“We Can Make the Cars, but Will People Buy Them?” Or: The State Cannot Mandate Average Fuel Efficiency Standards

The Obama administration proposes to raise fuel efficiency to an average of 56.2. miles per gallon by 2025, putting the U.S. on par with Europe. If achieved, average 2025 fuel efficiency would double its current level. Supporters claim the higher standards will save gasoline, reduce global warming, and cut oil imports.

The administration neglects one important fact: Europe achieves higher average fuel efficiency because its gas prices are more than twice ours. Europe’s astronomical gas prices, not EU standards, cause Europeans to purchase fuel-efficient cars.

For the U.S. to achieve average European fuel efficiency, we must have European-style gas prices!

Auto makers understand this point very well. Said one auto executive: “We can build these vehicles. The question is will consumers buy them?”

As long as we are allowed a free choice of vehicles, average fuel efficiency depends on the price of gas. Currently, gas averages $8 per gallon in Europe. In the U.S., it is slightly under $4 per gallon, and we think that is very high.  Europeans have had to pay more than twice what we pay in the United States for gas for a very long time. Their purchases of fuel-efficient cars reflect the higher gas prices.

Average mpg equals the share of large cars times their mpg plus the share of small cars times their mpg. As long as US gas is cheap relative to Europe, we’ll purchase larger cars and have lower average mpg, even if we are given exactly the same choice of cars.

As far as I see it, we can achieve European average mpg by 2025 in three ways:

1)      Raise our gas prices to European levels, which would be more than a doubling from today’s high prices.

2)      Take away freedom of choice by outlawing certain low-efficiency vehicles.

3)      Bribe people to buy fuel efficient automobiles by means of subsidies and other incentives paid for by taxpayers and penalize purchasers of low-efficiency vehicles by higher taxes and other penalties.

As I write this piece I am sitting outdoors at a Starbucks in Menlo Park, California waiting for my wife to waive to me that she has finished shopping at Safeway across the way.  She can see me and I her only if non-SUVs are parked curbside. We do this every week, and I must report it is a rare occasion when our view is not blocked by a solid row of SUVs.

To rephrase the auto executive: We can make them but we can’t force people to buy them, even in Northern California.