Publications: Notes at the Margin

California Asserts Command over US Fuel Economy (July 29, 2019)


We begin with Woody Allen. Allen often used the word "sucker" in his films. The phrase "too bad, suckers" appeared in one, although I could not trace it. This week the phrase has been aimed at US refiners.


Refiners and oil producers thought they struck gold when the Trump administration announced its rollback of national fuel economy standards. Bloomberg’s Ari Natter and Jennifer Dlouhy wrote an article posted a year ago titled, "Big Oil Cheers Quietly as Trump Moves to Ease Auto Standards."[1] As the authors explained, "The proposal, released Thursday, would translate into an additional 500,000 barrels of U.S. oil demand per day by the early 2030s, about 2 to 3 percent of projected consumption, according to government calculations."


A related Bloomberg article published around the same time noted that the "Trump Cap on U.S. Auto Fuel Economy May Raise Prices at the Pump."[2] It also pronounced that US gasoline demand would not decline at the rate projected prior to the announcement.


The oil industry cheered quietly behind the scenes. Why not? The rule change would yield greater revenue. Natter and Dlouhy quoted a spokesperson from the American Fuel & Petrochemical Manufacturers trade association who was obviously gloating over the victory:


"We come from a free-market perspective, where we believe consumers should have a choice in their vehicles, and they can weigh all the appropriate factors—be it size, horsepower, utility, or fuel economy,"’ said Derrick Morgan, senior vice president of the group. "We trust individual consumers to make the right decisions; we don’t think Washington or Sacramento should be making all those determinations.’"


Sacramento, though, posed a problem. California (Sacramento is the state capital) enjoys a unique privilege in US environmental law because it had adopted several programs before the Clean Air Act was enacted. Its pioneering efforts led Congress to grant California the right to impose stricter rules where necessary. When the state announced it would set its own fuel economy standards, the Obama administration worked out a national compromise. It was this agreement that the Trump administration repealed. When California objected, Scott Prewitt, then the EPA’s administrator, sounded off:


"Cooperative federalism doesn’t mean that one state can dictate standards for the rest of the country. EPA will set a national standard for greenhouse gas emissions that allows auto manufacturers to make cars that people both want and can afford—while still expanding environmental and safety benefits of newer cars. It is in America’s best interest to have a national standard, and we look forward to partnering with all states, including California, as we work to finalize that standard."[3]


The auto industry, in contrast, lobbied hard for the EPA and California to find a middle ground. Industry officials were reportedly petrified that the US would promulgate national rules while California adopted its own. The fears were well-grounded. California is by far the largest vehicle market in the country. In addition, the Clean Air Act allows other states to follow California’s tougher standards. Currently, Colorado, Connecticut, Delaware, Maine, Maryland, Massachusetts, New Jersey, New Mexico, Oregon, Pennsylvania, Rhode Island, Vermont, and Washington are doing so.


The auto industry’s desperation is understandable. The "California" states account for thirty-three percent of the auto registrations and thirty-two percent of the nation’s truck registrations. Furthermore, California and the states following its example are generally the wealthier states. Their residents tend to buy the more profitable products. If California fought the lower standards, as it promised it would, the auto industry would face years of uncertainty and quite probably poor sales. Furthermore, firms that continued to sell vehicles in California (and the other states) that did not meet the state’s standards would risk being fined. As The New York Times' Coral Davenport explained,


.... automakers would have to demonstrate that the average mileage of all the cars they sell in California is much higher than in states like Utah, where the new Trump standard of about 37 miles per gallon would be in effect.[4]


The auto industry wanted to compromise. The oil industry did not. This week, California and four carmakers—Ford, Honda, VW, and BMW—announced their agreement on a set of standards the automakers would follow for the entire nation (and Canada). The pact gives the industry more time to meet the new standards and gives automakers extra compliance credits for selling electric vehicles.[5]


Other auto companies were looking to join the agreement at the end of the week, with Toyota and GM listed as likely to sign up first. Officials in the Trump administration responded to the news by calling the deal a stunt.[6]


The compromise is almost certainly not a stunt. The auto industry is global. Its leaders likely want as much uniformity in standards as possible. Given the pressures from other countries as well as the wealthier states in the US, the compromise negotiated with California is a clear win for the industry. Marathon Petroleum, in contrast, is the biggest loser, along with other independent refiners. As a December 2018 New York Times article explained, Marathon had done everything possible to push the administration to stick to its relaxation of the rules.[7]


More recently, the Times carried an article headlined, “Climate Change Denialists Dubbed Auto Makers the ‘Opposition’ in Fight over Trump’s Emissions Rollback.” The article detailed the effort by the Competitive Enterprise Institute (CEI) to push through the regulations, backed apparently by Marathon, despite the auto industry’s call for negotiations with California.


The latter’s officials clearly have a response for Marathon and the other oil companies that pushed to weaken fuel economy standards. They might even quote Woody Allen.


The decision by the auto industry to sue for peace with California environmentalists is part of a trend that has ominous implications for the oil industry writ large. Through their intransigence, Marathon, other refiners, and the CEI are putting the longer-term economic future of all oil producers, especially oil-exporting countries, at risk. Bluntly, Marathon’s “grubby, greedy grab” for short-term profits could rapidly accelerate the move away from oil. The auto industry, after all, is the primary source of Marathon’s sales. One would think the firm’s executives would be more thoughtful.


Marathon’s stupid attacks were also ill-timed because the auto industry is reeling from the long-term impact of "Dieselgate." For those who have forgotten, Dieselgate involved the use of "defeat devices," software in engines that manipulates exhaust emissions when a vehicle is on a test stand.[8] The California Air Resources Board commissioned a study from the International Council on Clean Transportation to measure discrepancies between US and European vehicle models. Engineers from West Virginia ran road tests on three European diesel vehicles and uncovered the devices. Their finding opened a Pandora’s box for the auto industry, leading to further investigations, large payments to states, and utter surrender by all carmakers to California. Oil has become "collateral damage" in this battle.[9]


Volkswagen has now "staked its future, to the tune of 80 billion euros ($91 billion), on being able to profitably mass produce electric vehicles."[10] VW moved to produce such vehicles following the Dieselgate catastrophe. As Reuters explained, the company seeks to regain the high ground with environmentalists by switching much of its future production to electric. The last VWs powered by gasoline or diesel will be produced in 2026.


The European Union has also adopted carbon emission standards that force automakers to sell more electric cars. William Boston wrote in The Wall Street Journal that "auto manufacturers are rushing to bring hundreds of new battery-electric and hybrid models to market by next year to meet the continent’s new targets on greenhouse-gas emissions from vehicles and avert potential fines of up to €33 billion ($37 billion)."[11]


Beginning in 2020, new vehicles sold in Europe must emit fewer than ninety-five grams of carbon dioxide per kilometer. The standard drops to eighty grams per kilometer in 2025 and sixty grams in 2030. Boston noted that the target is currently the world’s most ambitious. He added that the US fuel economy standard for a Toyota Camry-sized vehicle would have to be fifty-seven miles per gallon to meet the European standard of ninety-five grams per kilometer.


Firms in Europe are rushing to meet the CO2 emission limit by pushing more electric vehicles. The recent elections for the EU parliament almost assure these rules will not be relaxed. The consequence will be a decline in petroleum-based fuel use.


This risk could be increased as major metropolitan areas in Europe limit or ban the entry of vehicles powered by fossil fuels. A Bloomberg article presented a map indicating that by 2030 diesel vehicles will be banned from cities with populations totaling twenty-four million and that all fossil-fuel-powered vehicles will be banned from cities with populations totaling around thirty million, including London, Milan, and Rome.[12]


The trend will not likely reverse. The Trump administration’s failure to compromise with California on fuel economy will probably accelerate it. Historians may well come to see the deal reached last week not as "publicity stunt" but rather as the ceding of US and perhaps world environmental authority to the California Air Resources Board. This outcome will not benefit oil producers.

[1] Ari Natter and Jennifer A. Dlouhy, "Big Oil Cheers Quietly as Trump Moves to Ease Auto Standards," Bloomberg, August 3, 2018 [].

[2] Jessica Summers, "Trump Cap on U.S. Auto Fuel Economy May Raise Prices at Pump," Bloomberg, August 2, 2018 [].

[3] Meghan Gordon, "US EPA scraps 2022-25 fuel economy standards, may take aim at California," Platts on the Net, April 2, 2019.

[4] Coral Davenport, "Automakers Tell Trump His Pollution Rules Could Mean 'Untenable' Instability and Lower Profits," The New York Times, June 6, 2019 [].

[5] Ryan Beene and Ari Natter, "White House Shrugs at California’s Compromise with Automakers," Bloomberg, July 25, 2019 [].

[6] Coral Davenport and Hiroko Tabuchi, "Automakers, Rejecting Trump Pollution Rule, Strike a Deal With California," The New York Times, July 25, 2019 [].

[7] Hiroko Tabuchi, "Oil Industry’s Covert Campaign to Rewrite American Car Emissions Rules," The New York Times, December, 13, 2018 [].

[8] Soren Amelang, Benjamin Wehrmann, "'Dieselgate' – a timeline of Germany's car emissions fraud scandal," Clean Energy Wire, July 2, 2019 [].

[9] William Boston, "New Discovery Broadens VW-Emissions-Cheating Crisis," The Wall Street Journal, November 6, 2016 [].

[10] Edward Taylor and Jan Schwartz, "Bet everything on electric: Inside Volkswagen's radical strategy shift," Reuters, February 6, 2019 [].

[11] William Boston, "EU Auto Makers Have to Sell More Electric Cars as New Emission Targets Loom," The Wall Street Journal, June 21, 2019 [

[12] Elisabeth Behrman, "A Dead End for Fossil Fuel in Europe’s City Centers," Bloomberg, July 26, 2019 [].


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