Commentary: Yergin Sees Clear Road Ahead For More Fuel-Efficient Cars

Jim Tkatch / photo: Jim Tkatch Dr. Daniel Yergin, CNBC global energy analyst & Chairman of CERA

The road is getting much clearer.

This week, legislation will emerge from committee, and almost certainly soon head to the floor of the U.S. Senate. It might not get that much notice in itself, but it ought to, because it tells you how much has changed on energy issues. And, given its probable passage (or that of something along its lines), the new legislation will have a big impact on the automobile industry, on gasoline consumption, and on what people drive.

The bill is the “Ten-in-Ten Fuel Economy Act,” and it is coming out of the Senate Committee on Commerce, Science, and Technology under the joint sponsorship of Democratic Chairman Daniel Inouye and Republican Vice Chairman Ted Stevens. Whether it is the provisions in this bill, or something like it, fuel efficiency standards for American vehicles are going to go up.

It’s no longer left versus right, Democrats versus Republicans, Congress versus the Administration. In this year's State of the Union address, President Bush cited the need to "reform and modernize fuel efficiency standards," and the Administration is working on its own proposals. Putting it simply, on this formerly contentious issue, bipartisanship prevails.

We even know pretty much by how much efficiency will go up. “The Great Mentioner” (to borrow a conceit that the columnist Russell Baker invented years ago) has decided on the “Four-Percent Solution.” That is, fuel efficiency is meant to go up by about 4% a year (though, some of the time, by 3.5%). That translates into about a 10-mile-per-gallon improvement over the next ten years. That’s your “Ten in Ten.”

There are some key characteristics of this "Ten in Ten." First, it will apply not only to cars, but also to SUVs, vans, pickups, and medium and heavy trucks, all at the same rate. Secondly, it will be based on "attributes." That is, it will allocated across class of vehicles (measured by weight and size and functionality). This will help eliminate the rigidities of the current Corporate Average Fuel Efficiency Standards, which measure changes across a company’s entire output – a problem when the public tilted to larger, less fuel-efficient vehicles, forcing companies to produce smaller, less-profitable or barely-profitable cars to meet the targets.

There is still one hot issue – the appropriately named “off-ramps.” Tuesday’s legislation would give the National Highway Transport Safety Administration the authority to reduce or waive the 4% target in a given year if it was proving not cost-effective.

Off-ramps are controversial, so expect much debate on that question before this is all over, but don’t expect the debate to go off road.

Where did this consensus come from? The answer is clear. It’s the coalescing of concerns about energy security, prices at the pump, and climate change. And it is a very powerful consensus.

In his opening statement at last week’s hearing on the legislation, Senator Stevens captured the new tone: “The issue of fuel economy of our cars and light trucks is significant as our country faces an increasing energy crisis.” He then went on to talk about the effects of climate change on his state, Alaska.

Retired Admiral Dennis Blair, formerly commander of the U.S. Pacific Fleet, testified at the same hearing. He was representing the Energy Security Leadership Council, headed by Former Marine Commandant P.X. Kelley and FedEx CEO Fred Smith, which has been one of the key players in helping to shape this consensus. Over the last few months, the Council had worked with Democrat Byron Dorgan and Republican Larry Craig to draft legislation that embodies many of these principles.

“Improved security,” said Admiral Blair, “will require greater conservation as well as increased production of petroleum and alternatives here at home. Put another way, improved vehicle fuel economy will increase our military flexibility and our overall national security, not just our energy security.”

The ESLC estimates that this improvement will end up saving 4.5 million barrels a day by 2030.

The fuel-efficiency standards were originally established in 1975, two years after the 1973 oil embargo, with the aim of doubling fuel efficiency levels within a decade. It was a furious battle to get them enacted.

“We do not want any handouts, we do not way any taxes, and we do not want any regulations,” said the CEO of one of the Big Three in the midst of the battle. “We do not like that sort of thing.”

But a few years later, Henry Ford II declared, “It is fair to say” that the fuel efficiency standards “moved us faster toward energy conservation goals than competitive, free-market forces would have done.”

They certainly did work, saving about two million barrels per day, compared to what would otherwise have been consumed.

At the same time, two million barrels per day of new supply was added with the construction of the Alaska oil pipeline. That’s the same point that the ESLC and others argues today, about the importance of both greater efficiency and additional supply.

Our study Gasoline and the American People shows that fuel-efficiency gains have flattened out in recent years as American’s love affair with the automobile turned into a passion for SUVs. Low gasoline prices further stimulated the ardor. The larger, less-efficient vehicles also turned out to be the part of the market where Detroit had competitive advantage. Any significant improvement in fuel efficiency standards was stalemated by, among other things, fear for the impact on beleagured Detroit, struggling as it is with heavy legacy and health costs compared with its competitors.

But circumstances have been changing over the last couple of years. In 2002, for instance, the National Academy of Science argued that fuel efficiency could be improved by a quarter over a decade with “existing and emerging technologies.” Right now, the momentum for higher standards looks unstoppable. Tying the changes to class of vehicles, rather than across an automaker’s entire output, is meant to help troubled Detroit steer it way through the challenges ahead.

Daniel Yergin is CNBC’s Global Energy Expert and the Chairman of Cambridge Energy Research Associates. He received the Pulitzer Prize for his book The Prize: the Epic Quest for Oil, Money, and Power.