Producing More Fuel-Efficient Automobiles

GAO was requested to: (1) examine the background for the current fuel economy standards; (2) review pertinent studies that assess the potential for attaining further fuel economy improvements; and (3) obtain information on the financial impact of the fuel economy standards on the automobile industry in meeting such standards.

The federal fuel economy standards were established in response to fuel shortages and concern that the nation's dependence on foreign oil posed a threat to national security and the economy. A major goal of the standards was to reduce U.S. gasoline consumption through the production and sale of more fuel-efficient automobiles. The automobile accounts for about 30 percent of all petroleum consumption and is a major factor contributing to the nation's dependence on foreign oil. After the fuel economy standards were established, the automobile industry expressed concern about having to produce cars that met the fuel standards within the specified timeframes. The industry felt that it did not have enough time to redesign its equipment and plants to produce automobiles that met the fuel standards. During the 1970's, gasoline prices rose substantially. By 1979, Americans were purchasing imported, smaller, more fuel-efficient cars. To compete with the imports and produce automobiles that met the fuel economy standards, the industry began pouring huge amounts of capital into redesigning its product line. However, this capital investment and sagging revenues resulting from high car prices and high interest rates have placed the industry in a weakened financial position for the next several years. The two major automobile producers will most likely have negative cash flows of about $3 to 5 billion in 1981. Two studies predict a moderate improvement in fuel economy gains by the early to mid-1990's, or a rapid improvement by the 1990's.