Conflicting Signals on Fuel Economy Leave Buyers in the Driver's SeatOctober 16, 2006

October is turning into a big month for alternatives to century old gasoline car technology.

Just last week, Toyota Motor Corp. officially launched production of its gas-electric hybrid Toyota Camry sedan at its big factory in Kentucky. Toyota's betting that 60,000 Americans a year will want a $26,200 family car that averages 39 mpg.

The small but vigorous lobby that wants auto makers to put more muscle behind so-called "plug-in" hybrid technology got a symbolic boost when AutoNation Inc., owner of the largest chain of car dealerships in the U.S., issued a call for car companies to build such vehicles, and said it will take orders from customers who want them.

A plug-in hybrid takes the technology of a car like the Toyota Prius to the next level by allowing the driver to operate the car solely on battery power for up to 60 miles. The owner recharges the batteries by plugging the car into a wall socket. A plug-in hybrid can still rely on its gasoline engine for longer trips or if the battery runs out. Advocates say that a hybrid car that allows for a significant amount of all-electric operation can save far more petroleum than a conventional hybrid car which needs to run its gasoline engine often.

But that's not all. Fans of European diesel technology, which enables family cars to average around 40 miles per gallon or more, are cheering because after years of rangling, regulations requiring refiners in the U.S. to remove 97% of the sulfur previously allowed in on-road diesel fuels finally take effect. Ultra-low sulfur diesel is a prerequisite to various car makers' plans to try to re-launch diesel engines as a mass-market alternative for cars and sport utility vehicles. Several car makers have recently announced plans to add or expand diesel models in the U.S. market over the next three years.

To top it off, President Bush on Thursday used the podium of a Renewable Energy Conference in St. Louis to express his enthusiasm for a wide range of oil-conserving technologies, including corn and cellulosic ethanol, fuel cells, and plug-in hybrids, as well as nuclear power, natural gas and coal. The president explicitly linked reducing oil consumption to protecting national security and economic security.

With all of these developments, you'd think the Green Revolution is right around the corner.

There's just one problem: Gasoline is once again getting cheap, or at least, cheapish. That's great if you drive a long way to work. But if you really want to end what the president has called America's "addiction to oil," it's a problem, as the president himself acknowledged.

"Look, let me just put it bluntly: We're too dependent on oil," Mr. Bush said, according to a transcript posted on the White House Web site. "…And see, low gasoline prices may mask that concern. So, first, I want to tell you that I welcome the low gasoline prices, however it's not going to dim my enthusiasm for making sure we diversify away from oil. "

Mr. Bush's quandary reflects a much longer term dilemma. The U.S. has been having an argument with itself about automobile fuel efficiency for more than 30 years. Over those decades, the momentum of the argument has shifted from one pole to another. In the 1970s, oil prices spiked and Washington for the first time demanded that auto makers meet certain Corporate Average Fuel Economy standards, commonly known as CAFE. The societal urge to escape the squeeze of Middle Eastern oil producers also brought on the 55 mile-per-hour speed limit, a surge in demand for small Japanese cars and Jimmy Carter's cardigan.

In the later 1980s and 1990s, gasoline prices plunged, and American culture lurched back the other way. Cardigans, Drive 55, and econoboxes were out. Hummers and Explorers were in.

The constant in all of this: An unwavering commitment by the government to cheap gasoline.

So instead of clear signals, there is static. The political rhetoric says, "Keep America Strong! Buy a plug-in hybrid that burns E85 ethanol." But the everyday message sent by prices at the gas pump is, "Aren't you glad that $3 a gallon business is over? Fill 'er up."
Moreover, there is no serious talk right now of substantially raising car and truck fuel economy targets -- the better to force fuel-saving technology into production. And there is no serious discussion of reordering national priorities by say, diverting some of the billions spent on highways to construct high-speed intercity rail links.

The big question is, what signals will consumers heed, and what signals will they send?
The next several months will be a test. Auto industry executives say they believe that a greater number of American consumers now rank fuel economy high on their list of priorities, despite the recent gas price drop.

In September, as gasoline prices eased under $2.50 a gallon in many parts of the country, interest in fuel economy oriented gas-electric hybrid vehicles such as the Honda Civic and Ford Escape and the Toyota Prius remained relatively strong, according to data from the Power Information Network. An Escape hybrid, for example, took 24 days, on average, to move off a dealer's lot in August and September, according to PIN data. That compares to 63 days to sell in March. The Escape had an average $1,305 rebate in August and $568 rebate in September. During the past two months, the Civic and Prius moved after just 10 days and 5 days, respectively, with no rebates.

The few diesel cars on the U.S. market aren't quite as hot as the Civic and Prius hybrids. But the diesel Volkswagen Jetta in September sold in an average of just 18 days, compared to 67 days for the gasoline version, according to PIN data.

Meanwhile, data from Edmunds.com, the big shopping site, indicates that many of the best selling large SUVs are still struggling. The average discount offered on a Dodge Durango in September was over $11,000, or about 30% of sticker price. And the vehicles still are sitting unsold for an average of 182 days.

One car to watch is the Camry hybrid. The hybrid Camry is rated at 39 miles per gallon in combined city/highway driving, compared to an EPA rating of 27 miles per gallon in city/highway driving for a four cylinder Camry with a five speed automatic transmission. The Hybrid Camry has features similar to the four cylinder Camry with the most expensive XLE trim level, which starts at $24,700. That puts the hybrid premium at about $1,500. But if you wanted to be rigorous about it, the cheapest Camry sedan starts at $18,270, and the average Camry sells for about $22,700, according to Power Information Network data. On those terms, the hybrid premium is more like $3,500. Toyota says Camry hybrids purchased after Oct. 1 will qualify for a $1,300 tax credit.

Toyota has publicly defined success as selling 60,000 Camry hybrids a year, or 5,000 a month, which is roughly equivalent to 15% of total U.S. Camry sales. If the Camry misses that target, it could be a sign that President Bush is right to be worried about the resolve of Americans to end oil addiction, just because they should.