May 19, 2009

Economic Outlook: Fuel efficiency 101

New automobile efficiency standards expected from Washington Tuesday target every car on the road, a senior government official said.

As the Obama administration raises the bar on fuel efficiency and automobile emission standards, every single category of car will be more efficient, the official told The Washington Post.

The changes will include raising the mileage expectation of new cars from 25 miles per gallon to 35.5 miles per gallon by 2016, the Post said.

But the implications run deep and wide, affecting the economy, the environment, finance, and, in part, the nation's legal system, various reports said.

Starting with the environment, This is a very big deal, Daniel Becker, director of the Safe Climate Campaign told The New York Times.

This the single biggest step the American government has ever taken to cut greenhouse gas emissions, which are thought to contribute to global warming, Becker said.

On the other hand, expect cars to cost up to $1,300 more with $600 of that attributed to the higher efficiency standards, a government official told the Post.

That means consumers will borrow more to buy a new car and automakers will be forced to squeeze more profits from smaller vehicles. In the past, the larger SUVs and trucks provided the greater profit margin for car companies.

Under the category of lifestyle, consumers could see cars shrink to gain better efficiency and features increase in importance, as automakers aim to merge the efficiency standards with the need to maintain profits.

Why, then, are industry leaders expected to stand behind the new rules?

In part, this is because the federal standards will wipe out the break-away standards California tried to impose in 2002.

As thirteen other states intended to raise fuel efficiency standards to match California's, the automobile industry sensed a threat of double-standards across the country would have been worse than higher standards across the board.

For seven years, there has been a debate over whether states or the federal government should regulate autos, said Dave McCurdy, president of the Alliance of Auto Manufacturers. President Obama's announcement ends that old debate by starting a federal rulemaking to set a national program, he said.

That said, the court system would buy a break, as the federal standards are close to California's and would cancel the lawsuits the industry has filed, the Times said.

The new standards also imply a reduction of the U.S. trade deficit, which is weighted heavily by oil imports. It could also influence world hunger. Less fuel in cars could free up acreage devoted to ethanol production for food production.

California state senator Fran Pavley, who sponsored the bill in California, was headed to Washington to stand behind the president for the announcement.

This cleans up our air, reduces our dependence on foreign oil and continues to allow California to lead the way, a spokeswoman from Pavley's office said.

In market news, The Nikkei average in Japan rose 2.78 percent Tuesday, following strong gains in U.S. markets Monday. The Hang Seng index in Hong Kong rose 3.06 percent. The Singapore Straits Times rose 3.83 percent.

In midday trading in Europe, the FTSE index in Britain rose 0.65 percent. The DAX 30 in Germany rose 1.85 percent. The CAC in France rose 0.86 percent, while the broader DJStoxx 600 rose 1.31 percent.