I Can’t Drive 55!

  John Eichberger |  August 31, 2018

I love to drive. Period. Like Charlton Heston, “They will pry my keys out of my cold, dead hands.” The Red Rocker feels the same.  Sammy Hagar, who turns 71 in October, is still rocking like no other and having a blast. He also still loves fast cars and has an extensive collection, including a Ferrari LaFerrari worth more than $1 million.

Stories in the news seem to constantly trigger audio tracks in my head, and recently the first Sammy song I remember hearing is on repeat between my ears because of the recent proposed regulations reforming the corporate average fuel economy (CAFE) standards:

“Gonna write me up a 125
Post my face wanted dead or alive
Take my license, all that jive
I can't drive 55!
No, no no,”

Ahhh…that black Ferrari and his yellow and red sleeveless onesie – that was 1984 baby!

Drivers today may not remember why Sammy was so frustrated. Between 1974 and 1995, the official federal maximum speed limit in the United States was 55 mph. After the Arab oil embargo, the 1974 Emergency Highway Conservation Act sought to conserve fuel by mandating Americans drive slower. They believed that a 55 mph speed limit would reduce fuel consumption by more than 2%. Later, the standard remained in place primarily because of arguments about vehicle safety. In 1987, states were allowed to set higher limits within their borders, but Congress did not ultimately repeal the provision until 1995.

Some of the arguments underlying the recent Trump administration proposed revisions to the CAFE program echo the sentiments of efficiency and safety that came with 55 mph, hence the mental track selection. (I am sure it has nothing to do with the fact that I am missing Sammy’s big car show and concert on the beach in California, which is scheduled the day before the NACS Show!)

Among other provisions, the proposed rule seeks to freeze the increase in CAFE standards (which relate to tailpipe emissions) at model year 2020 levels through model year 2026. The proposal estimates this would result in a fleet average efficiency of about 37.0 mpg vs the prior requirements which would have resulted in an average of 46.7 mpg. There has been extensive coverage of the proposal, which I will not repeat here. But, when I read through it (granted, I have not ready every word of the 900+ pages), it seemed to me that there is a primary, underlying thesis: the proposal seeks to accelerate fleet turnover by reducing the stringency of the standard to mitigate an increase in the price of new vehicles.

The argument seems to assume that higher prices will reduce sales of new vehicles, which have proven over time to be more fuel efficient and safer than older vehicles. Under this assumption, by reducing the stringency of the program, the Administration hopes to hasten the introduction of new vehicles at a lower price, thus benefiting fleet efficiency and safety performance by replacing older vehicles with newer ones at an accelerated rate.

Clearly, if sales of new vehicles were to slow, then the fleet of more than 260 million light duty vehicles would turnover more slowly. But what price increase would be required to slow the sale of new vehicles and what type of sales reduction would be required to have a significant impact on fleet turnover?  The proposal has pages dedicated to supporting its thesis, but in this piece I want to take a very simplistic approach (a.k.a., cocktail napkin math) to evaluate the theory.  Let’s look at fleet turnover rates and the recent trend in new vehicle prices and sales and see how they relate to the theory.

Impact on Fleet Turnover

A key question I have had for years is how long does it take for new vehicles and their technologies to accumulate significant market share of the vehicle fleet that is on the ground. To answer this question, I used forecasts published by the U.S. Energy Information Administration (EIA) in their 2018 Annual Energy Outlook.

The following chart shows the pace at which vehicles sold after a certain year will gain market share. This is useful when trying to understand how long it will take for a new vehicle feature (such as backup cameras or, in this case, a certain minimum level of fuel efficiency and safety features) to represent a certain share of the market. The chart presents EIA’s forecast for sales and fleet size through 2035, along with an adjustment in sales of 5% and 10% below the forecast to determine what impact slowing new vehicle sales would have on the spread of a new vehicle feature.
Aug2018-1.png[1] This Fuels Institute chart applies the EIA annual average scrappage rate of approximately 6% equally to new vehicles and older vehicles. This is not reflective of actual market behavior in which older vehicles are retired at a faster rate than new vehicles, and effectively slows the pace of market share acquisition by new vehicles, but simplifies the analysis, avoids potentially contentious alternative assumptions and provides a comparative baseline.

In this straight-line analysis, a 10% drop in sales would reduce annual new vehicle sales by approximately 1.6 million units – this is a significant number. With this drop in sales, it would take an additional three years before new vehicles amassed 50% share of the fleet on the ground, compared with the existing forecast. I will leave it to the reader to conclude whether this delay would have a significant impact on the fleet’s efficiency and safety performance. 

Impact of Vehicle Prices

An assumption of the Administration’s proposal is that higher vehicle prices will negatively impact sales by making new vehicles less affordable for American families. What would it take for sales to fall 5% or 10% below the EIA forecast to slow market transition as depicted above?

According to a recent Fuels Institute report, “Driving Vehicle Sales – Utility, Affordability and Efficiency,” the average price for the most popular models in each vehicle class increased by an unweighted average of approximately 7% between 2011 – 2016, during which time total volume of new vehicles sold increased by 37%.  On a class by class basis, the average retail price fell for luxury vehicles, SUVs, vans and pickup trucks while the average price increased for all other vehicle classes.  Units sold, however, went up for every single vehicle class, which would indicate minimal impact of price increases on units sold. It is important to recognize, however, that during this time frame the vehicle market and economy were recovering from the Great Recession and growing at a strong pace, potentially negating the impact of price increases.
Aug2018-2.png

As an example, the most popular class of vehicle during this time period, the crossover utility vehicle (CUV), went up an average of $1,258 and increased its market share from 25% to 32% from 2011 – 2016. Some automakers have presented data at public conferences which indicates the technologies required to satisfy the previous CAFE requirements in 2025 could increase the average price of a vehicle by potentially $4,000 above a similarly equipped vehicle in 2015. How much would such a price increase impact vehicle sales and fleet turnover over a 10 year period?

Conclusion

The argument that slowing the sale of new vehicles will consequently prolong the useful life of older vehicles and thereby compromise the rapid adoption of safer and more fuel efficient vehicles is a fact – if we sell fewer new cars, older cars will remain in service longer. What might cause a slowdown in the purchase of new vehicles, however, is less clear – as is how much of a slow down would be required to significantly affect the pace of fleet turnover.

I suggest that new vehicle prices may not be the most threatening dynamic to the new vehicle market. According to the 2018 Cox Automotive Forecast, used car sales are projected to hit 39.5 million units sold, a slight increase over 2017. What will be different is that the composition of “gently used” vehicles that will be coming off lease will more closely resemble the trends of new car purchases – in other words, more CUVs than ever. This dynamic will present consumers with well-equipped, in-demand vehicles at significant discounts compared with new versions and this could have a greater impact on new vehicle sales and an increase in MSRP.

The assumptions of the Administration’s proposal assessed in this article are theoretically valid, but there are many dynamics affecting the new vehicle market that could mitigate sales and slow the conversion of the market to new technologies. The proposed freezing of CAFE requirements seeks to mitigate one such dynamic – a potential increase in vehicle prices – but we must not lose sight of the other factors involved. Consumer decisions are not always economically rationale and are never made in a vacuum.

Regardless how we interpret the proposal, or the veracity of its arguments, I still hear Sammy screaming at me:

“When I drive that slow, you know it's hard to steer.
And I can't get my care out of second gear.
What used to take two hours now takes all day. Huh!
It took me 16 hours to get to L.A.”

Latest Updates

On the Road Again
February 2021
Life is a Highway
January 2021
When It’s Love
November 5, 2020
Walking on the Moon
October 5, 2020