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Sunday, June 24, 2007

Whiffing On Energy

The Senate passed their "energy bill" this week, which does little to ween us off of foreign oil and gas, should increase inflation significantly, and will limit consumer choice. Of course it also has them all slapping each other on the back for a job well done.

The bill passed in the Senate raises fuel efficiency standards for all cars, light trucks, and SUV's to a "fleetwide average" of 35 mpg by 2020. The (formerly Big) three domestic automakers fought this one, and rightfully so on one count, putting trucks in the same category as cars. The idea of actually raising the standards isn't a bad one. The US producers have lagged the rest of the world for 3 decades on fuel economy.

How will this limit your choices? Fleetwide averages use the mileage and sales volume of every model built , and average the milage of them all.

Take Ford as an example, the F-150 doesn't meet the new CAFE standard, but is Ford's biggest seller. The Chevy Silverado/GMC Sierra are the biggest selling pick up model around (when combined), and also fail to meet the standard. Under current rules they are in a separate category from passenger vehicles, with a lower fuel economy standard. That makes sense, they have a different use than passenger vehicles.

Because in both cases the number of trucks sold skew the CAFE data horribly the consumer is going to end up with a smaller choice of trucks and probably very few intermediate cars to chose from. In other words you can get a truck, or an econo box but not much else in just a few years.

The other option for the automakers is to eliminate "half ton" pickups, like the F-150 and GMC 1500's. Since they are considered "light trucks", with less than a GVWR of 8,500 lbs they will count against the new CAFE standards. However, the GMC 2500 and Ford F-250's don't count against the standard, so by increasing sales of them (by making other options unavailable) you raise your standard by default.

The other effect of this is of course on the profits of those automakers. Ford, GM, and Chysler all make their actual money on the truck and SUV lines, basically breaking even on the smaller cars that they have to increase the numbers of, unless they remove some trucks from the lineup.

Why doesn't this reduce foriegn oil dependency? Well, it might in the long term, when the full CAFE standards are in effect, and that is debateable based on how they meet the standards. In the short term, since the "energy bill" really contains no new domestic oil or gas production, we still have to get it from somewhere.

The bill also contains provisions making coal less attractive as a source of electricity. While it encourages renewable resources, they aren't efficient enough to meet increasing demands. That means more natural gas fired power plants, but we aren't allowing for increased domestic production of that resource. Watch your home heating bill go up because of that one.

The source of inflation is already being felt in food prices, it's ethanol. The Senate bill mandates a 7 fold increase in production of ethanol by 2020. The problem with this is of course corn prices, which are predicted to hit an all time high of $6 per bushel this year. For every bushel of corn diverted to ethanol you have to find a replacement for all of it's other uses, or find land to grow more corn on. Mexico has already seen up to 50% increases in the price of corn tortillas due to the amount of corn they've diverted to ethanol.

Brazil used to get derided for clear cutting rain forests for beef production. Now they do it to grow corn and saw grass for ethanol production. What forests should we get rid of to increase our ethanol output?

Technorati Tags: CAFE Standards, Energy, Oil, Gas, Vehicles, Gas Mileage, coal

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