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Government failed to push Detroit's Big Three automakers to see the future

Watching America's Big Three automakers present their bailout plan to Congress on CNBC the other day, I couldn't help notice the irony sitting in the top left hand corner of the screen.

As the CEOs of Ford, General Motors and Chrysler outlined a new future of fuel-efficient vehicles, including electric cars, the oil ticker kept falling. By the time the congressional hearing was over, oil had hit $40.

It's been a long time since oil was that low — February 2005 to be precise. But as oil prices crept up over the last decade, reaching a historic peak of $147 in July, the car companies resisted legislative pressure for improved fuel efficiency. It would be bad for business, they said.

To be sure, few predicted the depths of the crisis we are in today, and the issue of fuel efficiency is only part of the problem Detroit faces. Even if the car companies were manufacturing more smaller, hybrid-electric cars with better fuel economy, credit lines for consumers have dried up.

Detroit helped dig its own hole by failing to listen to the rising tide of voices warning that dependence on oil was bad for the economy, bad for the planet and bad for our lungs. Just as with cigarettes, oil became an addiction we just couldn't seem to shake off, despite all the mounting science out there.

Now reality bites. After their first dismal visit to Congress was lampooned on Saturday Night Live, the Big Three experienced a collective epiphany. When they returned this month they were suddenly talking about a major overhaul of their business plans. In a double irony, the car companies went begging for a bailout. But it was too late. The House voted to help. The Senate did not.

Ford's new plan is based on "an accelerated vehicle electrification plan for a family of hybrids, plug-in hybrids and battery electric vehicles," as well as mass production of its smaller gasoline-powered cars, such as the Ford Fiesta.

"It looks like the Detroit Three have learned the lesson about fuel efficiency," said Deron Lovaas, vehicles campaign director for the National Resources Defense Council in Washington. "Right now they are no longer banking on low oil prices. They are making the right bets. The question is are they making the right bets too late in the game."

The real lesson here — as with other aspects to the current financial crisis — is the role of federal regulation, or the lack of it. For decades the auto industry's powerful corporate interests have resisted government intervention. Politicians and economists backed them, on the shortsighted, black-and-white notion that free-market capitalism is good and socialism is bad. It turns out that unfettered capitalism isn't quite as good as most people like to think, and a little socialism sometimes helps.

Back in the mid 1970s, Congress introduced the Corporate Average Fuel Economy standard (CAFE) to try to improve fuel efficiency in the wake of the Arab oil embargo.

Average fleet fuel efficiency rose slowly from 13 mpg in 1973 to 27.5 mpg by 1990. But, thanks to cheap oil, the standard remained stuck at the 1990 level for the next 18 years. It wasn't until this summer that Congress forced up the fuel economy standard to 35 miles per gallon. In seeking better fuel economy, there is a good argument that government took exactly the wrong approach, that rather than mandate fuel economy standards, it would have been better to raise gas taxes, encouraging the market itself to demand cars with better mileage.

Still, it's not as if the Big Three CEOs were blindsided by some cataclysmic event that overnight made their business model unsustainable. So-called "Peak Oil" theorists have been arguing for some years about the inevitable tipping point where global demand for oil begins to outstrip its supply, forcing prices through the roof for a scarce commodity.

What we have seen over the last few years is precisely the beginning of that trend, as economic growth in China and India has rapidly increased the demand for energy. This has been coupled with falling oil production by two of the United States' most important suppliers, Venezuela and Mexico, who jointly make up for about 20 percent of U.S. imports.

In fact, the International Energy Agency has warned of this for some time. Its latest report last month showed that production from the world's 400 largest oil fields is declining faster than previously thought.

Defenders of the auto industry liken it to a giant oceangoing supertanker that takes miles to change course. "The problem is that corporate America runs on the basis of quarterly profit system, so it's geared to short-term thinking," said Zan Dubin Scott, a co-founder of Plug-in America, a group that advocates electric cars.

With so many jobs at stake, from car plants, parts makers and dealerships, one can make a strong case for arguing that the auto industry is a matter of national security. So, if the industry is unable to balance its short-term profit goals with predictable long-term economic realities, it clearly needs some form of federal oversight.

One of the most extraordinary aspects of the bailout crisis is how long the Big Three actually had the answer to their problems at their fingertips. After all, it was GM who pioneered electric car technology back in the late 1980s.

GM's first electric car, the EV1, hit the road in 1996. Other car companies came out with similar electric models over the next few years, including Toyota's all-electric RAV4 mini SUV. They proved popular in California for a while, but then abruptly, and controversially, went out of production.

GM had seemed reluctant from the start, offering the EV1 on a lease-only option. When it decided to halt production it recalled all the cars. They were literally crushed for scrap metal, as chronicled in the documentary film, Who Killed the Electric Car?

"There's a lot of mea culpa going on," said Chelsea Sexton, a former GM saleswoman who worked on the EV1 project and whose personal battle to save the car was featured in the film.

The filmmakers are working on a sequel, titled Revenge of the Electric Car, looking at how fortunes have shifted. Toyota recently invited some of California's few surviving electric car drivers in for a chat. "They wanted to know about our driving experiences," said Dubin Scott.

She was happy to explain that she has been driving her RAV4 for six years and after 65,000 miles without a single mechanical problem "the battery performs exactly the way it did the day I bought it."

Only 1,400 of the electric RAV4s were made, even though they can get 100 miles on a single charge. Dubin Scott got hers for $29,000 after tax credits.

Today electric car advocates find themselves in an odd position. After years of fighting the Big Three, they are now cheerleaders for a bailout, as long as it means a genuine revival of the electric car. "I think they understand now how badly they screwed up, but I would still like to see them come out of it," said Sexton.

She doesn't worry any more about the price of oil. By the time the Big Three bring their new fuel-efficient cars to the market, she is confident the price of oil will have risen again.

David Adams is the Latin America correspondent for the Times and can be reached at dadams@sptimes.com.

Detroit's plan

Ford: Ford pledged to accelerate its product line of hybrids, plug-in hybrids, and battery electric vehicles. Ford's planned $14-billion investment will also target ultraefficient gas-powered cars like the upcoming 2011 Ford Fiesta, a big seller in Europe.

GM: GM says it is spending almost $750-million to develop the electric-powered Chevy Volt, much of which is going into battery research. It hopes to get it into production by 2010.

Chrysler: The company says it has new models in the works, including several electric vehicles scheduled to arrive early next decade. But its near-term product pipeline is made up of the usual gas-guzzling suspects: a new Jeep Grand Cherokee SUV, a new Chrysler 300 sedan, and the Dodge Charger muscle car.

Government failed to push Detroit's Big Three automakers to see the future 12/13/08 [Last modified: Tuesday, December 23, 2008 6:34pm]

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