Good article by David Welch

To the American car buyer, I say prepare to downsize your vehicles or pay more for them. Late Thursday, the Senate approved a bill that would require auto makers to boost the fuel economy average of the fleet of vehicles they sell to 35 miles per gallon by 2020. Right now, they must meet an average of 21.6 mpg for trucks and 27.5 mpg for passenger cars. The bill still needs to be passed by the House of Representatives and signed by the President to become law. Moving to a one-fleet average generally means auto makers will either have to sell fewer suvs or sell enough small vehicles to offset the sales volume of their gas guzzlers. Lawmakers see this as politically expedient because voters will roil over a gasoline tax.

Here’s the bit of irony. Congress and the President (regardless of which side of the aisle and who is in the Oval Office) have long seen gasoline taxes as political suicide. Consumers want their big cars and suvs and would like to drive them, too. They won’t go for a gasoline tax that would entice them to buy smaller vehicles. This isn’t the generation that rationed gasoline during World War II. We want it all. But we’ll be paying a few thousand dollars more for our cars anyway.

To hit the proposed regs, auto makers will have to start using some expensive technology. One Honda executive told me that they would have to first employ cheap efficiency boosters like high-tech transmissions, variable-valve timing in engines, materials that reduce weight and friction and other tweaks. They all cost money. If those don’t cut it—and they probably won’t--we’re talking about more hybrids and clean diesels. That’s all good news. We need to use less fuel. But don’t think the consumer is going to escape more out-of-pocket expense.

Even Honda—the industry’s leaders in fuel economy performance—has work to do. The trucks it sold during the 2006 model year averaged out to get about 24.6 mpg and its cars averaged 33.2 mpg. The combined fleet average is 29.1 mpg, according to the National Highway Traffic and Safety Administration.

One Honda insider said that the company’s best minds don’t know how much more it will have to charge for its cars while it works on meeting the new regulations. If this bill becomes law, auto makers will have to hit the regulation by 2020. That gives them 13 years to find a way to boost efficiency. Right now, hitting 35 mpg would cost between $2,000 and $7,000 a vehicle depending on the model, according to one company’s estimate. Most models would need at least $5,000 in technology to get to 35 mpg, says an auto company executive who asked not to be named. That premium may fall as technology improves and becomes cheaper between now and 2020.

The real issue will be how quickly the fuel economy premium falls. The average car today gets 21 mpg in real world performance. The Senate’s 35 mpg—which is measured by the government’s testing methods--will probably equal 29 mpg in real world performance. Assuming that the average motorists goes about 12,000 miles a year and pays $3 a gallon for the gas, the new regulations would save them $470 a year. So if the average consumer keeps his car for five years, most will pay $5,000 to save less than $2,500. If the industry can keep pushing fuel efficient technology, the premium will drop closer to the amount of money saved at the pump and everyone wins. If not, we pay more for our cars and won't get the money back in gasoline savings. Efficiency is something we have to do. Just don’t expect it to come free.

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