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June 6, 2008

General Motors Shifts Gears, and Concedes the CAFE Debate


In the end, it was General Motors who settled the debate over fuel economy standards in the United States.


Responding to plummeting demand for the full-size trucks and sport-utility vehicles that prompted Detroit’s resurgence during the ’90s, GM announced this week that it is going to change its business model. It will no longer focus on trucks, and plans to close four plants that builds them – focusing instead on cars that burn gasoline more efficiently.


In doing so, the company was following the oldest rule in capitalism – supply must follow demand. American consumers had finally reached their breaking point when it comes to the cost of gasoline. It turns out that people’s patience expires when it hits about $3.50 a gallon, at least when it appears that it will stick around there for awhile.


The last couple of months have been incredibly savage for automakers, already in tatters from increased foreign competition. Perhaps nothing illustrated the Big Three’s woes more than when four foreign-built car models topped Ford’s F-series truck as the nation’s top selling model. It was a title Ford had held since 1991.


GM’s announced refocusing on smaller, more efficient cars means that the argument that Detroit’s automakers can’t meet rigorous Corporate Average Fuel Economy (CAFE) standards is now moot. Because CAFE focuses on fleet-wide standards, the contention of automakers has been that they can’t build the kinds of cars people are buying in ways that meet a high standard. There was something to that. People were buying as much car as they could afford, and fuel economy was not an issue.


Fuel economy is now an issue, and people are no longer buying big, inefficient vehicles. When GM shifts production away from inefficient vehicles to more efficient ones, their fleet-wide average – critical to meeting fuel economy standards – will rise without the company’s engineers lifting a finger.


This should be backdropped against the fact that the auto fleets in most European countries would meet the most rigorous economy standards suggested anywhere in the United States. They do that because the price of gasoline is so high in Europe.


It used to be, 10 years ago, that the automakers built highly efficient cars so they could help the Big Three meet their fuel efficiency standards. Because no one was buying them, they sat in the lot. These days, people are buying those cars, and dealers can’t keep them in stock.


The lots are filled with SUVs and full-sized trucks. People still occasionally buy them, but these days it’s because they need them. There’s good reason to think that what remains of demand will come from rental fleets, where people will go when they need a truck’s towing capabilities for individual jobs. For shorter trips and commuting to work, they’ll use an efficient, smaller car.


The danger to this, however, is volatility in the price of gasoline. There are predictions circulating that the price of oil reflects both a weak dollar and activity by speculators purchasing up oil futures.


Although the price of oil has been on a sustained upward slope, which suggests that if there is speculation going on, there isn’t much, it appears that at least the dollar is getting stronger. A stronger dollar means that the cost per gallon of gasoline will probably drop a little bit.


General Motors, at least, is banking on that the drop in price won’t be enough to overcome the deep shock the cost of gasoline has put Americans into. They are putting their money on efficiency, which is probably the safest, smartest bet there is these days.


© 2008 North Star Writers Group. May not be republished without permission.


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