America's Stalled Fuel Efficiency

Unfortunately, when it comes to increasing fuel efficiency --something a majority of Americans favor -- Detroit is stuck in reverse, writes William O'Keefe

Published: 29-Aug-2006

Crude oil prices hover at historic highs. Consumers face price shock at local gasoline stations. And politicians in Washington scramble to respond. The latest Capitol Hill darling is ethanol, which supporters claim it will reduce dependence on foreign oil -- because it is derived from corn -- and also combat global warming.

Surprisingly, Detroit's big three automakers also are going along for the ride. They are promoting production of "flex-fuel" vehicles, which run on ethanol, as a solution that could lower gas prices and help the environment.

Through a clever combination of marketing and gimmickry that would make P.T. Barnum blush, domestic automakers claim to be "green" while diverting attention away from the real issue: A federal tax loophole is creating an artificial market for ethanol, while stifling development of new technologies by automakers that would put more fuel efficient vehicles on the road.

Last year's energy legislation mandated that ethanol use in gasoline be increased from roughly 3 billion gallons annually to 7.5 billion by 2012. Recent problems with gasoline availability and price spikes can be traced directly to the shift to ethanol. As a result of this mandate, the price of ethanol has increased from about $1.25 per gallon this spring to almost $3 now.

Once the ethanol mandate was in place, along with its $2 billion annual subsidy, so-called energy independence advocates stepped up the campaign to significantly increase ethanol's use in gasoline from 10 to 85 percent, a blend called E-85.

Domestic automakers have hopped aboard this campaign by pledging to rapidly increase production of E-85 capable vehicles. There now are about 5 million so-called flexible fuel vehicles on the road, but with a total fleet of more than 250 million, automakers see a huge potential market. And they are lobbying Congress to compel refiners to produce and market this fuel in order to spur sales, promising to double production to 2 million vehicles annually if enough E-85 is available.

Automotive and fuel experts, though, know the technology for large scale, cost effective ethanol production is at least a decade or more in the future.

Currently, most ethanol in the United States is made from corn. Despite a subsidy of 51 cents per gallon in place for decades, it only represents about 3 percent of the gasoline pool. The National Corn Growers Association, an ethanol advocate, estimates that by 2015 ethanol production will be about 18 billion gallons. But because ethanol contains less energy than gasoline, that amounts to about 11 billion gallons of gasoline saved -- less than 7 percent of the projected gasoline supply.

And, at what a price? Ethanol costs about $4 per gallon on a gasoline equivalent basis even with the 51-cent per gallon subsidy.

So, the future of ethanol can't depend on corn. New technology must be developed to convert all forms of biomass -- from agricultural to lawn to timber waste -- into fuel. But even if significant technical and economic barriers are overcome, an extensive evaluation by the Agriculture Department has concluded biomass ethanol potential would not exceed one-third of the demand for transportation fuel several decades from now.

So why are the domestic automakers pushing E-85 so aggressively? Well, like politicians, they want to look responsive to the public's concerns about high gasoline prices and appease environmental advocates. Call this marketing.

More pragmatically, they are taking advantage of a loophole in federal corporate average fuel economy standards. CAFE gives them mileage credits for alternative fuel capable vehicles even if they never use a drop of ethanol. Call this a gimmick. It is pushed by bamboozling consumers who might buy E-85 vehicles into thinking they would get better mileage, reduce oil imports and help the environment. Instead, it would only saddle them with $5 per gallon gasoline equivalent fuel cost while awaiting a technological breakthrough, likely decades away.

There's a better answer. The National Academy of Sciences in 2002 concluded vehicle mpg could be increased 20 percent or more with more readily available technologies. Japanese auto manufacturers seem to understand this, and are increasing the availability of higher-mileage vehicles and hybrids that combine electric and gasoline engines.

Automotive experts and consumers view hybrid technology as one way forward. John Heywood of the Massachusetts Institute of Technology sees a bright future for hybrids as technology improves and manufacturing costs decline. And the head of Toyota's North American division recently said the company "sold more U.S. hybrids so far this year than Cadillac, Buick or Mercedes-Benz has sold cars."

But domestic automakers are going in another direction, promoting ethanol use while conceding the lead on developing automobiles that get dramatically better fuel economy. Unfortunately, when it comes to increasing fuel efficiency -- something a majority of Americans favor, Detroit is stuck in reverse.

William O'Keefe is president of Solutions Consulting Inc. and has been executive vice president and chief operating officer of the American Petroleum Institute.

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