Business Week Online  [Printer-friendly version]
December 19, 2007


By David Kiley

The Energy Independence & Security Act, passed by the U.S. Senate last
week and expected to be signed by the White House as early as this
week [it was signed Dec. 19 -- Rachel's editors], is a step in the
right direction to reduce America's addiction to fossil fuels. But
those who are suspicious of a bill green-lighted by both houses of
Congress, the auto and oil industries, and an oil-patch White House
are probably right to withhold applause.

The main focus of the bill is to raise the fuel-economy standards for
the auto industry to 35 mpg by 2020, 10 mpg beyond where it is now.
The measure is estimated to save the U.S. about 1.1 million barrels of
oil per day by the time the standard is reached -- 13 years from now.
Some experts estimate that depending on how expensive oil becomes,
U.S. consumers could save $22 billion a year with 200 million fewer
tons of greenhouse gas emissions.

The increase in fuel economy is no small mission. Consider that today,
Ford and Chrysler do not make a single vehicle for the U.S. that tops
35 mpg. But two things to keep in perspective about this new fuel-
economy standard: The European vehicle fleet today already achieves
more than 40 mpg. Remember the words of former Defense Secretary
Donald Rumsfeld when France and Germany would not assist in the Iraq
War? He called those countries "Old Europe." Which part of the world
looks old now?

Vehicular Trade-offs

To achieve the higher fuel economy, General Motors, Ford, and Chrysler
will have to sell more fuel-efficient cars than they have been
selling, to offset the trucks and SUVs they will continue to sell. But
here is the wild card: Americans continue to prefer larger vehicles to
small ones. True, an increasing number of people are trading away from
gas-thirsty, truck-based SUVs such as the Ford Explorer and Chevy
TrailBlazer, to car-based SUVs. But this is not a huge sacrifice by

If an Explorer owner, for example, switches to a Ford Edge crossover,
he or she has gone from a vehicle that gets 13 mpg city/18 highway to
one that gets 16 city/22 highway. That's about a 22% increase in fuel-
economy performance -- but pardon me if the actual numbers don't feel
like a moon shot. That kind of trade-off won't get automakers to 35

But consider the transformation of the fleet when you consider a
switch to clean diesel and full hybrids. A Dodge minivan gets about
18-19 mpg in combined city/highway fuel economy. General Motors sells
a smaller minivan in Europe, the Zafira, whose fuel economy with a gas
engine is about 27 mpg. The diesel version, though, gets 41 mpg. While
most Americans still get anxious about the idea of diesel, I just
don't hear many Europeans complaining about the diesel engine or the
smaller vehicle, which has three rows of seats.

Toyota's Prius, a legitimate alternative to a Toyota Camry or Ford
Fusion, gets nearly 50 mpg depending on real-world driving use. And
truthfully, a lot of Edge owners would get along fine with a Prius as
well, or even a Ford Escape Hybrid, which gets around 30 mpg.

Incentives and Diesel Education

What's missing from this energy bill are sufficient carrots and sticks
for automakers, oil companies, and consumers to make this transition
happen. "I honestly don't know how we are supposed to reach the 35-mpg
standard," says GM Vice-Chairman Robert Lutz. "I'm not sure anyone

GM is banking on increasing the fuel economy of all its vehicles, plus
an influx of plug-in cars whose fuel economy is yet to be rated. It
will be an interesting political battle to see how plug-ins are
counted toward each company's CAFE [corporate average fuel economy]
rating. Also missing from the energy bill are continued incentives for
consumers, still wary or unsure about hybrids and diesels, to keep
buying them. Diesels, in fact, were never part of the incentive
program of tax credits allowed to buyers of Toyota Priuses and Ford
Escape Hybrids, which phase out after a certain number of those
vehicles are sold.

Clean diesel fuel, which is available now in the U.S., could be a huge
game-changer in the U.S., as it has been in Europe. But one of the
sticking points for automakers is the technology to meet U.S. and
California emissions requirements, as well as the lack of interest by
consumers, most of whom don't understand diesel engines.

Consider a measure that would have made a lot of sense in the energy
bill, but got no conversation in Washington: What if the U.S.
government allocated $1 billion to promote clean diesel and educate
the public. The Feds have done this previously with ad campaigns to
promote, for example, "Just Say No" to drugs. There are still no peer-
reviewed papers showing those ads deter kids from using drugs. None.
But it is a fair assumption that, with Europe as a model, $1 billion
to educate people about clean diesel would actually have some impact.

Something to Talk About

The energy bill was passed by the Senate last week after it stripped
out tax hikes on oil companies and preserved huge ethanol subsidies to
agribusiness. And it was done just as the U.S. was looking especially
bad at a 190-nation conference that convened on the Indonesian island
of Bali to hammer out an accord to fight global warming in the next
decade. The U.S., the world's biggest carbon producer, had been
fighting participation in the agreement. Said House Speaker Nancy
Pelosi [D-Calif.] about the bill: "It sends a message to world leaders
meeting in Bali that the United States is serious about addressing
global warming."

Here is a prediction. This energy bill, even after it's signed by
President Bush, will be revisited in the next few years, amended,
tweaked, and ultimately made even less effective than it is now. And
here is another prediction. Unless American consumers are led by their
government to a new energy age, which will require them to make
sacrifices and change their thinking about how they power their cars,
houses, and planes, the only change will be increased prices of
automobiles, home heating bills, and plane tickets. That's because too
many consumers will decide they'd rather have the costs of those
things go up as automakers, utility companies, and airlines end up
paying fines instead of complying with the new laws.

There is, as we know, a wide-open and raucous Presidential election
under way. The idea of "shared sacrifice" has only been occasionally
uttered by a few of the candidates -- notably New Mexico Governor Bill
Richardson and Illinois Senator Barack Obama, both Democrats. But
talking to Iowans, New Hampshirites, and South Carolinians about
driving fewer pickups and SUVs "doesn't focus-group well," a
Democratic campaign strategist told me.

"Right now," says the strategist, "the energy bill has something for
everyone to talk about." And that, it seems, was the point all along.