Thomas White Global Investing
Green Reports

May 25, 2011

The Green Report

Rising Gasoline Prices: Fuel Efficient Cars to the Rescue

Fuel-efficient cars to the rescue

A host of affordable fuel-efficient cars such as the Ford Focus have become quite popular in the U.S. With gasoline trending over $4 a gallon, many consumers are lapping up such fuel-efficient cars.


Blame it on the unrest in the Middle East, or the rapacious appetite of China and India, or the loose monetary policy in the developed markets. Blame it on whatever you like, gasoline prices are heading north, harrowing the average American driver and burning a deep hole in pocketbooks.

In the eighteen months starting from January 2010, the American driver has witnessed gasoline prices soar to $3.9 per gallon from just $2.5 gallon. That is a whopping 56% jump, high enough to frustrate even the most stoic middle-class driver. In fact, a $1 rise in the price of gasoline pushes the annual fuel budget of an American driver up by around $700. This high cost of gasoline is pushing middle-class consumers to change even their basic consumption patterns. For instance, retail chains such as Wal-Mart and Lowe’s have complained that customers are making fewer trips to their stores.

This is strikingly similar to the situation that played out in the summer of 2008, the last time American drivers decided to drive less in the face of acute inflationary pressures. During 2008, vehicle miles travelled in the U.S. fell for the first time in almost three decades. Back then, the American driver decided to dump gas-guzzling SUVs altogether and vowed not to purchase another anytime soon. Consequently, sales of SUVs in 2008 plunged 40% from 2007 figures. Unfortunately, at the time, most American car manufacturers were dependent on the production of SUVs for survival, and the subsequent austerity and belt-tightening by the American driver sent many of the nation’s car makers into a tizzy. The upheaval that followed in the U.S. car industry pushed iconic brands such as GM and Chrysler into bankruptcy in 2009, and reduced the ambitions of foreign car makers that had taken the American driver for granted.

But now, three years later, as the American driver is once again facing more expensive oil, car makers seem to understand the driver’s needs. Smarting from the debacle in 2008, when their assembly lines were skewed towards producing expensive gas guzzlers, and partly due to government pressures, car companies in the U.S. now offer a choice of less-expensive, fuel-sipping cars. Ford’s strategic shift to sell smaller fuel-efficient cars is just a case in point.

A host of fuel-efficient cars with a price tag ranging between $15,000
and $20,000 can run more than 35 miles on one gallon. At a time when
gasoline prices are trending upwards of $4 a gallon, such
cars could deliver more bang for the buck.

For the American consumer, though, gone are the days where buying a fuel-efficient car means a $30,000 – $40,000 hybrid or a plug-in, almost twice the cost of a conventional automobile. Now, a host of mid-sized and compact vehicles with a price tag ranging from $15,000 to $20,000 are selling like hot cakes in the U.S. Since mid-2010, sales of small cars in the U.S. have steadily increased. In April 2011, large auto makers such as GM and Ford reported over 25% growth in the sales of small cars, almost double the rate of growth in the trucks and SUVs division. Sales of South Korea-based Hyundai’s popular compact, Elantra, doubled in the same month. For Ford, it was small models such as the Fiesta and Focus and the mid-sized Fusion that pushed the top line up.

Many of these models score well above the US Environmental Protection Agency (EPA) mandated fuel economy standards. The EPA mandates that the overall fleet of cars manufactured by auto makers should average 35.5 miles per gallon (mpg) by 2016. Many of the small fuel-efficient models have achieved this. Ford’s Fiesta and GM’s Chevrolet Cruze Eco now boast fuel efficiency of 40 mpg and 42 mpg on the highways, respectively. Travelling a mile in Honda’s Fit, a minicar, costs just 44 cents, almost half the cost it takes to travel in a conventional SUV.

Most car manufacturers have achieved these improvements through technological improvements like maximizing engine output and enhancing the aerodynamics of the car. For instance, in the Chevrolet Cruze Eco, replacing the hydraulic power steering with a rack-mounted one, employing a patented technology called regulated voltage control (RVC) that avoids overcharging the car’s battery, and knocking some excess weight off the car have all played a significant part in making the automobile fuel-efficient. Further, these cheaper models do not seem to compromise on safety and design standards. For instance, the relatively inexpensive Hyndai’s Elantra has scored five stars, the top score, in the federal government’s test for front driver and passenger crash tests.

On the other hand, in order to achieve fuel efficiency, these frugal models sacrifice some features that an American driver often deems necessary. The Chevrolet Cruze Eco, for example, requires manual transmission to achieve 42 mpg, while most drivers in the country prefer automatic transmission. Adding an automatic transmission to the Chevrolet Cruze Evo brings down fuel efficiency to 37 mpg.

And then, there is the problem of size of the car, supposedly the biggest deterrent to the appeal of a high mpg car. Currently, cars with high mpg are typically smaller. But an average American is widely perceived to lean towards a bigger car. Some auto industry leaders complain that despite their eco-friendliness, small cars are slow to move off the showrooms as they are not very popular with an average consumer. But that situation too is changing. In the second part of the last decade, both American drivers and auto industry executives have rated fuel efficiency a more important option than the size of the car.

In the longer run, even larger cars are expected to change incrementally to become more fuel efficient. A few SUVs that are quite roomy now come with the option of a less-powerful engine to save fuel expenses. Two SUV models from Ford, namely the Edge and the Explorer, are nearly 40% more fuel efficient now than they were 15 years ago. Diesel engine technology, which is quite popular in Europe, but yet to make headway in the U.S., could also help larger vehicles become more efficient. Luxury car makers in particular, like BMW and Mercedes, are planning to replicate their European models that are nearly 30% more fuel-efficient, for the U.S. market.

For its part, the U.S. government is trying to force auto makers into producing fuel-efficient vehicles. The EPA will require cars manufactured from 2017 to 2025 to achieve an average fleet mileage of 62 mpg. This will require auto makers to improve fuel efficiency by 3% to 6% every year starting from 2017 to 2025.

Now the ball is in the U.S. auto manufacturer’s court. If they can adhere to the standards set by the government they will not only likely save substantial money for the driver, but may also help U.S. passenger vehicles bring down green house gases, and reduce the dependency on foreign oil to boot.

Image Credit: Stuart Axe on Flickr under a Creative Commons license



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