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US auto industry could boost profits with higher mileage standards

05.01.2011  |  Thinnes, Billy,  Hydrocarbon Processing Staff, Houston, TX


As the US ramps up vehicle fuel efficiency standards, new reports from Citi Investment Research, Ceres and longtime independent industry experts conclude that US automakers will be more profitable at a fleet-wide 42 miles per gallon (mpg) average in 2020 (the strictest standard now proposed for that year and one seen as eminently achievable) and that by 2015 more than one in 20 cars sold in the US will be hybrid, plug-in or full electric vehicles (EVs).

The two new reports were produced by Citi and Ceres’ Investor Network on Climate Risk in conjunction with the University of Michigan Transportation Research Institute, Baum and Associates and Meszler Engineering Services.

Fuel economy.

The fuel economy analysis evaluates the potential impact that changes to the US Corporate Average Fuel Economy (CAFE) and greenhouse gas (GHG) emissions standards may have on the auto industry in 2020. Federal and California state agencies tasked with developing these standards are expected to send their recommendations to the White House as early as this month.

Stronger mileage and GHG standards will boost variable profits and sales in 2020 for the auto industry worldwide, with the Detroit 3 (General Motors, Ford and Chrysler) seeing the biggest financial benefits. The Detroit 3’s variable profit gains would garner more than half of all increased profits.

The US electric vehicle industry is already robust and viable, and will grow further under strong standards and other government policies that will boost demand for electric and plug-in electric cars.

The 42-mpg standard by 2020 is consistent with a 6% annual mileage improvement, starting in 2017, that would boost fleet mileage to 62 mpg by 2025 (Fig. 2). In addition to increasing profits, these goals are eminently achievable technologically and cost-effective.

“Our research indicates that increasing industry average fuel economy to 42 miles per gallon by 2020 could raise industry variable profit by $9.1 billion, or 8%,” said Walter McManus, an economist at the University of Michigan Transportation Research Institute and director of the Automotive Analysis Group.


Dan Meszler of Meszler Engineering Services provided estimates of vehicle technology costs and fuel economy impacts for the CAFE study.

“Technology exists to address a number of continuing inefficiencies associated with internal combustion engines,” Mr. Meszler said. “Between now and 2020, much of this technology is expected to mature, so that a 2020 CAFE requirement of 42 mpg should produce consumer savings starting at gas prices of $2 per gallon. Since current and expected future gasoline prices far exceed that price, these technology-driven fuel savings are extremely cost effective and indicate that a 42-mpg CAFE program will not only reduce petroleum imports, but save consumers money.”

In May 2010, President Obama directed the US Environmental Protection Agency and the National Highway Transportation Safety Administration to work with California to develop the next phase of the nationwide CAFE mileage standards and GHG emissions limits for model years 2017–2025. The agencies are considering a range of standards representing an annual decrease in carbon-dioxide (CO2) emissions of 3%–6%, which translates to a range of 47 mpg to 62 mpg in 2025. The agencies’ recommendation appear headed for the White House sometime this month.

Tougher fuel economy standards will have positive implications for sales units and variable profits for the auto industry in general, especially US automakers. The report assumes an industry-wide standard in 2020 of 42 mpg (a 6% improvement per year). Under this scenario, the Detroit 3 could see variable profits jumping 8% globally in 2020 globally. HP 

  Fig. 2. Marginal fuel economy cost in 2020 by CAFE level.

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