Why Detroit Doesn't Mind the New CAFE Standards

Last week, the White House announced its new plan to increase corporate average fuel economy, or CAFE, to 54.5 miles per gallon by 2025. In a strange turn of events, the same American automakers who usually gripe loudest about these mandates actually support this deal.

A simplified history of CAFE standards
Ford (NYS: F) , General Motors (NYS: GM) , and Chrysler have traditionally railed against CAFE standards, arguing that they give foreign car companies an unfair advantage. Toyota (NYS: TM) and Honda (NYS: HMC) have flaunted their efficient cars since the original CAFE standards passed in 1975. The Japanese automakers' lines already met those initial requirements, while the Americans had to spend huge quantities of money to make their fleets less fuel-thirsty. Repeat this story for nearly every increase up until now.

So what's changed? For one thing, the proposed plan is actually a compromise. Originally, the White House had targeted 56.2 mpg, but automakers balked. In addition to the lowered goal, the new plan partially exempts full-sized pick-ups from the restrictions. It also includes credits for hybrid trucks, alternative fuel vehicles, and other fuel-economy-boosting measures. The White House also agreed to review the rules later on to make sure they're not too stringent.

Rise of the four-banger
In addition, rising gas prices have altered consumer demand. An increasing number of car buyers actually want more fuel-efficient vehicles. Four cylinder engines now power 43% of the cars sold in the first half of the year. If you exclude fleet sales, more than half of all cars sold this year run on four cylinders.

Neither Ford nor GM missed the shift to smaller engines. Both companies have managed to build fuel sippers that don't feel like soul-crushing econo-boxes. GM plans to boost production of its plug-in hybrid, the Chevy Volt. Also, in April, the Chevy Cruze booked a 180% year-over-year sales increase compared to its predecessor, the Cobalt

Meanwhile, Ford replaced the yawn-inducing American-designed Focus with one based on its European model, and enjoyed a subsequent 32% sales increase in May.The move toward smaller engines has even reached the world of light trucks. Ford now sells more V-6 powered F-150s than those with V-8s, and it's actually struggling to keep up with the demand for its turbocharged EcoBoost V-6 engine.

The portfolio approach
Finally, GM and Ford appear to actually have a plan for meeting the requirements. In addition to boosting the efficiency of gasoline engines, both companies have begun to experiment with alternative fuels and new car technologies.

Ford believes we may not find a clear winner among the current gasoline alternatives, so it's chosen to develop a portfolio of alternative fuels. In addition to its current line of hybrid vehicles, Ford plans to release an electric Focus, and the C-MAX -- a crossover that will be available as either a full electric car or plug-in hybrid. The company also offers natural gas conversion packages for the Transit Connect, F-series trucks, and E-series vans, although these are aimed more toward fleet customers equipped with central filling stations.

GM has actually made even more surprising moves than Ford. Breaking with its longtime reluctance to embrace new fuels, it plans to release a diesel-powered version of the Cruze in 2013, and it's partnered with Westport Innovations (NAS: WPRT) to design natural gas engines for light duty vehicles. On the electric front, GM has invested in Proterra -- a maker of electric buses -- and broken ground on a new electric motor plant in Maryland.

Foolish takeaway
I'm tempted to launch into soaring rhetoric here, praising Ford and GM for their investments in making our cars more environmentally friendly, but I think that might be premature. For now, I'll say that I like the portfolio approach. It greatly lowers the risk that either company will fall behind when consumers eventually pick their new favorite fuel source.

Even with all of these innovations coming down the pipeline, oil prices won't necessarily fall any time soon. If you're looking for ways to profit from fossil fuels while you wait for someone to invent an affordable long-range electric vehicle, check out this free report, "3 Stocks for $100 Oil." It's absolutely free, so click here to download it today.

At the time thisarticle was published Fool contributorPatrick Martindoes not own shares of any of the companies mentioned here. You can follow him on twitter @TMFpcmart03. The Motley Fool owns shares of Ford.Motley Fool newsletter serviceshave recommended buying shares of Ford, General Motors, and Westport Innovations. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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