Why falling fuel prices are bad, bad news

Cheap gasoline usually brings 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 than necessary. When gasoline sells for $3.50 a gallon, my Jeep's empty fuel tank can swallow 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 crude oil has tumbled more than 50 percent. A gallon of regular unleaded gasoline now costs less than $2 in many states. Last week, crude prices fell below $50 a barrel.

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

Fuel-efficient vehicles are harder to sell when gasoline is cheap. Demand for Volkswagen's fuel-efficient diesels has plummeted in recent months, for example, and sales of most hybrids are tanking.

Cheap gasoline usually requires higher, profit-draining incentives on hybrids and high-efficiency cars. If returns on technology investment fall, it's harder for automakers and suppliers to develop the next generation of fuel-efficient hardware.

Despite the plunge in fuel prices, several high-ranking executives I spoke with promise not to stop investing in new technologies -- even if sales sag.

"If you are a slave to monthly sales, you give up your long-term vision," says Mark Reuss, General Motors' global product development chief.

"We did that" with the EV1, he said. "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. We are not going to make that mistake again."

Still, low fuel prices make it harder to justify spending billions to develop products that customers don't want to buy. It can prompt 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 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," Nair says. "Although we haven't seen a big near-term impact, ... we have seen a longer term impact on total electrification sales for the industry. They are not as high as some people expected."

Nair doesn't rule out boosting incentives if hybrid sales continue to decline. "We'll always look at pricing and ... transaction prices ... and make sure we are competitive."

We need a temporary hike in petroleum taxes to prevent Americans from returning to guzzlers. Cheap fuel is America's addiction. When oil is cheap, the economy grows faster.

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

Bob Fascetti, Ford's vice president for powertrain engineering, said: "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."

This won't be popular, but I hope fuel prices rise in 2015. Failing that, maybe Americans have learned a lesson and won't abandon fuel-efficient vehicles.

But I wouldn't bet on it.