Impact of AEO estimates of Oil prices on proposed CAFE standards for light-trucks

Silly of me not to thought about this before, but buried deep inside Tuesday's WSJ was a short piece on how the significantly higher AEO estimates on oil prices could have important consequences on NHTSA's proposed light-truck CAFE standards.

...(EIA estimate) also raised its forecast for gasoline prices, a value that figures into the government's proposed new fuel-economy standards for trucks and SUVs. The toughest of those standards, for model-year 2011 vehicles, is based on gasoline prices of $1.51 to $1.58 a gallon beginning by 2008 from EIA's outlook last year. The outlook released yesterday bumps those prices to a range of $1.99 to $2.20 for the same time period.

Auto makers already were grumbling that proposed fuel-economy standards would be tough to meet. "The current proposals are a challenge," said Chris Preuss, spokesman for General Motors Corp. He declined to comment on the impact of even higher targets.

..."If they're going to be intellectually consistent with the methodology they proposed, they would have to set higher standards," said Eric Haxthausen, an economist with Environmental Defense, an environmental-advocacy group based in New York. His organization has tried to replicate the National Highway Traffic Safety Administration calculations and estimates that the new gas prices alone would bump up the targets by one mile a gallon.

This means that light-truck CAFE standards could be bumped up to around 24 or 24.5 mpg by 2010 (rough estimate for a schedule 22.7 mpg for 2008, 23.5 for 2009). This would further reduce the gap between light-truck CAFE standards and passenger car standards which are currently frozen at 27.5 mpg. Onus has been on the Congress for quite some time now to take up the issue of light-duty vehicle fuel use either though CAFE or other means.

In the mean time, car companies who have been betting on their fortunes on light-trucks (you know who they are) will see their profit margins sqeezed further unless they are able to pass on the costs to the consumers without a drop in sales. Combine this with possibility that we might see gasoline price spikes, like the one after KatRita, due to various reasons and the stage is set for a very turbulent couple of years in terms of auto sales.