Trump Cap on U.S. Auto Fuel Economy May Raise Prices at the Pump

(Bloomberg) -- The Trump administration’s proposal to ease U.S. fuel economy standards after 2020 may slow an expected decline in gasoline demand, resulting in higher prices at the pump.

The Environmental Protection Agency and National Highway Traffic Safety Administration jointly proposed on Thursday to cap fuel economy requirements at a fleet average of 37 miles per gallon starting in 2020. Under the Obama plan, the fleet-wide fuel economy would have risen gradually to roughly 47 mpg by 2025. The change would mean a 2 percent to 3 percent increase in daily fuel consumption.

“In, say, five or 10 years, there could be some impact to gas prices,” said Patrick DeHaan, senior petroleum analyst at GasBuddy. “This decision would put upward pressure on prices, rather than downward."

The projected increase of about 500,000 barrels a day in fuel demand comes as U.S. consumption is holding near record levels. The Energy Information Administration forecast in its latest Annual Energy Outlook that demand would begin to decline after this year, shrinking more than 2.5 million barrels a day by 2040.

“Longer-term, what this means, is that gasoline demand in the U.S. won’t decline as quickly,” said Katie Bays, an analyst at Height Securities LLC. “There is less incentive for car makers to try to push plug-in hybrids or electric vehicles, which obviously have higher fuel economy ratings.”

Trump Cap on U.S. Auto Fuel Economy May Raise Prices at the Pump

The average price of U.S. retail regular gasoline is about $2.87 a gallon, near a three-year high reached in May, according to data from the American Automobile Association. The four-week average gasoline demand has remained above 9 million barrels a day since February.

The plan “should be bullish for gasoline prices,” said Bill O’Grady, chief market strategist at Confluence Investment Management LLC in St. Louis. “Before, you had a double whammy. You had flat driving activity and falling miles per gallon. That fear of every year that goes by, cars become increasingly efficient, goes away.”

A 60-day comment period will begin once the proposal is published in the Federal Register, and a final rule could be finalized by the end of 2018 or early next year.

So how much will consumers be affected when they go to fill up their tanks?

“Does it lift prices relative to where they would have been if CAFE standards remained really stringent? Probably,” Bays said. “But, does it necessarily cause gasoline prices to rise from where they are today? Maybe not.”

©2018 Bloomberg L.P.