Freedom from oil dependence

When Daniel Yergin met with Big Three executives in 2005, gasoline prices were still under $2 a gallon, and company leaders mainly were concerned about how to use their biggest vehicles to maximize profits during the industry’s historic boom.

“They were just locked into trucks; that was the future,” recalled Yergin, hailed as the world’s leading analyst of the energy industry. But just three years later, record gasoline prices of more than $4 a gallon, followed by the Great Recession, decimated pickup sales and laid automakers in a trough they’re still climbing out of.

Today, the auto industry is at a similar turning point with energy — but this time the change is working in its favor. Thanks to horizontal drilling and hydraulic fracturing, or “fracking,” newly accessible oil and natural gas resources are being loosed across the United States at such a rate that the nation essentially now is awash in them. This phenomenon has practically vanquished concerns about global “peak oil” and nearly vaporized decades-long anxieties about the security of America’s hydrocarbon supplies.

But automakers run the risk of reacting to the positive new scenario in the wrong way or of being handcuffed from capitalizing on any change in consumer priorities by strict Obama administration mandates that require them to reach Corporate Average Fuel Economy (CAFE) of 54.5 miles a gallon by 2025 compared with 35.5 mpg in 2016, and a ruling that carbon-dioxide emissions are a pollutant.

“Trying to achieve 54.5 mpg and meet zero-emissions vehicles mandates in a world where consumers don’t put any value in that would put us in a difficult place with regulators,” saidTom Stricker, vice president of technical and regulatory affairs for Toyota Motor Sales U.S.A.

It’s difficult to understate the possibilities for change harbored by America’s new energy independence, just as it was impossible to foresee exactly how the oil-price shocks of the 1970s would reshape the auto industry and traumatize American consumers. Gas-price hikes and service-station lines seared the notion of rank vulnerability to “foreign oil imports” in our minds, determining everything from car sizes to U.S. military priorities that would predominate for decades. Then climate change became a concern, layering on a “green” mentality that also favored fuel-sipping vehicles.

Now, oil production in the U.S. has increased by half in just five years, already slashing our dependence on foreign oil to just 36 percent from 60 percent in only eight years. Our foreign-trade deficit already has been halved. New activity in the oil patch has sparked the moribund American economy with the most dynamic hiring of any sector, and refining capacity finally is catching up. Meanwhile, automakers have achieved huge gains in fuel economy, and Americans are driving less, both of which are cratering hydrocarbon demand.

General Motors CEO Dan Akerson is among industry executives who sense the magnitude of the change. “I think we have a moment in time to really change the calculus for this country on so many dimensions,” he said at a recent “green” conference. “We’ve been given a gift called shale [because] we sit on more BTUs of energy than Saudi Arabia does.”

What isn’t clear is what GM and rivals will do with this gift. In recent remarks, Akerson listed several priorities in light of the change: Continuing to reduce vehicle weight and fuel consumption, fostering a diversity of propulsion systems and making GM a stronger competitor worldwide as global clean-air standards converge.

Yet all of that arguably comprises things the company would be doing anyway, even especially in a worse domestic-supply scenario. What will the industry do if a new and growing sense of “energy security” gives American consumers the confidence and peace of mind to think differently about their automotive purchases than they have for nearly a half-century?

“Until now, the threat of peak oil has been a huge catalyst from the consumer-demand side about our willingness to experiment with alternative forms of energy,” said Sheryl Connelly, Ford’s futurist. “And that was a catalyst for the industry to work rapidly to come up with alternatives,” such as electric cars.

Still, despite the Tesla phenomenon, most U.S. consumers have continued their wan embrace of the alternatives.

“Many customers want to reduce CO2, but they aren’t willing to change their lifestyle or pay the cost — yet,” said Bob Lee, head of global powertrain for Fiat and Chrysler, at the recent Traverse City industry conference. Now, if Americans take on a general lack of concern about where their next tankful of gasoline is going to come from, presumably they will be even less willing to stretch their pocketbooks and their common sense to afford an all-electric vehicle — despite recent price reductions in the segment — or even a hybrid. Human nature certainly argues for that possibility.

Of course, the auto industry isn’t simply free to backslide, even if American consumers do. Besides federal rules on mileage and emissions, there are even stricter clean-air mandates in the crucial California market, and some other states follow them too. The country’s increasing urbanization argues at least for a some-day mass-market future for electric vehicles. And while popular skepticism about climate change persists, the prevailing scientific orthodoxy on this point prevails.

“All of those forces will continue to act on the auto industry, and so they’re not going back to a previous era,” said Yergin, vice chairman of the consulting firm IHS and author of the new book, “The Quest: Energy, Security, and the Remaking of the Modern World.”

Added Mustafa Mohatarem, GM’s chief economist: “It’s really important not to overplay the card” dealt by domestic energy security.

One possibility is that moderating gasoline prices, a sense of energy “security” and a predictable increase in family formation by millennials will cause today’s consumer enthusiasm for small vehicles to fade somewhat. That would imperil even automakers’ best efforts to comply with CAFE, because meeting the standards is a function of the fuel-economy averages of vehicles that actually sell, not just a reflection of the technological achievements of the fleet.

“Every time the economy picks up, our CAFE [compliance] goes down,” said Oliver Schmidt, general manager of the environmental and engineering office of Volkswagen of America. “If there is independence on oil and no concerns about ‘peak oil,’ that will change consumer behavior a lot. The difficulty will be that there will be no company capable of achieving greenhouse-gas targets.”

So if Americans in the near future begin insisting on larger, gasoline-powered vehicles — which still will be much more fuel efficient than erstwhile models — instead of small and “green” vehicles, can automakers still be held accountable?

And at what point might consumer and even political pressure develop for the federal government to ease up and allow both consumers and the auto industry to take greater advantage of the rather sudden blessing of ample U.S. oil supplies for everyone’s lifetimes?

“Auto executives believe we’ll rely on the internal-combustion engine through 2025, but they’re terrified that the government won’t even let them make these cars,” said Sean McAlinden, chief economist of the Center for Automotive Research, in Ann Arbor. “So they’re going to keep betting on every technology.”

Most experts believe the main rudder on consumer demands will be gasoline prices. Despite the flood of new and expected American oil supplies, pump prices have continued to push $4 a gallon. That’s largely because oil continues to be a global market; the rise in Chinese consumption alone has more than offset the pickup in U.S. production, said Toyota’s Stricker, and emerging markets remain thirsty for gasoline.

“And the market is still subject to global shock,” GM’s Mohatarem noted. A current example is the conflict in Syria, which easily could jack up oil prices worldwide. “But clearly the fact that we’re producing it means we may be able to manage the shocks a little better.”

Yergin believes only a globalization of the fracking phenomenon — which he predicts — could change the supply-demand balance of gasoline enough to lead to moderating prices. “Then the consumer could really change,” he said. And while prices remain at levels so high they were nearly unthinkable just a decade ago, they’re more constant, and fewer fluctuations now are expected over time because of the boom in domestic supply. “That does,” Yergin said, “shift the mind of the consumer.”

The one sure bet on change seems to be that rising supplies of natural gas will lead to a boom in transportation use of compressed or liquefied natural gas, which produce fewer emissions than gasoline and are far more price-efficient per mile.

Already, many trucking fleets are switching from diesel, and many taxi fleets opting for “CNG” instead of gasoline may be next.

And while there are tremendous infrastructure obstacles to running mainstream vehicles on either form of natural gas, some believe those could be rapidly overcome.