Gallon by Gallon Guzzlers: Emerging Markets, Fuel Policy and Expensive Gasoline

Has anyone tried to buy a couple of dollars worth of gas lately?

If you’re living in a box, you might not have heard that these days your money doesn’t go too far. The other day I came across one local Burlington fill-up station charging $3.59 for a gallon of gas.

While still less than the $5.89 being charged elsewhere in the country, paying more than three dollars per gallon is not an easy purchase on a college budget.

Unlike the energy crisis of the 1970s, these sky-high rates are not the result of some back-room corporate collusion by a group of vindictive middle-eastern fuel suppliers. This time around, prices are not being held up by artificial supply-side trickery. Although prices have spiked because of the recent disruptions caused by the disaster in New Orleans and the resulting limitations on refining capacity, prices have been, and will remain, high because of demand side issues. Gas costs more than three dollars per gallon because of booming demand and the fact that there are now a previously unfathomable number of drivers clamoring to buy every gallon of gas they can lay their hands on.

As rapid economic development in many emerging economies worldwide leads to the creation of new middle-class hungry for the freedom, independence and status of car ownership, demand for fuel has reached record highs. Rapid urbanization and economic growth have made it possible for people in expanding, flourishing cities like Beijing to purchase cars at unprecedented levels.

Prices are so high right now because to purchase a gallon of gas, we are all competing worldwide with a number of car owners never before seen. Increased demand causes price increases and the problem will only get worse with time. Automotive sales in China are expected to increase by 10 percent annually and the rate of fuel consumption will shoot up as time passes. If the current growth rate of car ownership continues, China will eventually demand more oil than OPEC (Organization of Petroleum Exporting Countries) currently produces.

The difference between Chinese and U.S. energy policy is that the Chinese realize that current high prices are a demand-side issue and are actually doing something about it. Chinese politicians also understand that their country is a potentially huge market for automobile sales and that they have enough bargaining power to make even the biggest manufacturers meet certain demands.

According to a recent New York Times article, Chinese officials “are drafting plans to impose steep taxes on cars and sport utility vehicles with gas guzzling engines.” The taxes could add as much as 27 percent to the price of the most wasteful cars, but are not a stand-alone measure.

The proposed taxes supplement much stricter fuel economy standards that will leave major manufacturers scrambling to re-tool their fleets in order to maintain access to the lucrative Chinese market. Such legislation will discourage manufacturers from producing needlessly large and wasteful engines and will help to bring down worldwide demand and in turn help lower gasoline prices. While China marches forward with such bold legislation, U.S. officials sit on their hands and allow the gas guzzling Ford Explorer to remain America’s top-selling SUV. In China, the Explorer, which is available with a 4.0 litre V6 or a behemouth 4.6 litre V8, would be hit with a sales-crippling 20 percent sales tax. In the U.S., the vehicle is allowed to sneak under the gas-guzzler tax because of its absurd classification as a light-truck and the tax loophole which comes with such classification.

Right now a sports car with a 3.4 litre V8 would, under current policy, be seen as having more power than an average consumer needs, and would be subject to a gas guzzler tax. But, at the same time, an SUV can waste even more fuel and duck the guzzler tax. This simply does not make sense. The U.S. should close the SUV loophole and impose stricter fuel economy regulations. Americans purchase millions of new cars each year. Do U.S. officials think that America does not have the market power to impose fuel consumption standards on auto manufacturers? Do they seriously believe that Toyota, Ford, Dodge, Honda, and the others would walk away from the American market rather than meet the new standards?

It would be no great task for car manufacturers to make more fuel-efficient cars, it’s just a matter of giving them an incentive to do it.

To see if high fuel prices are having an impact on car sales I went to talk to Rick Hurlburt, salesman at Lewis Audi in South Burlington, Vermont. From what I heard, more strict fuel economy standards would not exactly be a shock to the market. In fact, consumers are self-selecting more fuel-efficient cars. Rick says that “fuel is a big deal now and it never was.” He explained that the primary questions potential customers ask have shifted from horsepower and engine output to fuel economy and efficiency.

Not only is the four cylinder A4 the most popular car on his lot, it is also, not surprisingly, the most fuel efficient. The turbo-charged 2.0 litre version of the A4 is both powerful and efficient and outsells the more fuel-thirsty 3.2 litre V6 option by a ratio of about twenty to one. Rick also explained that there is actually a waiting list for all of the wonderfully fuel efficient, pre-owned turbo-diesel powered vehicles that the dealership can find.

People are scrambling to buy these cars and convert them to bio-diesel fuel-efficiency powerhouses. According to Rick, there is a feverish demand for these diesel cars that would have been unheard of years ago. With this in mind, I don’t think that anyone would have a problem with legislation that would encourage manufacturers to use technology instead of just huge, wasteful engines to create the powerful cars they want to sell.

While China is implementing legislation that will encourage fuel economy and smaller cars, the U.S. allows a loophole to exist that actually shifts consumption away from smaller cars towards needlessly wasteful SUVs.

That $3.59 you’re paying could easily be much lower if the U.S. helped decrease demand by using regulations to encourage the use of more fuel-efficient vehicles. If every SUV owner traded in her wasteful junk-heap for a turbo-charged four cylinder vehicle, fuel consumption would decline and prices would naturally come down. It’s just a matter of the U.S. stepping up to the plate and doing something about it.

It’s not exactly “Long live Chairman Mao!” But, I think we really could learn a thing or two from the Chinese on this one. Lets see if our supposedly pro-business administration can help all consumers by bringing fuel prices down by introducing tough legislation and encouraging fuel-efficiency. Come on Georgie, it’s not rocket science, it’s just the oil business.