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The downside of low fuel prices

Cheap gasoline usually means higher incentives on hybrids and other fuel-efficient cars -- making it harder for automakers and suppliers to sell them at a profit.

When it comes to buying gasoline, I have deep pockets but short arms. Like you, I don’t want to pay more for fuel than necessary. When gasoline sells for around $3.50 a gallon, my Jeep’s empty fuel tank can drain the better part of a $100 bill.

And yet, I view the dramatic plunge in fuel prices as a bad, bad thing.

Since June, the price of a barrel of oil has tumbled more than 50 percent. A gallon of regular unleaded gasoline now costs less than $2 in many parts of the country. Monday, a barrel of oil cost just over $50.

If oil prices keep falling, there is a real danger that the billions invested by automakers and suppliers on smaller, cleaner-running and more fuel-efficient engines, on lighter vehicles, on hybrids and on more-efficient transmissions will be lost.

Fuel-efficient vehicles become harder to sell when gasoline is cheap. VW, for instance, has seen demand for its fuel-efficient diesels plummet in recent months, and sales of most hybrids are tanking.

Cheap gasoline usually means higher incentives on hybrids and other fuel-efficient cars, which, of course makes it harder for automakers and suppliers to sell them at a profit. Without a return on the technology investment, it becomes more difficult to pay for the next generation of fuel-efficient hardware.

Despite the plunge in fuel prices, several high-ranking executives I spoke with are promising no changes in their strategies to keep improving fuel economy by investing in new technologies -- even if sales fall.

“If you are a slave to monthly sales, you will give up your long-term vision of what you think the future will be,” says Mark Reuss, General Motors’ global product development chief. “And we did that [with the EV1]. We had the first electric car. And we didn’t follow it up. Think of where we would be today if we hadn’t done that. And I remind people who weren’t in the company or are younger. I say, we are not going to make that mistake again.”

Still, if fuel prices stay low it becomes harder to justify spending billions of dollars to develop products that customers don’t want to buy. And that usually provokes lobbying efforts to repeal fuel economy and CO2 regulations.

Raj Nair, Ford’s global product development chief, admits the company’s most fuel efficient vehicles, such as the C-Max hybrid, Fiesta SFE and Focus Electric, are going to be harder to sell in an era of cheap gasoline.

“Certainly on some products like hybrids and electric vehicles, lower gas prices make it more difficult,” says Nair. “Although we haven’t seen a big near-term impact on what’s going on right now, we have seen a longer term impact on total electrification sales for the entire industry. They are not as high as some people expected.”

Nair doesn’t rule out higher incentives should sales of hybrid continue to decline.

“We’ll always look at pricing in the market and what transaction prices are running at and make sure we are competitive in the market.”

You probably won’t hear President Barack Obama or many members of Congress proposing a temporary gas price tax hike. But we need one to prevent Americans from falling into bad habits and retreating back into guzzlers. Cheap fuel is America’s addiction. When oil is cheap, the economy grows faster.

Meanwhile, engineers have the budgets -- for now -- to continue developing new, more efficient powertrains.

“We’re as thrilled as anyone to see some relief at the pump, but we will continue to invest in fuel-saving innovations because it’s the right thing to do for our customers,” said Bob Fascetti, Ford’s vice president for powertrain engineering.

“Our progress on EcoBoost and other efficient and accessible technologies that lower overall ownership costs are key to our long-term goal of helping lower CO2 emissions, which ultimately benefits our customers.”

This won’t make me very popular, but here’s hoping that 2015 sees fuel prices rise. Failing that, maybe Americans have learned a lesson and won’t abandon fuel-efficient vehicles.

But I wouldn’t bet on that if I were you.

You can reach Richard Truett at rtruett@autonews.com

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