The Relationship Between the Price of Gasoline, CAFE Standards and Vehicle Mileage

The Pew Environmental Group credits the CAFE standards program with vehicle fuel-efficiency improvements, and it blames a lack of additional progress on the federal government’s failure to increase the mileage standard.[17] But this ignores the role that gasoline prices play in shaping consumer preferences for fuel efficiency. When gasoline prices rise, consumers increase their preference for lighter, more fuel-efficient vehicles. Automakers respond to this new demand by producing more fuel-efficient vehicles. When gasoline prices fall, consumers tend to shift their preferences toward larger, heavier, less fuel-efficient vehicles, to which automakers also respond.

The National Research Council’s Committee on the Effectiveness and Impact of Corporate Average Fuel Economy Standards found that before 1985, when crude oil and gasoline prices were rising, technological improvements for both passenger cars and light trucks were concentrated on improving fuel efficiency. After 1985, as crude oil and gasoline prices were falling, technological improvements were concentrated on other performance characteristics, such as acceleration. The committee notes that after 1985, vehicles became 20% heavier and the average 0-60 mph time dropped by 25%.[18] This suggests that the effect of CAFE standards on overall average fuel efficiency is influenced by the relative price of gasoline: The standards will be less effective when gasoline prices are low or falling.

Graphic 6 plots the price of crude oil and the price of gasoline from 1976 to 2017.[*] Since crude oil is the main input for manufacturing gasoline, it is not surprising that the two prices move closely together. There were two price spikes in the crude oil and gasoline markets in this timespan. The first occurred in the mid-1970s, following the Middle Eastern oil embargo, and then again in 1979, following the Iranian Revolution and overthrow of the Shah. Crude oil and gasoline prices remained at a high level throughout the early 1980s due to collusion by the Organization of Petroleum Exporting Countries. Prices then declined in 1986 as Saudi Arabia increased its crude oil production and OPEC collusion broke down. Except for a price spike in 1991 due to the Persian Gulf war, crude oil and gasoline prices remained low until the early 2000s, when global demand, particularly from China and India, pushed prices up. Crude oil and gasoline prices then decreased until around 2014, when the fracking revolution increased the supply of crude oil from nontraditional sources. Crude oil and gasoline prices were low until 2021.[19]

Graphic 6: History of Crude Oil and Gasoline Prices, in 2018 Dollars

Given that purchasing fuel is a significant cost of operating a car, the price of gasoline influences the type of new car consumers choose to buy. This is illustrated by the mix of light trucks and passenger cars produced, which is shown on Graphic 7.[20]

Passenger cars rose from 78% of total vehicle production in 1976 to 84% in 1980, following an increase in the price of gasoline. A similar trend emerged during a more recent period of relatively high gasoline prices: Cars rose from 55% of total vehicle production in 2002 to 67% in 2009. Light truck production moved in just the opposite direction, increasing in the 1980s and 1990s as the price of gasoline was either flat or falling. It again increased after 2014, when gasoline prices began falling following the fracking revolution. Thus, the price of gasoline drives consumer preferences and, in turn, vehicle production. This conclusion is supported by several academic studies, which show that consumers account for expected increases in gasoline prices when purchasing a new vehicle.[21]

Graphic 7: Light Truck and Passenger Car Production as a Share of Total Vehicle Production

Disentangling the effects of CAFE standards on improved vehicle mileage from the price of gasoline is complicated because CAFE standards have only been increased when the price of gasoline was rising. The stated motivation for increasing CAFE standards is to reduce the country’s dependence on foreign oil and reduce greenhouse gas emissions.[22] However, an unstated motivation might be for politicians to “do something” in response to the increasing price of gasoline. As the National Research Council points out in the introduction to a 2002 report, “Fuel economy is attracting public and official attention in a way not seen for almost two decades. Gasoline prices have risen sharply over the past two years and fluctuated unpredictably.”[23]

Requiring producers to make cars with higher fuel efficiency can give voters the impression that higher gasoline prices can be fully offset by improved mileage, because consumers may need to buy gas less frequently. But the cost of improved fuel efficiency is buried in the purchase price of the vehicle. President Obama, for instance, claimed that increasing the CAFE standard to 54.5 mpg is equivalent to lowering the price of gasoline by $1 per gallon, which ignores this hidden cost.[24] This could explain why elected officials use CAFE standards to force mileage improvements when the consensus in the academic literature is that the same improvements could be obtained at a fraction of the cost by using a gasoline tax.[†]

Graphics 8 and 9 plot the history of miles per gallon for new cars and new light trucks, along with the price of gasoline and CAFE standards.[‡] The graphic plots “real world mpg” over time, which is different than the “2-cycle 55/45” test the EPA uses to calculate mpg for purposes of CAFE compliance. The EPA acknowledges that the 2-cycle test does not accurately reflect real world driving and thus conducts a second test that calculates miles per gallon using more realistic driving conditions. [25] The 2-cycle test inflates miles per gallon by an average of 21% for passenger cars and 22% for light trucks over the time in the graphic. Therefore, both car and truck mpg are consistently lower than the CAFE standard in the graphic. The amount that the 2-cycle test inflates miles per gallon is increasing over time. In 2017, it inflated miles per gallon by 26% for both passenger cars and light trucks.[§] Thus, passenger cars and light trucks do not actually get the mileage advertised in CAFE standards.

Graphic 8: Passenger Car Mileage, CAFE Standards, and the Price of Gasoline

Graphic 9: Light Truck Mileage, CAFE Standards, and Gasoline Prices

Passenger car and light truck mileage closely tracks both the price of gasoline and the CAFE standard. This is consistent with the idea that automakers respond to consumer preferences for improved mileage when the price of gasoline is rising, and politicians respond to voters’ concern about rising gasoline prices by increasing CAFE standards.

Passenger car and light truck mileage and CAFE standards are flat when the price of gasoline is flat. Voters are less concerned about the price of gasoline when it is not rising.[26] Increasing the requirements of CAFE standards, and thus mandating smaller, more fuel-efficient vehicles when gasoline is cheap, would be politically unpopular, which could help explain why CAFE standards were unchanged during the 1980s and 1990s.

Brookings Institution economist Robert Crandall argues that the vehicle mileage improvements seen in the early days of the CAFE standards program would have occurred even without it.[27] He points out that the average fuel efficiency improved by more than 20% from 1973-76, even though the CAFE standard program did not take effect until the 1978 model year. The rate of fuel efficiency improvements was greater during 1973-77, which coincided with the oil shock from the Middle Eastern oil embargo, than between 1978-84, which coincided with falling gasoline prices and CAFE standards taking effect. He also argues that the rate of fuel efficiency improvements experienced during the 1970-84 period is what would have been expected without CAFE standards, given the cost of engineering and manufacturing fuel-efficient cars and the rise of the price of gasoline during that time.

Graphics 10 and 11 plot vehicle mileage, along with the CAFE standard for passenger cars and light trucks for General Motors, Ford, Chrysler, Toyota and Honda for the 1975-2017 period.[**]

Graphic 10: Mileage and CAFE Standard for GM, Ford, Chrysler, Toyota and Honda Passenger Cars

Graphic 11: Mileage and the CAFE Standard for GM, Ford, Chrysler, Toyota and Honda Light Trucks

These charts illustrate Crandall’s point. Both passenger car and light truck mileage were rising before CAFE standards took effect. Toyota and Honda have never been constrained by the CAFE standards, a point which numerous authors in the research literature have raised.[28] Even GM, Ford and Chrysler exceeded the CAFE standard for light trucks until 1983, a point also noted by Clemson University economist Bruce Yandle in 1980.[29] Thus, it is likely that the mileage improvements seen during the late 1970s and early 1980s would have occurred even without the CAFE standards program.