Why That Lincoln Navigator Is Saving The Planet

As the horrible devastation of Hurricane Katrina pushes the price of gasoline to ever-higher levels, the Bush Administration has stated that they intend to raise federal fuel efficiency (CAFE) standards even higher to promote greater energy efficiency and lower oil consumption.

The problem with this is that it simply won’t work. There’s a dirty little economic secret that few know about but has a profound effect on the world economy: Increasing efficiency doesn’t decrease consumption.

James Glassman at Tech Central Station provides an explanation for this phenomenon:

“The pursuit of efficiency,” write Peter Huber and Mark Mills in “The Bottomless Well,” their superb book on the future of energy, “has been the one completely consistent and bipartisan cornerstone of national energy policy since 1970.”


We’re told that higher mpg can even defeat our enemies. In a recent article that linked oil dependency with terrorism, Fareed Zakaria, editor of Newsweek International, concluded, “It’s true that there is no silver bullet that will entirely solve America’s energy problem, but there is one that goes a long way: more fuel-efficient cars. If American cars averaged 40 miles per gallon, we would soon reduce consumption by 2 million to 3 million barrels of oil a day.”


Increases in energy efficiency have been the rule in the United States for a century — and especially in the past 30 years. But, as Huber and Mills write, “Efficiency doesn’t lower demand, it raises it…. Efficiency has come, and demand has risen apace.”

Economists wouldn’t find that concept as strange as it may seem. Efficiency tends to lower costs – and lower costs tends to make people use more of something. Indeed, the numbers bear out this theory – over the past 30 years energy usage has increased at the same time energy efficiency has increased. Modern cars get significantly better gas milage than the gas-guzzling monstrosities of the 1970s – but the usage of gas continues to increase. Huber and Mills’ book is a fascinating look into the economics of energy, and why conventional energy policy tends to make things much, much worse.

For instance, take raising the CAFE standards. More energy efficient vehicles means less pollution and less gasoline usage, right? The problem is that increasing fuel efficiency requires technical tradeoffs in design. Instead of using stronger steel-frame construction, a manufacturer might use lighter aluminum that’s more likely to crumple in an impact. The difference in weight and fuel efficiency comes at the expense of passenger safety. Engineers understand these compromises, but politicians do not.

The economics also don’t make much sense once one gets beyond the surface of the issue. Newer cars are more fuel efficient than older cars. However, more fuel efficient cars can be more expensive, and the costs of increased fuel efficiency end up getting reflected in the sticker price. If someone has to keep running with a 1990s era car with less stringent emissions controls and less fuel efficiency, that represents less benefit than had that person gone to a car that would have been slightly less efficient, but cheaper.

Don’t get me wrong, fuel efficient vehicles make a lot of economic sense, and car prices are quite low now. The idiots who bought that road-hogging Hummer H2 a few years ago are finding themselves taking up the tailpipe every time they fill the tank, and good luck finding a car dealership that would be willing to accept one of those beasts as a trade-in. That’s the market in action – fuel efficiency is a selling point regardless of what the current CAFE standards are.

And that’s the other issue here – gasoline is in the middle of a price bubble. Speculators have driven the price of oil to a level that’s substantially above its true market value. Megan McArdle believes that $30-$40/barrel oil is the equilibrium price, and I’d tend to agree with that assessment. At that price, reserves like the tar sands of Alberta become economically feasible to extract. Canada could easily end up being the next Saudi Arabia at that price levels – except with nutty socialism replacing virulent Wahhabism.

McArdle points out a fact about price levels and commodities:

It is an odd fact of human psychology that if tight supply (or excess capacity) persists for long enough, people will start acting as if the trend line is permanent. It is odd because “long enough” isn’t very long. Five years ago, people were talking about $5 a barrel oil, not realising what is perfectly obvious in hindsight, which is that low oil prices were not a result of being overtaken by a bold new future, but of the widespread recession in Asia that followed upon the 1997/8 financial crisis. Now they’re talking about $100 a barrel oil.

Neither prediction was particularly realistic – while we may be getting close to Hubbert’s Peak that’s only for cheap and easy oil. The Canadian tar sands aren’t cheap or easy, but it will provide us with plenty of energy until we can find an alternate source of energy. Acting in a panic tends to produce poor public policy, and that’s one of the reasons why it’s important not to overreact now.

What are the solutions to our energy problems? The biggest is our lack of refinery capabilities. We’re already running American refineries at nearly 98% capacity, and Katrina will put us much further behind. We need to build more refineries, but environmental regulations have made that nearly impossible. People want gas, but they don’t want a refinery near their house. Furthermore, our ports are heavily populated, and refineries naturally need to be close to where the crude oil enters the country to avoid the costs of shipping crude over land. Unless people are willing to budge, gas prices will remain artificially high.

Furthermore, as always, government adds a significant amount of cost – not just in taxes, but in regulations. A blend of gasoline for use in Chicago can’t be used in Los Angeles – meaning that refineries have to produce “microbrews” of gasoline that can’t be shipped freely across the country. If Los Angeles has a shortage of gas, and Chicago has a glut, you can’t ship more gasoline from Chicago to Los Angeles to make up the difference. That sort of artificial inefficiency makes the refinery situation even worse and dramatically increases the cost of gasoline.

The rise in gas prices is more reflective of poor public policy than anything else, and the continuing calls for more the same will only make things worse. Efficiency helps the consumer, but it doesn’t reduce the consumption of oil. Measures like price caps only ensure that consumption increases and supply goes down – putting gas stations (who only make a miniscule profit on gas sales) out of business and making life difficult for all. The market has already evolved a system for dealing with changes in commodity supplies – prices. The price of gas is helping to drive down demand, which will increase supply, which will eventually lead to market equilibrium. Trying to control this process is like trying to legislate a hurricane.

Over the long term, energy independence lies with clear nuclear power – which is why countries like China are working hard at building a network of clean pebble-bed reactors that can produce massive amounts of power without producing pollution or significant amounts of nuclear waste. Even the French get this right – 70% of their energy is nuclear. An efficient and effective nuclear program based on standardized pebble-bed reactor designs is the Holy Grail of energy policy – when electricity becomes cheap, things like electric cars become economically feasible. Right now all the electric cars in the world would just shift emissions from cars to power plants rather than reducing pollution.

The problem is not SUV drivers, the problem is that we’re caught between our need for energy and our own irrational fears. Forcing everyone into hybrid cars won’t reduce energy usage, it will increase it. Electric cars only shift the source of pollution from gasoline to our already over-extended power grid. We’re trying to have a 21st Century economy on an energy infrastructure that is stifled by onerous environmental regulation and the completely irrational fear of nuclear energy.

We can’t have our cake and eat it too. If we want cheap energy that doesn’t fuel terrorism, we have to start looking at economically and technologically feasible ways of doing it here at home. Rather than force yet another rounds of increased CAFE standards, President Bush needs to be making the case for bringing the US into the 21st Century – creating a network of safe and efficient nuclear reactors that can not only provide our homes with power, but also power the next generation of fuel cell, hydrogen, or electric vehicles.

As always, politicians prefer to make highly-visible gestures that ultimately don’t fix the problem – and more often than not make them worse. We can’t force people to drive hybrid vehicles, nor should we. What we can do is let the market do what markets have always done – utilize the laws of supply and demand to create a natural equilibrium.

7 thoughts on “Why That Lincoln Navigator Is Saving The Planet

  1. Jay,

    My hubby and I are arguing over the merits of your post. (I’ve got your back, dude) Here’s the question: you stated that usage has increased the past 30 years in the face of increased efficiency, to what degree is the growth in population accounted for in that statement?

  2. Actually jay i gotta disagree with you on some of your ideas. You claim that hybrid cars won’t decrease the amount of gas used, however I have a tough time following your logic. Most fuel efficent cars have small fuel tanks ( under 14 gallons) yet drive as if they 50% more. why would that cuase an increase in gas usage? People wont think to themselves, “Gee, now that I can get more out of my tank of gas, let me start driving just for the heck of driving”. People will more likely pocket the savings.

    And raising the cafe is not a bad idea. They began raising it in the 70s and early 80’s and look what resulted, low gas prices for almost two decades.

    Finally, Power plants, as a result of government regulations, are cleaner then ever before. In fact power plants are more efficent, using a third less fuel to get the same job down that they had to do 30 years ago.

    I agree that nuculear power and hydrogen cars are the way to go, however transfering over to hybrids for the meantime does not seem to be a bad call.

  3. Jay’s post has absolutely zero merit. The reason people are driving more is sprawl. Does he really believe that if the government hadn’t updated CAFE standards since the 1971 Chrysler, sprawl wouldn’t have occurred and per capita oil consumption would have stalled or declined? As usual, he’s just parroting the spin from corporate America so that even the most basic government regulation is perceived as ruinous. Even among the Rush Limbaugh faithful, it’s gonna be a stretch to convince us that we’d somehow have fewer energy-related problems if we were all still driving 1976 Buicks.

  4. Huber and Mills’ book goes into far more detail than I ever could, and their arguments are backed up with a great deal of research.

    The reason why “efficiency” isn’t such a great thing is that when there’s more of something, people do tend to use more. Yes, you’re more likely to drive more in a more efficient vehicle than you are in less efficient vehicle, unless the price is really high.

    Furthermore, hybrids (while nice cars) don’t *yet* make economic sense. I seriously thought about getting a Prius. However, it would take *years* before the savings in gas would make up for the difference in price. My Mazda gets great mileage as is, and was much less than the Prius. A Prius would have been $3,000-$4,000 more. Whatever increase in gas mileage I would have gotten would have been eaten up by the extra principle and interest on my car loan. Yes, if you’re planning to drive the Prius for a number of years, it’s not a bad deal. However, if you’re planning on only driving a car for 3-5 years, it’s not economically feasible yet. Even with $3/gal. gas it’s still not quite at the right price point – and the chances of oil staying as high as it has isn’t that likely.

    There’s nothing wrong with increased energy efficiency. The market demands it. However, an increase in CAFE standards won’t reduce demand in the long run. People who were dumb and bought all those Excursions, Hummers, Navigators, and Ford Freudian Overcompensators are now far less likely to drive except when absolutely necessary, which reduces overall usage.

    Again, Huber and Mills make a much more detailed argument than I ever could, which is why their book is so fascinating.

  5. I understand the point your making jay, however I still disagree. Consider your own answer, how you looked at a prius, but went with your mazda. Price was a factor however your still getting good efficency ( albeit not amazing efficency as you would in a prius). Do you find yourself driving more, or at least significantly more? I doubt it, there is a fixed number of places you’ll be inclined to drive too. Keep in mind a person driving the hummers or the “Freudian Overcompensators” ( good choice), while they will avoid driving, still have to drive to a certain number of locations as well. Thus they are spending more gas to go to less locations, while you are using a lower amount to go to more locations.

    As to government versus free market, CAFE is important becuase it forces all corporations to increase efficency together. In a free market many companies would eb wary to increase efficency because they’d be forcxed to raise costs. If all companies have to do it then they can move with a certain expectation of profit ( and thus they can still offer sales incentive)

    While i have my disagreements I’ll have to read that Huber and mills book though, it sounds like an interesting arguement

  6. As the population rises and metro areas sprawl, people will drive more no matter how much gas costs. It’s that simple. Per capita gasoline consumption was lower in the 1970s because at that time, people actually lived and worked in Detroit, Atlanta and Houston. Now they work in Detroit, Atlanta and Houston, but live in Livonia, Marietta and Sugar Land. Even if CAFE standard mandates hadn’t declined since 1975, I expect people would still live in Livonia, Marietta and Sugar Land rather than Detroit, Atlanta and Houston. The only way Huber and Mills’ thesis can be accurate is if they believe that if not for CAFE standards, SUV-driving yuppies would still be living in inner-cities rather than the gated communities of suburbia where daily commutes are a necessity.

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