It's usually a bad idea for Washington to tell companies what to sell, or consumers what to buy. But every now and then, government mandates accidentally do some good.
Fuel economy standards have become a surprising example of tougher government rules that benefit practically everybody. In 2007, the Bush administration raised the gas mileage requirements automakers had to meet. Then in 2009, the Obama administration raised them further. Those rules, which are about to be finalized in detail, will require each automaker's fleet to average a lofty 54.5 miles per gallon by 2025—roughly double the mileage requirement of just five years ago.
The aggressive new standards are controversial, especially among Republicans opposed to activist government. GOP presidential contender Mitt Romney, for one, characterizes the new rules as just another effort to "insert the federal government into the life of the private sector." He has suggested that if elected, he'll roll back or even seek to eliminate federal mileage standards.
Yet so far, the new mileage rules have generated tangible benefits for consumers, with few of the downsides opponents have predicted. "Without a doubt, the new rules have been a win-win for everybody," says Jesse Toprak, of the car-research site TrueCar.com. "It's a win for consumers, a win for manufacturers, and a win for the environment."
Automakers have been rolling out new technology and other innovations that boost mileage, such as advanced powertrains and transmissions, lighter components, and even fix-a-flat canisters in lieu of a traditional jack and spare tire, to save weight. Since 2007, the average fuel economy of cars purchased has risen from 20.1 miles per gallon to 23.6 mpg, according to the University of Michigan's Transportation Research Institute.
The mileage of some popular vehicles has improved by more. A 2013 Nissan Altima with a standard four-cylinder engine averages 31 mpg, for example, up from 26 mpg in 2007. That's a 19 percent improvement. The most powerful Ford Explorer went from 16 mpg in 2007 to 20 mpg today, a 25 percent gain. The biggest efficiency gains typically occur when automakers retool a model—which typically happens every five years or so—and outfit it with the latest technology. So more big mileage gains will be coming as more models turn over.
Boosting fuel economy by four or five miles per gallon might not sound earth-shattering—until you bank the savings. A 5 mpg improvement would save about $525 per year for a motorist who drives 15,000 miles annually, if gas were at $3.50 per gallon. With gas at $4 per gallon, the savings would amount to $600 per year.
Some car enthusiasts have argued that the new mileage rules would force automakers to depower cars and build blasé econoboxes reminiscent of the 1970s, when soaring oil prices led to the first government fuel-economy requirements. Back then, automakers built some truly dreadful cars in order to comply with the rules, such as the Dodge Omni and the Ford Mustang II, an emasculated version of the iconic muscle car.
But they're not making that mistake again. Instead, automakers have found ways to coax more power out of smaller engines, so drivers don't have to give up performance or other amenities they've gotten used to. The four-cylinder engine on the new Altima, for example, generates 182 horsepower, compared to 175 horsepower on the lower-mileage engine it's replacing. Ford now offers a V-6 "ecoboost" engine on its F-150 pickup truck that generates more horsepower and torque than a V-8 that's available—with slightly better mileage.
The new technology that's behind such efficiency gains does cost extra money, fueling another concern about the tougher mileage rules: They'll force car buyers to pay more out of pocket, whether they want higher mileage or not. And car prices have in fact gone up over the last couple of years. TrueCar says the average price paid for a new set of wheels has risen from about $27,300 in January 2010 to $30,400 today—close to a record high.
But other factors besides high-mileage technology seem to be pushing prices up. In general, car buyers have been shifting to smaller vehicles, as a cushion against gas price spikes that now seem to occur every year or two. But buyers have also been selecting more features, ranging from leather upholstery to navigation systems to rear-view cameras. So they're buying smaller cars with more options. Low interest rates have also allowed many buyers to load up on features while still ending up with a lower monthly payment than they had on their last car.
This is good news for automakers, because they're able to make better profits on small cars that typically have razor-thin margins. In fact, for years, the Detroit automakers lost money on most of their small cars, which they built mainly to push up their fleetwide mileage ratings. As a money-losing venture, however, small cars got little of the attention or resources that profitable trucks and SUVs got. That turned into a huge liability when gas prices soared in 2008 and buyers began clamoring for high-mileage vehicles. General Motors, Ford, and Chrysler had few compelling models, and their sales plummeted, while the Japanese and European carmakers did better.
The new mileage rules could still end up costing buyers money, as the targets get tougher and automakers end up with little choice but to push customers into expensive high-mileage technology. But the cost of fancy new systems usually falls as more people buy them. Meanwhile, automakers are doing everything else they can to become more efficient and cut costs, lest rising prices cut into business. Somehow it seems like car buyers will continue to benefit.
Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.