Worst of times, best of times in Detroit: Wagoner out, fuel efficiency in

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It's a down day, but in a sense it's an up day for the U.S. auto sector, since recent developments may mark the beginning of new period of recovery and growth.

Of course, news that General Motors (GM) C.E.O. Rick Wagoner had resigned following a request from the Obama administration as a precondition to additional U.S. government aid, would be hard to interpret as a good data point for the U.S. auto sector. It is a painful, but necessary step, many auto industry analysts agree.

Out with old ways, in with new

"We cannot, and will not simply let our auto industry vanish," President Obama said at a Tuesday news conference addressing the government's agreement with GM and Chrysler, Bloomberg News reported Monday. The president added that the restructuring the U.S. government was requesting "would mark not an end, but a new beginning for the U.S. auto industry."

So where's the upside in the news cycle relating to the auto sector? The U.S. Department of Transportation announced that it has increased the fuel economy standard for cars and light trucks to an industry-wide 27.3 miles per gallon (mpg) for 2011, up a full two mpg from 2010 models.

The increased mpg standard is expected to save about 890 million gallons of fuel and lower carbon dioxide emissions by 8.3 million tons, the U.S. DOT said.

What's more, cars will have to meet a higher standard than trucks. Cars will have to average 30.2 mpg and light trucks 24.1 mpg in 2011, the U.S. DOT said. The department added that it's currently working on a car and light truck fuel economy plan for the post-2011 years.

Many investors may overlook the higher fuel economy standards, but this is a significant development. The higher standards should have been implemented a decade ago, but as investors realize, there was another president in charge at that time. Low fuel economy standards were part of the U.S. auto sector's undoing during the past decade, as American vehicle buyers shunned lower-mpg cars, SUVs, and trucks in favor of higher-mpg vehicles made by foreign car companies.

Fuel economy is relevant again

To be sure, the U.S. auto sector will need more than increased gas mileage, such as sacrifices from all stakeholders involved (management, UAW, dealers, suppliers, shareholders, bond holders) to execute a turnaround, but fuel economy is not an inconsequential variable, particularly if the era of relatively low oil prices (and gasoline prices) is short.

Veteran oil analyst Matt Simmons, founder of Simmons & Co., a Houston-based investment bank, is in the camp that says oil's low price period will be very brief.

"We are three, six, maybe nine months away from a price shock. We are not talking about three to five years away -- it will be much sooner," Simmons told Reuters. "These prices now are dangerously low. The lower prices fall, the less oil will be produced and the greater the chance of an oil spike."

Oil traded Monday down $2.45 to $50.03 per barrel. U.S. gasoline currently averages about $2.05 per gallon for regular unleaded, with high-cost urban areas experiencing prices about 20 cents higher.

The summer driving season typically results in a 20-35 percent increase in U.S. gasoline prices, due to increased demand, although that seasonal price spike will likely be mitigated by the U.S. recession, which is reducing the number of drivers. That said, the underlying trend is obvious enough: gas price are around $2 per gallon during a period of low demand. They're likely to return to uncomfortable levels above $3 during the economic recovery -- which underscores the importance of fuel economy during the next auto buying wave.

Auto Sector Analysis: Without question, quality, performance, utility, style, and, of course, price are the other major factors that influence the vehicle buying decision, but fuel efficiency will be up there, as well, during the next economic expansion. The key is for GM, Ford, and Chrysler to avoid losing customers simply because 'the Toyota model's gas mileage is 30 percent better'. If U.S. automakers can produce the vehicles Americans want, at a reasonable price, with competitive gas mileage, the industry has a fighting chance, albeit on a smaller scale.
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