Market change threatens to undermine important work starting in the US on vehicle fuel economy and greenhouse-gas (GHG) emissions. The gasoline market has defied expectations in place when Congress created corporate average fuel economy (CAFE) standards a generation ago. It probably will defy expectations underlying decisions made now.
Last month, the Environmental Protection Agency and National Highway Traffic Safety Administration (NHTSA) published technical documents launching a midterm evaluation of standards for model-year 2022-25 light-duty vehicles. A crucial question, raised in an OGJ article earlier this year, is the extent to which the agencies account for gasoline-market changes that have occurred since CAFE regulation began (OGJ, Apr. 4, 2016, p. 24). Just as important, however speculative, is whether they will acknowledge further changes likely in the next few years.
Assessing progress
CAFE standards, established in 1975 in response to the Arab oil embargo of 1973-74, have been combined with control of GHG emissions for regulation under a combined metric expressed as miles per gallon. Regulation born out of concern for fuel supply thus has evolved to accommodate concern about climate change. With gasoline lately abundant and priced low enough to revive demand growth, GHG control is the dominant concern—certainly of agencies in the Obama administration.
EPA committed to the midterm evaluation of progress toward MY 2022-25 goals when it issued the final rule for light-duty vehicles in 2012. It, NHTSA, and the California Air Resource Board are coordinating the work and prepared the technical assessment of progress toward a fleet average of 54.5 mpg in 2025, the mileage EPA determined would be necessary to meet emission goals wholly through fuel-economy improvements.
In comments for the midterm evaluation, the Alliance of Automobile Manufacturers put the challenge in useful perspective. Government targets, the group said, soon might outrun recent gains in vehicle fuel economy. Meeting the MY 2025 target requires the average vehicle to be more efficient than some current hybrids. “Real-world, holistic modeling predicts up to 47% of the US car fleet will need to be as efficient as modern hybrids,” the group asserted. Among its suggestions are recognition of “the higher level of electrified vehicles needed to meet future standards” and consideration of “how lower fuel prices impact consumer buying decisions and the standards’ achievability.”
The problem is consumer preference for light trucks, which becomes especially strong when gasoline prices are low. So an economic dilemma looms. Meeting CAFE and GHG emission targets requires accelerated electric-vehicles sales, which will boost growth in demand for electricity, the cost of which will be increasing as requirements expand for power from renewable sources. Electric cars will be expensive to buy and costly to operate.
At the same time, if current trends persist, the price of gasoline will be quite low by comparison. Part of the reason is obvious: a swing by the oil market from scarcity to abundance with the emergence of supply from unconventional reservoirs. Less noticed is a surge of gasoline feedstock accompanying growth in production of natural gas.
A liquids surge
As has been noted here before, the supply of natural gas liquids from gas plants is set to surge—perhaps by 5.7 million b/d during 2014-21, according to the late Al Troner of Asia Pacific Energy Consulting (OGJ, June 13, 2016, p. 17). One effect will be chronically plentiful naphtha, which will moderate the price of gasoline. This will happen partly because mandated increases in electricity from solar and wind will lift demand for natural gas in back-up generators.
Regulation and buying patterns sales thus indicate the need for electric-vehicle sales above current expectations even as regulation raises the costs of electricity while helping to suppress gasoline prices. Contradictory forces such as these are not the ingredients of regulatory success. A midterm evaluation of progress toward vehicle-efficiency and emission goals should be an opportunity to align regulation with realities of a market that seldom behaves as regulators wish it would.