Friday, July 28th, 2006
With crude oil prices hovering around $75 per barrel, big oil companies once again announced record profits yesterday. Congressional inquiries into price fixing went nowhere, primarily because oil companies don’t need to fix prices. They have a U.S. population addicted to driving (never mind what makes the car go), high switching costs, and fuel standards that make China look progressive.
How did this happen? After the record oil prices in the late 1970s - prices that produced the 1981 U.S. historical high of $3.01 per gallon (in 2006 dollars) - Corporate Average Fuel Economy (CAFE) standards were made more stringent. From 1978 to 1981, U.S. car and truck fuel efficiency standards rose by 24%.
Then came the cheap oil of the 1990s and the SUV revolution. As a percentage of income, the average American was able to buy three times more gas in 1998 than they could in 1980. Fuel standards reflected the cheaper oil. CAFE standards in 1983 were 24.8; in 2004 the average was 24.7 miles per gallon (MPG). The U.S. has long lagged behind Europe in fuel efficiency standards, but more surprisingly, even the developing world makes us look bad.
China’s red-hot economy has meant a rapid shift from bicycles to cars, and the government is taking stern measures to increase fuel efficiency. One major difference with the U.S. CAFE standards is that Chinese standards are based on weight rather than class of vehicles. The lightest vehicles in China were required to get 38 MPG in 2005, increasing to 43 MPG by 2008. Contrast that with the U.S. CAFE standard of 27.5 MPG for cars.
The United States fuel efficiency peaked nearly two decades ago, and today the oil companies are posting record profits. But don’t blame the oil companies. They’re just small-brained, carnivorous, profit-making sharks that swim and devour money. It’s the bloated American, SUV-loving consumer that we should blame for willingly wading into these shark-infested waters. Chomp!
Notes & Sources: # Historical Real GDP per capita is in 2006 dollars. 2006 GDP estimated by statastic.com using latest Economist forecasts. Gas prices are the annual average gas price and were adjusted to 2006 dollars.
^CAFE fleet standards for cars and trucks. 2005 and 2006 data unavailable, so 2004 standards of 24.7 MPG were used.