The Automotive Angle of the SOTU Speech

A quick take on the policy proposals that the White House has posted as part of the State Of The Union Speech.

PRESIDENT BUSH'S DOMESTIC AGENDA

Energy

President Bush Will Ask Congress And America's Scientists, Farmers, Industry Leaders, And Entrepreneurs To Join Him In Pursuing The Goal Of Reducing U.S. Gasoline Usage By 20 Percent In The Next Ten Years – Twenty In Ten.

America Will Reach The President's Twenty In Ten Goal By:

• Increasing The Supply Of Renewable And Alternative Fuels By Setting A Mandatory Fuels Standard To Require 35 Billion Gallons Of Renewable And Alternative Fuels In 2017 – Nearly Five Times The 2012 Target Now In Law. In 2017, this will displace 15 percent of projected annual gasoline use.

This sounds like increased mandatory ethanol mix, as well as possible mandates of biodiesel. Unless an open international market in ethanol and biodiesel is permitted, fuel prices will likely go up.

• Reforming And Modernizing Corporate Average Fuel Economy (CAFE) Standards For Cars And Extending The Current Light Truck Rule. In 2017, this will reduce projected annual gasoline use by up to 8.5 billion gallons, a further 5 percent reduction that, in combination with increasing the supply of renewable and alternative fuels, will bring the total reduction in projected annual gasoline use to 20 percent.

Not much detail here, but likely it means "increase CAFE", which is a mixed bag. On one hand, it will make cars more expensive or less powerful. On the other hand, more regulation means more competitive advantage to the established players, and a steeper hill to climb for the Chinese.

• Congress Must Reform CAFE For Passenger Cars. The Administration has twice increased CAFE standards for light trucks using an attribute-based method. An attribute-based system (for example, a size-based system) reduces the risk that vehicle safety is compromised, helps preserve consumer choice, and helps spread the burden of compliance across all product lines and manufacturers. Congress should authorize the Secretary of Transportation to apply the same kind of attribute-based method to passenger cars.

So cars would be graded approximately by weight (footprint = wheelbase x track) rather than all being required to average out to the same number. This is a smarter way to do CAFE (a smarter way to do a stupid thing) because it takes size into account. However, we don't know yet how hard the new rule will push on fuel economy.

The President's Plan Will Help Confront Climate Change By Stopping The Projected Growth Of Carbon Dioxide Emissions From Cars, Light Trucks, And SUVs Within 10 Years.

The President's Plan To Strengthen America's Energy Security Also Includes:

• Stepping Up Domestic Oil Production In Environmentally Sensitive Ways

Good. Supply and demand--reduce demand, but also increase supply. Require more ethanol mixing, but reduce the price of the major component to offset some of the pain.

• Doubling The Current Capacity Of The Strategic Petroleum Reserve (SPR) To 1.5 Billion Barrels By 2027. Doubling the SPR alone will provide approximately 97 days of net oil import protection, enhancing America's ability to respond to potential oil disruptions.

Interesting. The SPR is not just used to control market prices, and Bush didn't seem to suggest that it would be. Is he preparing for another possible embargo from the Arabs over war policy? The turmoil in the Persian Gulf caused by a war with Iran would certainly cause a huge spike in oil prices. Update: I did a little reading about the SPR, it only has a capacity of 700 million barrels, in underground caverns. To double it would take a long time.

So, overall it looks not too bad but also not great for the auto industry. CAFE pressure will increase, which will cause vehicles to be more expensive as more technology (hybrids, turbos, direct injection, etc.) is thrown at the problem. A quick answer will be to sell more cars with less powerful engines, so as a result the V6 and V8 options may become pricier. OTOH, CAFE will help keep the Chinese out longer.

Increased mandatory use of ethanol will cause fuel prices to go up (also corn) but may be offset by additional supply, if Congress agrees (unlikely). Increased fuel prices will encourage a mix of smaller vehicles--more pain for the midsize/large truck based SUVs, and fullsized pickup trucks.