The Challenge of Fuel-Efficient Cars

As China gets richer, its people would like to have more comfortable cars.

From Reuters:

Image from Lamarguerite.wordpress.com

BEIJING (Reuters) - China's energy policymakers have lately been thinking a lot about drivers like 24-year-old Cindy Chen, who chose a larger German Opel over smaller, more fuel-efficient models when she bought her first car in March.

Like many motorists of the "single child" generation -- kids of baby boomers born in the 1950s -- Cindy is showing early signs of an American-style auto affair, heedless of Beijing tax breaks meant to encourage sales of smaller cars, whose market share grew to over two-thirds of all new car sales in the first quarter.

"Daddy bought it for me, so why not a big one?," said Cindy, a lawyer with a local government office in eastern Ningbo city.

But she will have fewer incentives to drive the way her American counterparts do after policymakers on Monday raised diesel and gasoline prices by 6 and 7 percent respectively, the second increase this year but the biggest since last June.

While some criticized it as a half-measure that barely matched half of the recent rise in global crude oil costs, the increase takes gasoline prices to near their peaks last June, in stark contrast to U.S. prices that are half last summer's highs and are now about 40 percent cheaper than Chinese pump rates.

Early anecdotal evidence suggests the shock of steadily rising prices this year may be causing car-owners to think twice before hitting the road after five years in which authorities sought to cushion the blow for consumers, adding to demand.

"I never really thought about petrol cost before. My panic about oil prices started last summer... Now my pay has not increased but oil went up again. I will certainly start to plan for driving nowadays, like a car pool if driving long distance," said Zhang Yun, who drives a 2.7-liter Hyundai Tucsan.

At stake is nothing less than the outlook for global oil prices, which have rallied in part on hopes for a sustained recovery in demand from No. 2 consumer China, where gasoline use has led the pick-up in consumption seen in recent weeks.

Read On

This discussion of Chinese gasoline prices reminds me of a blog post I read a few weeks ago from the relatively new and popular China blog - China Smack. Here is what a blogger there had to say about China's gas prices:

The above is States Average Gas Prices is “United States average gasoline prices”.

For example: Wyoming state 1.753, Wyoming (unit should be USD/gallon?)

If we use the foreign exchange rate I just checked: 1 USD = 6.8311 yuan RMB

And 1 gallon = 3.785 liters

Conversion (U.S.) price: ?

1.753 USD * 6.8311 / 3.785 liters = 3.16 yuan RMB / liter (American gasoline price)

According to what netizens have said today, Yichang’s 93 octane gasoline is approximately 5.20 yuan/liter??

Yichang (it is said that Beijing, etc. are even higher) gasoline prices compared to Wyoming state is higher by %
(5.2-3.16) / 3.16 * 100% = 2.04/3.16 * 100% = 65%! ! ! !

Our gasoline prices per liter is 2.04 yuan higher than the United States, exceeding 65%!!!

And they do not have grade one, grade two road fees, bridge fees, highway fees…

And their average wages are perhaps 10 times our average wages…

Read On

Obviously, this guy was not happy about the gouging he was feeling at the pump.

The only problem I have with the calculations done above is that taking Wyoming's gas prices may not be the best indicator for America's prices as a whole. Wyoming, in America's mountain west, has the lowest population of the entire country. Even lower than Alaska. So the prices in rural Wyoming are going to be lower than those in more populated areas.

But overall, the price of Chinese gasoline compared to American prices are way higher. But I also remember from studying abroad in Europe in 2003 that Europe's gasoline prices are also significantly higher than America's.

So this leads me to the question: is it really fair to compare China's gas prices to America's? Instead of China's prices being "too high," are America's prices "too low?"

Doing a quick Google search, I found this list of the countries with the most and least expensive gasoline prices in the world as of last summer. The results of the prices from major cities within the country, from promotionalcodes.org.uk, are interesting:

Most Expensive Countries
1. Oslo, Norway - $9.85/gallon
2. Paris, France - $9.43/gallon
3. Copenhagen, Denmark - $9.24/gallon
4. Rome, Italy - $9.03/gallon
5. London, England - $8.96/gallon

Least Expensive Countries
1. Caracas, Venezuela - $0.12/gallon (!!!)
2. Tehran, Iran - $0.41/gallon
3. Riyadh, Saudi Arabia - $0.47/gallon
4. Kuwait City, Kuwait - $0.92/gallon
5. Cairo, Egypt - $1.24/gallon

These prices were from when gasoline was at an all-time high last summer. So the prices will be off compared to what they are now. But I imagine that the rankings are still fairly similar. China and America aren't at the top or bottom of the world's prices. Although it does appear obvious from the China Smack calculations that America is more setup for "happy motoring" than China is.

With GM and Chrysler now bankrupt, the days of Americans truckin' around in SUVs may very well be over though.

There was an intelligent discussion of Detroit's bankruptcies on NPR's podcast "Planet Money" the other day. Frank Langfitt, an NPR correspondent, was present at the Chrysler bankruptcy hearings this past week. He had some really interesting insights on what is going on with the government's take over of Detroit.

Indeed, the American car industry as we knew it is long gone.

I'm going to transcribe a couple of the key points, but I really recommend that you listen to it for yourself here.

From a discussion between Laura Conaway and Frank Langfitt on the Planet Money podcast:

Langfitt: Now what the government always says is, "We don't want to run this company. We want auto executives to do it." At the same time, let's take a look at that Fiat deal. One of the things they said to Fiat is, "It you want another 5% stake in Chrysler, you're going to have to deliver a 40 mile per gallon engine in the United States."

Conaway : So the Obama administration is directly saying to Fiat that you can have some more of Chrysler, but you've gotta give us a car that does like this on the road?

Langfitt: Exactly. So you can say publicly, as the president has, we're not going to dictate policy, but you already have the White House saying, "If you want X, you're going to have to deliver Y," and Y is a very fuel efficient engine, which is what the government's policy is towards oil and part of its energy policy and part of its automotive policy. So, it's very hard to divide this up when you have a government that has other political agendas that are related to the car industry.

Conaway : And let's talk for a minute about those agendas because government comes with one set of goals - more fuel efficient cars, maintaining the employment rate or getting the unemployment rate down in places like Michigan and Ohio, nobody in those places want to see the auto industry go away. But a profit-making company like Chrysler comes at things from a very different set of goals. First and foremost has to be, by law, maximizing profit.

Langfitt: Absolutely.

Conaway : How do you reconcile those?

Langfitt: It's going to be fascinating. This is going to be one of the big meta-stories of what's happening with the auto industry because if you talk with people in Michigan, they say smile and just nod their heads when Obama says anything. They say, "Sure boss, we'll do whatever you want." But they say it's been very difficult traditionally for those companies to make much money on small cars. The profit margins are very narrow. People perceive, rightly, that Toyota and Honda are better at making them. And so they're concerned about these fairly significant fuel standards and that they're going to have to make small cars that they can't make money off of, which would run counter to the tax payers' interest, which is getting some kind of return on the money we've put into these companies. So in some ways, these things can be very much at odds and how it plays out is going to be fascinating.

The discussion continues. It is really great. I just can't be bothered transcribing any more of it. This section was the most interesting to me anyways.

This contradiction between profitable cars and cars that the Obama administration wants the companies to produce is incredible. I can see where Obama is coming from. It is in America's best interest to get away from its oil addiction and try to drive smaller cars. Yet it is hard to see how the companies that the US is now gobbling up are going to be able to sustain themselves on such cars.

There are no clear answers as to how the collapse of the US auto industry can or will be reconciled. What happens over the coming months and years is going to be remarkable to witness.