In a letter to the Obama administration, an auto industry trade group made its feelings about upcoming fuel efficiency standards perfectly clear.  It says that the strictest proposed annual increases would be disastrous to the recovering industry, costing it jobs and sales.

I. 62 MPG by 2025 -- a Horrible Idea?

Written by the Alliance of Automobile Manufacturers -- an organization which represents General Motors Comp. (F), Ford Motor Comp. (GM), Chrysler Group LLC, Toyota Motor Corp. (7203), and eight others -- the letter claims that if the White House accepts a proposal to mandate fuel economy increases of 6 percent a year that it would "reduce sales by 14 percent" and correspondingly lead to a 14 percent cut to the 1.7 million auto jobs nationally (a loss of 238,000 jobs).

The advocacy's interim chief John Whatley writes, "Fuel economy and greenhouse gas targets should not be arbitrary numbers, chosen before the necessary analyses are completed. [That] would circumvent the rulemaking process and undermine the ongoing collaborative effort to set sound standards... [The health of the automotive industry] depends on reasonable regulations that provide clarity and certainty, without pricing our customers out of the market or preventing them from choosing vehicles that can meet their diverse needs."

U.S. President Barack Obama currently has several proposals on his desk.  They range from the least severe proposed fuel mandate -- a 3 percent per year fuel efficiency increase -- and the strictest -- a 6 percent per year increase.  The 3 percent increase would demand a fleetwide efficiency of 47 mpg, while a 6 percent would ask for a whopping 62 mpg fleet-wide average.

Experts working with the White House estimate the 3 percent increase would add $770 to the cost of manufacturing each vehicle, over the next 10 years.  A 6 percent increase would add $3,500.

II. Advocates Push for Strict Standards

Despite the costs, some feel the 6 percent increase would be possible.  A group of 18 U.S. Senators, including Olympia Snowe (R-Maine) and Dianne Feinstein (D-California) wrote a letter last month to U.S. Department of Transportation (DOT) Secretary Ray LaHood and U.S. Environmental Protection Agency (EPA) administrator Lisa Jackson.  Writes the Senators, "A significant increase in fleetwide fuel economy — six percent annually — is both technically feasible and cost effective for consumers."

The auto industry's reticence to improve fuel economy is also irritating global warming activists.  Daniel Becker, director of the non-profit Safe Climate Campaign, states in a Detroit News interview, "It is sad but typical that the automakers are trotting out the same tired excuses for not making efficient vehicles to meet the needs of American facing high gas prices."

Ultimately it's the DOT and EPA's duty to deliver a fuel efficiency proposal for ratification in Congress.  However, President Obama commands significant authority as he appointed both Ms. Jackson and Secretary LaHood.

III. A Brief History of CAFE

The U.S. has regulated fleetwide fuel economy since the 1970s under the Corporate Average Fuel Economy (CAFE) program.  In 1978 -- the first year of regulation -- the standard called for an average of 18 mpg for passenger cars.  

Fuel economy standards don't force automakers directly to ditch gas-guzzling models like SUVs or pickups, but they do pressure them to adopt technologies like turbocharging, direct injection, diesel engines, and electric drivetrains.  Automakers tend to use more efficient models like hybrids to make up for the lower efficiency members of their fleet.

The first major updates to the plan in some time came in 2007.  Former President George W. Bush (R) pushed the Energy Independence and Security Act of 2007 which demanded an average combined fuel efficiency (of both trucks, sedans, and SUVs in the fleet) of 35 mpg by 2020.

Also in 2007, the U.S. Supreme Court ruled in the case Massachusetts v. EPA that states had the right to set their own stricter mandates, to the chagrin of President Bush who was a strong proponent of greater power for the federal government.

In the wake of the decision, President Bush's successor, President Obama, pushed states to move up the timetable of fuel efficiencies increases, by extending California's stricter standards nationwide.  Under the current plan an average fuel economy of 34.1 mpg would be mandated by 2016, though states have some flexibility.

The increases will cost an estimated $51.5B USD, but will reduce oil consumption by 1.8B barrels and save customers $3,000 USD per vehicle in gas costs.

IV. What's Next?

In the U.S. the price of gas has recently spiked up to over $4 USD/gallon.  This is still well below the price in certain regions like Europe and is testament to the U.S. government’s price controls (including incentives).  It falls short of even greater price controls in a handful of nations like China, though.

The current plan only runs from 2012-2016.  The Obama administration is currently working to extend that plan from 2017-2025.  Of course, as President Obama will only be in office until 2016 if he wins another term next year, his successor would have a chance to tweak the policy, much as President Obama tweaked President Bush's plan.

Lawmakers will likely debate proposals from the DOT and EPA later this year, potentially coming to an agreement and setting standards targets through 2025.