If President Obama has his way, the average vehicle sold in the U.S. will get 35.5 miles per gallon by 2016 -- adding about $1,300 to its cost. What's the benefit? He thinks it will save 1.8 billion barrels of oil over the lifetime of the vehicles sold in the next five years -- equal to the U.S. imports from Saudi Arabia, Venezuela, Libya and Nigeria. And those more fuel efficient vehicles will cut carbon dioxide emissions by about one-third. Not only that, but there'll be 177 million fewer cars on the roads over the next 6.5 years.
This raises some interesting questions:
Are the mileage standards integral to his plan to auto industry turnaround?
No. The key to the turnaround plans is to cut these companies back to a profitable core. This means getting rid of unprofitable product lines and cutting back on excess production capacity and dealers. It also means writing new contracts with bondholders and unions.
But mileage standards are critical to Obama's environmental agenda and it looks like the auto companies are not complaining about them too much because they need government money to survive.
Also, since these standards will be applied to all companies, the auto companies perceive that the playing field is level. The key question is whether people will buy the more fuel efficient cars – particularly if they are more expensive to own and operate. If not, the government may need to provide tax incentives to get people to buy them.
Has Obama condemned U.S. automakers to being distributors of foreign-made cars?
No – Japanese auto makers build many of their cars in the U.S. There is no economic law that says that fuel efficient cars can't be made in the U.S. but U.S. companies will need to come up with new management methods to compete with their Japanese peers.
Is there a downside to the goal of energy independence (such as higher cost of living, stress for trading partners with oil-based economies)?
If we invent new energy technologies that make us energy independent then there is not likely to be a downside. But that will only work if the new technologies are cheaper and less polluting than oil and gas. As for stress for trading partners – Saudi Arabia and the other OPEC members – I am looking forward to the day when our lack of demand for their products eliminates the influence of their toxic values on the rest of the world (after all 12 of the 19 9/11 hijackers hailed from Saudi Arabia).
Why not adopt a gas tax instead?
A gas tax would make people drive less which would further damage the automobile industry along with tourism. It would lead to less air pollution though.
I think the best option is to create economic incentives for better, cheaper, less-polluting energy.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing.