Given the complexities of the global and U.S. economies, inevitably there are going to be economic and/or industrial trends that run counter to one another, but it seems to me that we are now experiencing two movements that are particularly inconsistent.

Last month, The New York Times ran a story about the surge in U.S. oil production, saying local oil output will increase by 800,000 barrels a day annually for at least the next three years (Dec. 17 page B1). Imported oil's share of total U.S. oil supplies should drop to 25% by 2016 from 37% today (and half a few years ago). One outcome of this increase in local supply will be a declining price of the world oil benchmark price to $92 a barrel by 2017, and this in turn should lead to ongoing declines in retail gas prices.

This anticipated long-term decline in gas prices flies right in the face of the Corporate Average Fuel Economy (CAFÉ) regulations for new vehicle manufacturers selling vehicles in the U.S. Not only are automakers required to meet fleet fuel economy averages of 35.5 mpg in 2016 and 54.5 mpg in 2025, but there are numerous incentives in place (at the federal and state levels) to spur sales of fuel-efficient vehicles. These include tax incentives, direct rebates, and access to restricted HOV lanes, among others, for hybrid and/or electric vehicles. As of this past March, California by itself had issued 18,000 rebates (since 2007) totaling more than $41 million to purchasers of electric vehicles or plug-in hybrids.

Obviously, both these trends have encouraging outcomes. As U.S. oil production increases, the U.S. becomes less dependent on unstable, and sometimes unfriendly, countries in the Middle East. Receding in the rear view mirror are the days when OPEC made a move and the world jumped.

And, clearly, burning less oil translates to less pollution and less global warming, both very desirable outcomes.

What sometimes gets overlooked in discussions of these trends, though, is that automakers are getting squeezed from both sides. On the one hand, the consumer's natural demand for more fuel-efficient vehicles will, everything else being equal, decline as fuel prices decline. (There are historical data that show a positive correlation between gas prices and sales of hybrid and electric vehicles as well as an inverse correlation between fuel prices and deliveries of larger, less fuel-efficient vehicles.) Yet, these same automakers are being forced to sell more fuel-efficient vehicles to meet CAFÉ standards, regardless of the price of gas. In the current situation, automakers are: a.) spending huge amounts of money to develop alternative powertrains and new technologies for existing powertrains, and b.) facing downward pressure on prices of smaller vehicles in order to sell them to meet CAFÉ requirements while at the same time curtailing production of larger, more profitable vehicles. All these actions reduce OEMs' margins from their natural levels, which in turn negatively impact future R&D spending.

If fuel prices were allowed to rise (perhaps via a gas tax, which I realize politically is a non-starter), moving in the direction of where they are now in Europe, natural consumer demand would shift towards smaller vehicles, there would be less need for outside intervention in the marketplace, and the manufacturers would be more healthy financially. Unfortunately, current trends seem to be moving in the opposite direction.

Tom Libby is manager, loyalty practice and industry analysis, IHS Automotive
Posted on January 3, 2014