Why Donald Trump Could Dump Obamas Fuel-Economy Standards

By John Rosevear Markets Fool.com

Will President Trump roll back the tough fuel-economy rules put in place by the Obama administration?

Continue Reading Below

Detroit automakers supported the Obama rules when they were put in place in 2011. But things have changed since then. Today they seem unrealistic and likely to hurt Detroit -- and it looks like Donald Trump might do something about that before long.

Obama's rules made some sense -- in 2011

Ford Motor Company (NYSE: F) CEO Mark Fields made headlines a few weeks ago when he said that he had told President Trump that about a million U.S. jobs could be at risk if the fuel-economy rules aren't adjusted to align with the reality of the U.S. new-car market.

Ford CEO Mark Fields at the company's Dearborn Truck Plant, a very busy factory that produces F-150 pickups in Michigan. Ford also makes the F-150 at a second factory near Kansas City and builds its Super Duty pickups in Kentucky. Image source: Ford Motor Company.

A million U.S. jobs? That might be a bit of hyperbole. But it's definitely true that the Obama-era rules stand to put heavy pressure on the Detroit automakers and their suppliers over the next few years, and that really could hurt employment.

Continue Reading Below

Here's the background: Back in 2011, President Obama put in place a strict new set of fuel-economy rules for all of the major automakers, both domestic and foreign. The rules tighten gradually over time, up to a surprisingly strict corporate average fuel economy of 54.5 miles per gallon in 2025.

Believe it or not, the automakers agreed to those rules at the time, and even supported them. Remember what it was like in 2011: Gas prices were high and thought to be headed higher over time. The automakers felt that the rules gave them a clear picture of what would be expected over the next 14 years, allowing them to plan their investments in advanced fuel-saving technologies accordingly.

Those rules are set to tighten considerably over the next couple of years. That's a problem because the assumptions that were in place when the Obama team set up the plan in 2011 haven't turned out to be true here in 2017.

How the Obama rules could crush profits at Ford and GM

The concern is that the tightening rules will restrict the ability of automakers, especially the Detroit automakers, to sell the kinds of vehicles that Americans want most.

Things have changed a lot since 2011. Gas prices are much lower. Electric cars aren't selling in anywhere near the numbers that the Obama team hoped to see by now. Instead, Americans are doing what Americans do when times are good -- they're buying lots of pickups and SUVs.

General Motors' big SUVs are made at a factory in Arlington, Texas. That factory has been so busy over the last couple of years that GM is investing in a big expansion of the plant. Image source: General Motors.

That's a very profitable situation for all of the automakers because SUVs and pickups have better profit margins than small cars. It's especially good for Ford,General Motors (NYSE: GM), and FiatChrysler Automobiles(NYSE: FCAU). All threesell huge numbers of SUVs and full-size pickups, and Ford and GM inparticular have been booking fat profits in North America in the current market.

Those profits have allowed them to invest aggressively in new products and technologies, helping them to position themselves as leaders (instead of roadkill) as technological changes transform the auto industry. Those investments are also creating new U.S. jobs, which is a big priority for President Trump.

Automakers have the technology to improve the fuel economy of big pickups and SUVs without sacrificing a lot of performance. The problem is that the technology is expensive, adding hundreds or even thousands of dollars to the cost of building the trucks and SUVs.

Fiat Chrysler's Jefferson North Assembly Plant in Detroit makes Jeep Grand Cherokee and Dodge Durango SUVs. It's thought to be one of the most profitable auto factories in the world right now. Image source: Fiat Chrysler Automobiles.

That would be one thing if Americans were willing to pay the cost. But with gas prices hovering around $2 a gallon, Americans aren't interested in paying extra for incremental fuel economy improvements. That has the automakers worried that they will have to eat the costs of these technologies.

Absorbing those costs will erode those nice profit margins. That in turn will limit the automakers' ability to invest in new products and technologies that will create and maintain all those American jobs in coming years.

That's a real issue, and it's one that Fields was talking about well before the election. Now, he's talking to a president who seems likely to hear the message.

So what happens next?

It's always hard to predict exactly what will happen with President Trump, but it seems likely that we'll see these rules modified in some way before long. If so, that won't mean that the automakers will stop working on electric cars and more fuel-efficient technologies, as they'll still need them here and in other parts of the world, especially if gas prices rise again.

But it will mean that Americans will be able to keep buying the trucks and SUVs they love without big price increases -- at least for a while longer.

10 stocks we like better than General Motors
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and General Motors wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of February 6, 2017

John Rosevear owns shares of Ford and General Motors. The Motley Fool owns shares of and recommends Ford. The Motley Fool recommends General Motors. The Motley Fool has a disclosure policy.