Finally (!): new MPG rules

There for awhile I was starting to wonder if Barack Obama was going to live up to much of the promise of his Administration.  Yes, I love the financial industry overhaul and feel that it was critical for the future economic health of the nation.  But his healthcare obsession and Iraqi/Afghan war efforts have been woeful in my opinion.  Then came the news that…

The Environmental Protection Agency and the Transportation Department have made the most far-reaching changes to how “miles per gallon” is calculated in almost 30 years.  Specifically car sales companies must now afix a letter grade to the MPG of a vehcile.  Under the new system this is how most cars will rate:

A+ to A- : will only be awarded to electric cars and hybrid electric cars;

Bs : will be awarded to compacts and mid-size cars;

Cs : will be given out to SUVs and trucks.

Analysis: Why is this important?  The reason that it is important is that the current system of reporting MPG in absolute terms, such as “19 MPG highway” does not give the buyer of a car any sense of fuel efficiency relative to all other car models.  Reporting MPG in absolute terms assumes that the consumer knows whether the number is good or bad relative to every other car.

Predictably the car industry is upset by the new rules.  C’mon!  The new rules help consumers make a more informed choice when purchasing a vehicle.  Not only are they more aware of the environmental impact of a new car purchase, but more selfishly, they now know more of the true operating costs of a car purchase.  That is important folks!  The reason that car manufacturers are upset is because they make the fattest margins on cars that have poor MPG ratings – that is, on trucks and SUVs.  Their fear is that this will have a negative effect on their car sales.  My prediction is that the new ratings system will only affect sales in a very, very minor way.  Why?

Most people purchase cars for every reason except MPG.  Function is tremendously important.  As is the look of the car.  Reputation for reliability is also important.  Etc.  Very few people exclusively buy a car because of the MPG rating.  If the new ratings cause a shift of the entire “demand curve” of the U.S. consumer to more fuel efficient cars then manufacturers will just have to shift which cars receive manufacturing priority.  Margins will fatten when consumer demand fattens because manufacturers will remove the purchase incentives on the cars that sell the best.  So, at worst, car manufacturers would see a temporary dip in their profits.  Meanwhile the long-term benefits are:

• Consumers have more information; a good thing

• Consumers will likely now be able to budget their car purchases’ total costs better; a good thing

• The new ratings will likely lead to an increase in the purchase of more environmentally friendly cars; long-term this is much better for the environment

Importance grade: 7; these new rules will permanently improve the information imbalance between consumers and businesses.  This is always a good thing.  Additionally, it will help reduce environmental degradation.  This is always a good thing, too.

Jason