U.S. Asks for Higher MPG as Oil Prices Rise

The Obama administration has begun to push the car industry to double the average MPG each company’s fleet gets by 2025. That would push the number to 54.5 MPG, a figure unimaginable based on today’s energy technology. And fossil fuel based engines are unlikely to improve fuel efficiency enough to reach the hurdle, especially if oil remains above $100 a barrel. That means technology that is used in cars on a very limited basis will be the key to higher mileage in the future.

It could be argued that it is unreasonable to say that a $100 oil price today can be used as a predictor of what oil prices will be in 2025. But the price of a barrel of crude probably will be much higher. Some analysts predict oil prices will be well above $200 by then. Oil expert Charles T. Maxwell recently told Barron’s he expects oil to cost $300 a barrel by 2020. The figure may seem wild and unsupportable. A more reliable source, the U.S. Energy Information Administration, predicts crude will be only $108 a barrel nine years from now. A number of brokerage firms have targets as high as $160 for the end of the decade. Very few experts expect oil prices to drop sharply. Global supply is unlikely to increase and may drop if new large fields are not discovered. Demand from the developing world will increase sharply as manufacturing and consumer demand grows.

Alternative energy cars have shown mixed promise. Hybrids like the Prius have sold very well. However, much of the balance of the Toyota (NYSE: TM) fleet gets MPG of less than 30. High-end models like the Lexus have much worse gas mileage. Other manufacturers have tested alternative engines, but they have not sold well so far. General Motors (NYSE: GM) sells only a few thousand Chevy Volts a month.

Auto research firm JD Power recently predicted that hybrid and plug-in cars sales will make up less than 10% of new auto sales through 2016, based on its consumer polls. Consumers are wary about what alternative energy cars and light trucks will cost. They are  concerned also about the availability of alternative fuels.

The 2025 goal of 54.5 MPG for each major car company fleet may make for good public relations. And it may please environmentalists. But the industry will not be able to get there.

Douglas A. McIntyre