Impact of Trump’s Plan to Roll Back Fuel Economy Standards

April 3, 2018

As expected, the Trump Administration has announced its intention to weaken the fuel economy standards put in place during Barack Obama’s presidency to increase the fuel efficiency of new automobiles and trucks sold in the U.S. The fuel economy regulations were touted by Obama Administration officials as essential to improve energy security and reduce greenhouse gas emissions from the transportation sector.

The decision to dismantle this program has been justified by the U.S. Environmental Protection Agency Administrator Scott Pruitt as providing a better balance between the nation’s economic and environmental policy objectives. Although he did not offer new fuel economy standards, Pruitt said that “what was done in 2011 and 12, as we evaluate it now, is not appropriate going forward.

Simply put, what the Trump Administration has done is roll back requirements that future automobiles meet stricter fuel economy standards. The rules that Trump and Pruitt seek to dilute, called Corporate Average Fuel Economy (CAFE) standards, require manufacturers of vehicles offered for sale in the U.S. to achieve an average fuel economy of 54.5 miles per gallon (mpg) over the entirety of the inventory of new vehicles by 2025.

The critical feature of CAFE is that it is calculated by averaging the fuel economy of all the vehicles produced by an auto manufacturer. This approach allows vehicle manufacturers to make some super fuel-efficient models and some more fuel hungry products, as long as the average fuel economy of all the vehicles they sell meets the fuel efficiency target.

Simply put, what the Trump Administration has done is roll back requirements that future automobiles meet stricter fuel economy requirements.

Fuel Economy Standards Borne out of America’s Addiction to Oil

The CAFE program was created by Congress in 1975 and went in to effect in 1978. The purpose of the fuel economy standards program was to reduce oil consumption by increasing the fuel economy of automobiles and light trucks. It is worth noting that the CAFE program originated as a response to lawmakers’ concerns that the U.S. was too dependent on foreign sources of transportation fuel. When the program was created, U.S. oil production was plummeting and our ever-growing appetite for petroleum had emerged as a serious threat to our national security.

The adverse impacts of the nation’s addiction to oil has been demonstrated time and again over the last 45 years, beginning in October 1973 when the Organization of Petroleum Exporting Countries (OPEC) embargoed the sale of their oil to the U.S. in retaliation for American support of Israel during the Yom Kippur War.

The U.S. economy was rocked again in 1979 when the Iran Hostage Crisis prompted instability and dislocation in the flow of petroleum from the Persian Gulf. The importance of maintaining American’s access to foreign sources of oil was again put on display in the early 1990s when the U.S. went to war with Iraq over Saddam Hussein’s invasion of oil-rich Kuwait.

Increased Energy Security & Emission Reductions: A Win-Win

The importance of enhancing the nation’s energy security was one of the primary reasons that the Obama administration used leverage gained from the $80 billion auto industry bailout after the Great Recession of 2008 to compel U.S. automakers to accept stringent new requirements for increased fuel economy standards.

This agreement on fuel standards represents the single most important step we’ve ever taken as a nation to reduce our dependence on foreign oil,” said President Obama when the deal was struck with auto makers in July of 2011 on how the new fuel economy standards would be achieved.

Supporters of the deal claimed that, over the life of the vehicles impacted, U.S. car owners would reduce their fuel use by 12 billion barrels of oil, save $1.7 trillion in reduced fuel costs, and cut more than 6 billion metric tons of carbon dioxide emissions—roughly the same amount of greenhouse gases that the U.S. emits in a year.

Illusion of Energy Stability Created by Low Fuel Prices

Given President Trump’s antipathy toward public policy to reduce emissions of greenhouse gases, perhaps the inclusion of the climate protection benefits as a key justification for the 2011 CAFE regulations was one of the reasons his Administration is now moving to gut the regulation. Even more likely is the widespread perception that improving fuel economy is not as important a public policy goal in 2018 as it was in 2011.

“This agreement on fuel standards represents the single most important step we’ve ever taken as a nation to reduce our dependence on foreign oil,” said President Obama when the deal was struck with auto makers in July of 2011.

When President Trump announced his intention to revisit the CAFE program and fuel economy standards in March 2017, the average price of a gallon of gasoline was $1.10 less than it was in July 2011 when then President Obama announced the historic agreement with 13 automakers.

Lower fuel prices have, once again, lulled the public, lawmakers and auto manufactures in to a false sense of security. This concept has multiple precedents. The illusion of energy stability brought about by cheap oil has always been dashed on the jagged rocks of reality. There is no reason to believe that this time will be any different.

What is more, in spite of advances in the nation’s ability to exploit our own fossil fuel resources and the Trump Administration’s call for the U.S. to move toward “energy dominance”, the U.S. is still dangerously dependent on foreign sources of petroleum.

U.S. petroleum production has grown dramatically over the last 10 years, largely as a result of unconventional extraction technologies (commonly known as hydrofracturing). This has led to a misplaced and misinformed perception that the nation is close to energy independence.

The facts, however, belie this delusion. The country still imports most of our petroleum habit. In 2017, the U.S. consumed nearly 20 million barrels of oil per day (19.877 million/day [mbd]) and produced only 9.3 million mbd. Thus, in 2017 the U.S. imported over 53% of the petroleum and petroleum products that we consumed.

The illusion of energy stability brought about by cheap oil has always been dashed on the jagged rocks of reality.

In 2018, the USEIA projects that the U.S. will beat its prior top oil production year (1970 – when the U.S. produced oil at a rate of 9.6 mbd) by growing our petroleum production capacity to 10.7 mbd. The energy agency projects that U.S. oil production will continue to grow, but will never top more than 12 mbd. In the meantime, U.S. petroleum consumption continues to grow, rising and average of 1.4% each of the last five years. Even with record oil production, the U.S. will still be alarmingly dependent on foreign sources for the next several decades, particularly if we abandon the fuel efficiency objectives put in place during the Obama era.

Thus, the U.S. remains extremely vulnerable to the volatility, intrigue and political machinations of the international oil market. Over 30% of the oil that we import comes from OPEC nations. In addition, the U.S. relies on oil from Russia, who is not a member of OPEC – in 2017 the U.S. imported over 140 million barrels of oil from our geopolitical foe. Therefore, it is clear that the primary national energy security rationale for a robust and aggressive U.S. program to reduce our petroleum consumption is as important today as any time in the last forty years.

Cheap Foreign Oil Led to a Demand for Fuel Inefficient SUVs

Why is the U.S. nearly as dependent on foreign oil today as we were in the mid-1980s? In the summer of 2014, Saudi Arabia decided to flood the market with petroleum in a vain effort to drive unconventional U.S. oil producers out of business. This cut the cost of fuel at the pump by about half by January 2017, and created a renewed consumer demand for fuel inefficient SUVs.

Even with record oil production, the U.S. will still be alarmingly dependent on foreign sources for the next several decades, particularly if we abandon the fuel efficiency objectives put in place during the Obama era.

The turnaround in the popularity of SUVs and crossover vehicles–which are heavier, more powerful and less fuel efficient that sedans–has stymied the progress that was being made not only in the U.S., but around the world in pushing for a more fuel-efficient transportation sector.

Looking To Energy Independence

This is not only bad for the climate, but once again exposes the U.S. to the unpredictable whims and unfriendly stratagems of nations not terribly interested in protecting Americans from the adverse impacts of high oil prices. Moreover, increased global instability could easily result in an unexpected conflict that could, overnight, cut the world off from major oil supplies.

How quickly we forget the high gasoline and diesel prices that drove U.S. and international car buyer’s interest in high mileage, fuel sipping sedans, hybrids and electric vehicles. It was only as recent as September 2014 when gasoline prices averaged over $3.50/gallon nationally; In April 2012, average prices across the U.S. almost topped $4/gallon.

Reducing our consumption of fossil fuels by all means, including mandated improvements in vehicle fuel efficiency, remains a national security imperative. The Trump Administration would be well advised to remember that good times never last, particularly when we are talking about oil, and the CAFE program and fuel economy standards can and should be a central element of any strategy to move the U.S. toward energy independence, let alone energy dominance.