The U.S. Air Force has started taking delivery of a new 15-ton bomb designed to crash into underground bunkers and blow them up. No prizes for guessing which Middle Eastern country with a suspected nuclear-weapons program the Air Force might have in mind.
But an alternative weapon weighing a fraction of that (and costing quite a bit less too) was unveiled this week: the fuel-efficient vehicle of tomorrow. True, unlike the grimly titled Massive Ordnance Penetrator, this vehicle doesn't yet exist. But it could have a devastating effect on something critical to Iran: oil.
Under new proposals unveiled by President Obama, the car industry would be forced to effectively double fuel efficiency on new vehicles by 2025. That's easier said than done. But if such efforts were successful, the impact could be profound.
In 2009, there were 245 million light vehicles on America's roads. Given recent history, let's assume that number hasn't grown. Divide it into the Department of Transportation's data on vehicle miles traveled, and the answer implies each vehicle on average drives about 12,000 miles per year. When they do, they average about 22.5 miles per gallon, based on last year's projections from the Environmental Protection Agency.
Prior to the financial crisis, a rule of thumb was that about 7% of U.S. vehicles were scrapped each year, implying the entire fleet turned over roughly every 14 years. But with the economy not exactly racing at top speed, it might be safer to assume drivers hang onto their cars for longer in the future. Assume the replacement rate drops to 5.5% and growth in the overall fleet is 1% per year (starting in 2013). Together, they imply annual new vehicle sales averaging 16.4 million vehicles per year to 2025—much better than this year's expected 12.6 million, but still below the peak rates and long-term expectations that prevailed before the financial crisis.
Based on this, and assuming new vehicles hit the effective 49.6 miles per gallon fuel-efficiency target by 2025, the impact on oil consumption is pretty dramatic. The analysis suggests the total vehicle fleet hits 276 million in 2025 and fuel economy across the fleet has risen 62% to just over 36 mpg. If driving habits remain constant, demand for motor fuel would have dropped by 2.6 million barrels per day.
That just happens to be a bit more than Iranian oil exports. Granted, this is a long-range model, and if the last decade or so has taught us anything, it's that anything can happen in that time. But in general, high oil prices are promoting measures world-wide to limit demand—something investors fixated on China's inexorable rise should remember. It wouldn't add up to shock and awe exactly. But it could still put a few big holes in Iran's economy—and the commodity investment case.
