Why fuel economy faces law of diminishing returns

In economics, it’s known as the law of diminishing returns, the shrinking benefit you get when you pour ever-increasing resources toward achieving a singular goal.

The U.S. Department of Energy’s Energy Information Agency showed a good mathematical example of the principle today with a graphic it released about the consumer benefits of fuel economy.

For consumers, the EIA points out, the fuel savings of upgrading from a 12 mpg vehicle to one that gets 15 mpg is exactly the same as upgrading from a 30 mpg vehicle to one that gets 60 mpg.

If fuel is $3.50/gallon and one drives 12,000 miles per year, that’s $700 annually. If one drives 20,000 miles per year at that fuel price, it’s about $1,170.

For the millionaires out there, that means trading in the 2014 Lamborghini Aventador Roadster (12 mpg combined) for the 2014 Ferrari 458 Italia (15 mpg combined) will save $700 at the pump. That’s the same as if you moved from an Acura RLX Hybrid (30 mpg combined) to… well, there isn’t anything yet certified at 60 mpg combined that’s not mostly electric, but you get the point.

Even if you’re permanently disposed not to believe the government, you can still believe the math.

This exercise isn’t exactly breaking new economic or mathematical ground here; it’s simple division. But it does highlight the problem automakers face as they move heaven and earth to achieve the aggressive Corporate Average Fuel Economy goals they agreed to in 2012 for 2017 and 2025.

As the National Automotive Dealers Association pointed out, consumers will be asked to pay more and more for the technologies needed to achieve a 54.4 mpg CAFÉ by 2025. Their relative returns on those out-of-pocket investments will diminish with each successive generation of more fuel-efficient vehicle they buy. That makes the value proposition of each new vehicle, at least in terms of fuel costs, less and less attractive.

Yet, it’s equally important to remember that simply saving money at the pump isn’t the singular reason that the nation chose to go down this path. We did so to reduce greenhouse gas emissions, to reduce overall fuel usage and our dependence on foreign fuel sources, and for other reasons.

The EIA’s simple math exercise doesn’t attempt to address those issues. However, there is substantial evidence to indicate that efforts made so far to improve passenger vehicle fuel economy have helped to reduce both emissions and energy demand in the United States.

So what does all this mean?

Speaking personally, I don’t agree with those who believe improving overall fuel economy is a waste of resources or that setting aggressive CAFÉ goals is an undue regulatory burden. To me, this is a noble undertaking, every bit worth the blood and treasure dedicated so far to seeing these goals achieved.

But I do believe that the costs of achieving that final goal -- for example, wringing the final 2 mpg out of a vehicle like the Ford F-150 to reach a predetermined number set years earlier -- will grow exponentially more expensive than it is even now.

It’s the law of diminishing returns, after all, and it’s coming very soon to a garage near you. 

You can reach Larry P. Vellequette at lvellequette@crain.com -- Follow Larry P. on Twitter: @LarryVellequett

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