Aggressive New CAFE Standards; The IC Empire Strikes Back

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John Petersen

Last Friday President Obama and executives from thirteen leading automakers gathered in Washington DC to announce an historic agreement to increase fleet-wide fuel economy standards for new cars and light trucks from 27.5 mpg for the 2011 model year to 54.5 mpg for the 2025 model year. While politicians frequently spin superlatives to describe mediocre results, I believe the President’s claim that the accord “represents the single most important step we’ve ever taken as a nation to reduce our dependence on foreign oil” is a refreshing example of political understatement. After three decades of demagoguery, debate, dithering and delay, meaningful policy change has finally arrived, and not a moment too soon.

The economic impact will be immense – a staggering $1.7 trillion in fuel cost savings that will flow directly to consumers. As those savings begin to work their way through the economy and kick-start secondary fiscal multiplier effects, the boost to GDP will be closer to $7 trillion. I believe Friday’s agreement will ultimately be seen as the biggest economic stimulus event in human history.

The following graph from a new White House report titled, “Driving Efficiency: Cutting Costs for Families at the Pump and Slashing Dependence on Oil” says it all.

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The most surprising aspect of this agreement isn’t the aggressive goals; it’s the fact that the auto industry has helped forge the goals and plans to achieve them by implementing “affordable technologies that are on the road today.” The new goals are not based on the electric dreams of a Tesla Motors (TSLA). They’re based on the automaker’s hard-nosed evaluation of the cumulative gains that can realistically be achieved with existing ICE technologies like engine downsizing, stop-start idle elimination, turbocharging, optimized cooling, low friction, direct fuel injection and variable valve timing.

Individually the fuel economy gains from advanced ICE technologies will only be baby steps toward energy independence. Collectively they’ll give American consumers passenger cars with lower well-to-wheels CO2 emissions than a 2012 Nissan (NSANY.PK) Leaf plugged into the typical wall socket. They’ll change the world without a budget busting paradigm shift.

In early July The Boston Consulting Group released a new report titled “Powering Autos to 2020; The Era of the Electric Car?” that evaluated the combined potential of baby-step fuel efficiency technologies and considered their likely impact on wildly expensive and impractical proposals to convert the world’s transportation infrastructure from liquid fuels to electricity. In the report BCG concluded that:

  • Conventional technologies have significant emissions-reduction potential, but OEMs will need to pull multiple levers simultaneously to meet emissions targets.
  • Advanced ICE technologies can reduce gasoline consumption by 40% at a cost to the consumer of $50 to $60 per percentage point of reduction – roughly half what BCG predicted three years ago.
  • Advanced ICE technologies are likely to become standard equipment worldwide during the next decade.
  • Electric cars will face stiff competition from ICE and will not be the preferred option for most consumers.
  • Battery costs will probably fall to about $9,600 per vehicle, but become increasingly uneconomic as the potential fuel savings per kWh of battery capacity plummets.
  • In addition to dismal economics, plug-ins will face substantial go-to-market challenges including battery durability concerns and the absence of adequate charging infrastructure.

In my view the BCG report is a must read for investors who want to profit from this fuel efficiency mega-trend and avoid heavy losses in vehicle electrification schemes that will become increasingly uneconomic over time. The fundamental flaw is simple. Today an EV with a fully charged 24 kWh battery pack can save a consumer the equivalent of 3 gallons of gas. By 2025, the savings will be closer to 1.5 gallons of gas. Even with falling battery prices the value proposition can only get more challenging with each passing year.

For the last couple years I’ve been cautioning investors that gee-whiz vehicle electrification technologies are transitory, a flash in the pan, and the biggest business opportunities in energy storage involve cheap, simple and effective baby-step technologies like stop-start idle elimination that will slash fuel consumption by 5% to 15% for a few hundred dollars. The BCG report and the newly announced fuel economy goals are yet another proof of that principle.

The future is all about getting more from less and has absolutely nothing to do with increasing consumption of one class of scarce natural resources in the name of conserving another.

While I can’t identify the component manufacturers that will thrive from the widespread implementation of advanced ICE technologies like turbocharging, direct fuel injection and variable valve timing, picking the winners in energy storage is easy. Johnson Controls (JCI) and Exide Technologies (XIDE) will be the first beneficiaries as automakers upgrade their electrical systems to withstand the strains of stop-start idle elimination. As stop-start systems become standard equipment worldwide and the inherent limits of current AGM battery technology become obvious, more powerful energy storage solutions from emerging technology developers like Maxwell Technologies (MXWL) and Axion Power International (AXPW.OB) will ascend to prominence if not dominance.

The new fuel efficiency standards are not an omen of doom for lithium-ion battery solutions from A123 Systems (AONE), Ener1 (HEV) and Valence Technologies (VLNC) which will no doubt gain a toehold among the 6% to 13% of consumers who say they’d purchase an environment-friendly car even if they had to pay a premium over the life of the vehicle. I’m just not certain how significant that toehold will be in light of the incontrovertible reality that less than 2% of consumers actually buy environment-friendly cars.

On balance I believe that survey-based uptake forecasts will be just another example of a painful lesson I learned in the biodiesel business – that individual buying decisions speak louder than surveys and the green in a consumer’s wallet always takes priority over the green in his cocktail party conversation.

For several years the mainstream media, financial press and sell-side analysts have been publishing irrationally optimistic stories and reports about the end of the ICE age and the dawn of a golden electric era. On Friday the Obama Administration and the automakers put the world on notice that IC Empire is striking back and plans to bury the now generation of electric wannabes like it has all of their predecessors.
< br> Disclosure: Author is a former director of Axion Power International (AXPW.OB) and holds a substantial long position in its common stock.


  1. John,
    As usual, while I agree with you that current electric cars are uneconomic for 95% of users, I think you underestimate their future appeal relative to ICEs.
    First, many of the technologies which will be used to improve the efficiency of ICE vehicles will also improve EVs. The most notable of these is downsizing and light-weighting, perhaps the most economic way to improve vehicle efficiency. As higher CAFE standards place more small and ultra-compact cars on the road, people will become more willing to drive smaller vehicles, and the economics of a small EV are a much greater improvement on the economics of a small ICE.
    Second, using your numbers, a 40% efficiency improvement for an ICE will cost $2200 ($55 per 1% improvement), with a commensurate decrease in fuel savings relative to an EV. But that $2200 will also erode the price advantage of ICEs by 23%. More efficient ICE’s will look better relative to EVs, but not 40% better.
    Third, you take no account for the likely rise in the price of oil over the next 15 years. I personally will be shocked if the US price of gasoline does not hit $10/gallon within the next 15 years. Electricity, on the other hand, should experience much more modest inflation, as there is a wide diversity of possible sources, many of which will be subject to inflation because of increasing commodity (including industrial metals) costs, but which will allow shifts to a reliance on those technologies which are subject to the least inflation.
    In short, the improved vehicle efficiency represented by the new CAFE standards is a good thing, but it will do little, if anything, to undermine the (far from assured) transition to electric vehicles.

  2. One other point is that the new standards will allow automakers to count EVs as using no fuel for the purposes of CAFE MPG calculations. This could easily hasten, rather than slow, the adoption of EVs.

  3. It’s going to be fascinating to see how it all plays out. I think increasing fuel economy will create massive headwinds for EVs because the difficult equilibrium between battery costs and fuel savings can only get more difficult over time. I think most consumers will choose a $2,200 premium over a $9,600 premium without giving the choice a second thought.
    For me the most exciting part of all this is credible action to slash oil imports and boost the domestic economy at the same time.
    The White House report doesn’t mention electric drive and the President’s remarks only used the word “electric” once. He did, however devote significant attention to increasing domestic oil production.
    I think we may be seeing the first subtle hints of a policy shift that’s long overdue.

  4. I’m not sure where I read the but about EVs counting for 0 gasoline use, so I might have that wrong, but I found this in the NYtimes:
    The system of credits has been devised to encourage new technology and better penetration of current fuel-saving equipment into the market.
    Sales of vehicles that run on electric batteries or fuel cells, for example, will be given more weight in the fleet average than normal gas-powered vehicles, even those with particularly efficient engines.
    Link to full article:

  5. No mention of the development of solar ink and the associated “plug and play” installation advantages. The combination of these 2 technologies alone will advance solar rooftop development for millions of citizens and small businesses. The fuel use = 0 (as well as the cost of fuel for the consumer once solar ROI happens). The MPG is infinite for EV’s, especially with the rapid advancement and development of swappable batteries (using solar charging). The projections for improvement in MPG are neanderthal and do not take into account technology advancements. Give the human race a little credit. They are not slugs.


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