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After Falling Oil Price Glee Comes Unintended Consequences

After Falling Oil Price Glee Comes Unintended Consequences.

CAFE Targets Under Pressure, Electric Car Economics Jeopardised.
Will 54.5 Mpg Become 50, With 60 Mpg Promised For 2030?

The falling oil price has been welcomed as an unmitigated bonus, with consumer spending boosting the economy in general and the auto business in particular, but investment bank Morgan Stanley has pointed out some unintended consequences.

U.S. car buyers are expected to increase their purchases of big, gas-guzzling SUVs and pick-up trucks with fat profit margins, but at the same time eschew small fuel-sippers developed at huge expense by the car companies. Small cars have never been popular in the U.S. but were set to become a necessity as government regulators set massive targets for fuel economy. The U.S. target of average fuel consumption of 54.5 miles per U.S. gallon by 2025, will come under attack, says Morgan Stanley. Also, many U.S. states like Texas, California, Alaska, New Mexico, Wyoming, Colorado and Kansas rely on oil revenues to balance their budgets. While pressure is also starting to persuade the U.S. Congress to raise gasoline taxes at the pump.

“The current trajectory of U.S. regulation on fuel economy was written during a time of higher-for-longer oil prices. The world has changed. Consumers aren’t buying what the regulations are demanding. Absent a serious hike in the gas tax, a re-write maybe needed. Soon,” said Morgan Stanley analysts Adam Jonas.

“We expect many auto manufacturers to push for a “re-grading” if not an outright delay of the current path of proposed CAFE standards through 2025,” Jonas said.

Jonas said the move to 54.5 mpg was a “near-moonshot” project.

Expect more lobbying in Washington
“If gasoline prices were to stay anywhere remotely near a $2 to $3 range, consumers will have little economic urgency to purchase expensive technologies required to achieve 55 mpg by 2025. This is a politically sensitive topic with broad implications tied to the corporate/consumer facing image of the manufacturers. As such, we would not expect conspicuous pressure from car companies to pull back on legislation. Traditionally, such pressures are placed through lobbying channels,” Jonas said.

Jonas said electric car prospects, weak anyway, will also be dealt a severe blow. $4 a gallon gasoline means roughly a five year payback from buying an electric car. If the price falls towards $2 this payback period becomes up to 14 years. He expects the 2017 stage in fuel economy which transitions to the second phase to 2025 to come under scrutiny, with more flexibility. The target for 2025 might be pushed back.

“We believe it is very likely that the current 54.5 mpg target will be eased somewhat. We believe 50 mpg will be an appropriate number that will keep the planned trajectory of improvement yet sufficiently ease pressure on (manufacturers) by allowing the target to be achieved almost entirely through ICE (internal combustion engine) improvements alone. Electrification would be the biggest loser in this scenario.”

“To prevent the perception of “slipping backwards” we also expect the standards to announce a larger target, farther out; for example 60 mpg by 2030,” Jonas said.

The fall in the price of gasoline might also provide an excuse to raise the U.S. tax at the pump. The tax, an average 49 cents a gallon including federal and state, compares with taxes in Britain and Germany about seven times higher. Price volatility makes it difficult for consumers and manufacturers to plan ahead, said Jonas.

“A well planned gasoline tax could help align economic incentives of all entities involved – consumers, auto manufacturers and the government,” he said.

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