Fuel Efficient Automobiles and US Foreign Policy

John Abell, Department of Economics

(This article appeared in the R-MWC Sundial, Nov. 12, 2001)

     The United States has a love affair with technology. Consumers demand faster computers, smaller computers, portable computers, and wireless computers. We demand instant information and communications, and become incensed when our e-mail server goes down. Our corporations demand efficiency in the workplace, with zero-tolerance for waste. Our military has laser-guided missiles, heat-seeking missiles, bunker-busting bombs, stealth aircraft; in other words, the most efficient methods of killing our enemies that money can buy.

    So, with all this emphasis on technology and efficiency why are we content with 100-year-old technology for our preferred method of travel, the automobile? My daughter and I were recently shopping for a new car and were thus paying close attention to car ads, mileage ratings, and so forth. The Nissan dealers were in a panic to sell us one of their 2001 Altimas to make room for the 2002 redesigned Altimas. However, I couldn’t see paying $15,000 for a car that gets 26 MPG when there were Honda Civics and Toyota Echos available that get 40 MPG. Admittedly, the Sentra, Nissan’s low-end car, might represent a better comparison in terms of gas mileage—it gets 35 MPG. But the dealerships weren’t pushing Sentras when we were out shopping. There were few discounts and no special financing deals. It was the Altimas that they wanted to unload. In the middle of our search, the new 2002 Altima arrived on the scene with an advertising flourish. The ads—designed for the short-attention-span crowd, with glitz and abbreviated action shots—suggested that a new form of transportation had arrived, a revolution for car buyers. But, if you look under the hood, do you know what you’ll find? You guessed it, an internal combustion engine that gets 26 MPG. Such a deal, and all for $22,249!

     Why are we satisfied with such mediocrity?  Let’s assume two things, neither of which places me too far out in the Marxist camp according to my economics classes, which I consulted on this: 1) Automobiles, with their carbon dioxide and carbon monoxide emissions, not to mention the waste products generated during the production process, have a negative impact on our environment. 2) The insistence that gasoline continues to be THE fuel source for our cars leaves us vulnerable to the uncertainties of the geopolitical marketplace. Like it or not, the Sept. 11th attacks are at least partially connected to our need to dictate oil market conditions in the Middle East.

     Mind you, I hope they round up the perpetrators of that crime and place them all in stocks at the site of the bombings so passers-by can throw eggs in their faces.  I may even throw one myself, who knows? But, I can assure you that until we disengage from our current oil-driven foreign policies in the Middle East, we will continue to face uncertainties. The history of our problems in that region are well documented, and will continue to haunt us—preventing us from achieving the “normalcy” we all so desperately crave at the moment.

     Here are some of the more memorable events from that region:

· The CIA overthrew Iran’s Prime Minister Mossadegh in 1953 because he wanted to claim the oil in the ground inside Iran’s borders for Iran, rather than for the oil companies.

· OPEC producers used the Egypt-Israeli 1973 war as an excuse to demand greater control over the oil in their countries and its selling price, and also as an opportunity to punish the US for its support of Israel.

· The 1979 overthrow of the hated Shah of Iran (who was put into office following Mossadegh’s ouster) led to the cutoff of Iranian oil and a chance for OPEC to further flex its muscles. This incident also resulted in the 444-day hostage crisis for imprisoned US embassy employees, as you may recall from your history lessons.

· The Persian Gulf War of 1991, in which the US and coalition forces drove Iraqi forces out of Kuwait, took place ostensibly for the reason of saving the Kuwaiti royal family. Everyone who believes that this was the actual reason for our engagement in the sands of the Middle East please feel free to begin doing hand-stands.

     I’m not sure if I have made my point yet.  I could go on to talk about US embassy bombings in Beirut in 1983 or again in 1998, or the embassy bombings in the same year in Kenya and Tanzania.

     I’d prefer to return to the assumptions I was making about automobile use before I digressed into the history lesson. If the costs to the environment and of lives and materials lost due to Middle East oil policy are costs that the automobile companies are not willing to bear (i.e., internalize), then society in general must bear them. Economists refer to such costs as externalities, and the conditions that create them represent market failures. The prices at which cars are sold, in this example, simply do not cover the actual costs to society. In this case (hold on to your seats for this) the Fundamental Theorem of Welfare Economics suggests that it is appropriate for the government to step in to force the private sector to cover the externalized costs.

     Unfortunately, our government is currently in the hands of oilmen.  For those thinking beyond the immediate crisis toward a sustainable future, though, this time will pass, and we should begin thinking about alternatives to the internal combustion engine. You can imagine that such thinking, which even hints of a role for the government will not be warmly received by the oilmen and their orthodox advisors. According to their view, the car companies simply respond to consumer demand, and apparently what we demand are 15-19 MPG SUVs that require a small consumer loan to fill up at the gas station. I asked my students about this. Mind you, the phrasing of my question was a bit biased, but here is what I asked. “If you had the choice to buy a car that got 80 MPG at $15,000 or one that got 40 MPG at $15,000, which would you prefer?” Not surprisingly, every single one of them said that they would prefer the high mileage car.

     Does it bother you that such choices simply don’t exist? Actually, an 80 MPG car does exist. It is the Honda Insight, which makes use of hybrid gas-electric technologies. The problem is that it costs $22,000 rather than $15,000.  In my way of thinking, this also represents a market failure. There is technology out there to produce a car that people want, but it exists at a price most people can’t afford. Others who could possibly afford it might conclude that the $7000 premium outweighs the savings at the pump under most driving scenarios.

     So what might be a governmental response to these market failures? In the same manner that recycling did not respond well 20 years ago to private sector initiatives until the government weighed in on behalf of the environment, the production of fuel-efficient automobiles might need a similar (pardon the pun) “jump start.” The government—mind you, this would require enlightened leadership—could do the following: 1) Subsidize the industry, i.e., work from the supply-side. If it’s not possible to profitably produce an 80 MPG car at $15,000 (whether $15,000 is affordable to the average consumer is debatable), then hand over to the companies the amount necessary ($7,000 in the above example) to make it affordable. 2) Subsidize consumers, i.e., work from the demand-side. For every purchase of a fuel-efficient car of some predetermined MPG, say 80, offer consumers a tax credit of the difference between the purchase price of the 40 vs. the 80 MPG vehicles. These subsidies wouldn’t have to last forever, just long enough to get the market for fuel-efficient cars up and running.

     There’s an even easier approach to fuel efficiency that would go a long way towards reducing our dependence on foreign oil—drop the façade of classifying SUVs and mini-vans as light duty trucks.  Under the government’s Corporate Average Fuel Economy (CAFE) standards, a car company’s SUV, mini-van, and pickup truck fleet need only average 20.7 MPG, while cars must average 27.5 MPG. SUVs and mini-vans are used for hauling families to soccer matches, grocery stores, and to the movies. They are rarely used to haul farm supplies, construction equipment, and other work-related supplies, the kinds of activities one normally associates with light duty trucks. Accurately classifying SUVs and mini-vans would force the car companies to improve their gas mileage.  Given that in 2001, sales of SUVs, mini-vans, and pickup trucks are expected to exceed sales of automobiles for the first time ever, this honesty-in-classification scheme would result in significant savings when it comes to buying imported oil.

     Prior to the 1973 oil crisis we imported only 28% of our oil from foreign sources.  That number has grown to 53%. Of the foreign imports, 27% comes from the Persian Gulf. Try to imagine US foreign policy if we imported no oil from that part of the world.  There would be no need to support dictators like the Shah of Iran and his despised Savak henchmen. We wouldn’t need “peace-keeping” troops on the holy ground of Saudi Arabia. Military spending to protect our economic interests in the region could be sharply curtailed, allowing for further tax reductions back home. In essence, we would have removed one of the most visible obstructions to peaceful relationships with Arabs and Muslims in that part of the world. As to our relationship with Israel, the other stumbling block, I’ll defer on that issue to my colleagues from the International Studies Department.