July 31, 2009

Cash For Clunkers Could Be Running On Empty

The federal government's "cash for clunkers" program has been highly popular and may provide a much-needed boost for the nation's ailing auto industry, but it will do little to cut fuel consumption, according to a Reuters analysis.

Congress is working to extend the program after the original $1 billion in funding dried up sooner than expected, resulting in the program's suspension.

The "Cash for clunkers" program, allows Americans to trade in their gas-guzzling vehicles for more fuel-efficient cars, was originally expected to run until September 30.

The program "has proved to be a highly successful vehicle marketing tool," Tim Evans, energy analyst for Citi Futures Perspective in New York, told Reuters.

"But you would need a microscope to see the demand impact for gasoline from this program because it involves a relatively small number of vehicles."

Indeed, even if the program is extended, analysts estimate it would only curb the nation's daily oil consumption by about 0.05 percent, or between 4,000 and 5,000 barrels per day.

That projection assumes 250,000 "clunkers" with an average fuel efficiency of 15 mpg are exchanged for vehicles with an average fuel efficiency of 25 mpg, and travel 10,000 miles per year.

"Unless they significantly increase it, I don't think the program as it is right now is big enough to have an impact," Tradition Energy analyst Gene McGillian told Reuters.

The U.S. Energy Information Administration (EIA), the Department of Energy's statistical arm, said it is not planning to change its short-term outlook as a result of the program.

"The impact of this is right now overwhelmed by the uncertainties we're seeing in the economy," said EIA oil economist Tancred Lidderdale.

Demand for gasoline in the U.S. has already contracted for the first time since 1991 as a result of the recession.  Experts project the slowdown could persist through 2010.

On its own, the "cash for clunkers" program is not likely to impact U.S. gasoline demand in a significant way, but experts note that it comes along with a broader drive toward efficiency.

"It is part of a larger trend toward increased fuel efficiency whether you look at that in terms of CAFE standards or consumer preference," Evans said.

"It is all pointing in the same direction where the U.S. is going to become more efficient in its transportation use of fuel."

The House of Representatives voted on Friday to approve an additional $2 billion for the program. The bill was passed on a vote of 316-109.