles, the required level of fuel economy decreases. In addition, because manufacturers achieve an average level of fuel economy across their fleet, the fuel economy of a specific vehicle can differ from its standard. Changes in sales mix can, therefore, affect the level of fuel economy required from the standards differently from the level of fuel economy that consumers choose.

While fuel prices remained relatively high and stable between 2012 and mid-2014, they began declining sharply in the summer of 2014. This paper examines the effect of lower fuel prices between June 2014 and August 2015 on consumer purchases of new vehicles. Accounting for changes in sales within the car and light truck classes and across classes, we estimate the effects of the decline in fuel prices on the level of fuel economy required by the standards as well as on the level of fuel economy that consumers choose.

Over the study period, low fuel prices had only a modest effect on the required level of fuel economy. If that finding continues past the study period, then low fuel prices will not substantially undermine the fuel consumption goals of the regulating agencies. However, low fuel prices cause the level of fuel economy chosen by consumers to decline more than the fuel economy requirement. Automakers have to make up the difference, which raises the cost of complying with the regulations.

Gasoline prices have continued to decline since the end of the study period, and in the future we intend to extend our analysis by analyzing this decline. Also, we did not examine the extent to which fuel economy standards were achieving the fuel consumption and emissions goals that policymakers stated when the rules were first finalized. This is a separate but important question because of the standards’ role in meeting the US commitment to reduce greenhouse gas emissions and reduce the costs of climate change. 
 
Download and read the complete report here [PDF]