The US Fixes The Car Industry And Plans To Break It Again

GM and Chrysler will pay the government back their tens of billions of dollars in loans by 2016 or go bust in the attempt. That is the year that the The White House wants car companies to have their fleets’ fuel efficiencies at 35.5 millions per gallon. The Administration says this will cut fuel consumption by 40%  and cause the economy to realize $130 billion in benefits

There is no way that The White House can prove its figures or critics can disprove them. There are tens of millions of cars on the road and gasoline prices could be $50 a gallon in 2016. The number of variables that go into creating a forecast of financial data six years from now is infinite.

One thing that is certain is that large improvements in fuel efficiency cost the car companies money. This has been true in the past. Analysts say the cost to the industry will be $52 billion for retooling engines and vehicles, and will raise the price of cars by $1,000 each. At least these numbers are based on

a long history of the costs car companies must pay to meet new federal requirements.

The Detroit Free Press reported that “This is the most aggressive fuel economy standard ever set in the United Sates for cars and trucks,” said U.S. Transportation Secretary Ray LaHood. The more aggressive the program, probably the higher the costs.

The American car market is in the very early stages of a recovery. In the last two years, domestic sales were only a little over 10 million vehicles a year. This compares to 16 million in 2005. The expectations for 2010 are for about 12 million cars and light trucks to be sold in US. The modest improvement might have yielded the industry some fairly good profits, but sales incentives that average better than $3,000 per car will hurt the sector’s bottom line considerably.

The environmental movement has applauded the decision to create new fuel-efficiency standards. The White House obviously thinks they are necessary to improve what people pay for a tank of gas. The standards may help decrease US dependence on foreign oil. But, the car industry does not have an extra $52 billion sitting on its “balance sheet” and the financial pressure to meet the standards will be especially hard for weak companies such as Chrysler.

Fuel standards may help consumers and the national economy, but they will leave a still-struggling industry with one more bill to pay.

Douglas A. McIntyre