(by Kevin Klustner) - The transportation sector is a powerhouse when it comes to the amount of fuel and energy it consumes. Combined, road and air transportation account for nearly 20 percent of global energy demand.



And while it appears that little can be done at this point to curb fuel and energy consumption in the commercial aviation sector, the automotive industry is poised to take great strides in the coming years.



Faced with rising gasoline costs, consumers are already reducing their transportation-fuel consumption by driving less and buying more fuel-efficient cars.



In 2006, for example, the average number of miles driven on U.S. roads decreased for the first time in 25 years.



And in California, traffic volume was flat last year despite growing 2.3 percent to 3.3 percent between 2001 and 2003.



Consumers are shifting away from heavier SUVs and pickups toward crossover utility vehicles (CUVs) and cars. SUV sales skidded more than 19 percent between 2005 and 2006 while CUV sales grew 7 percent and hybrid sales strengthened.



The bottom line is that after growing 2.4 percent in 2004, U.S. transportation-fuel demand expanded by just .9 percent in 2005 and .8 percent during the first nine months of 2006.



Automakers initially did very little to encourage this fuel efficiency. In fact, they did just the opposite.



Their first response to rising fuel prices in 2003 came in the form of increased rebates designed to stimulate continued purchase of low-fuel economy vehicles, especially SUVs and pickups. Data from the University of Michigan Transportation Research Institute show that between 2001 and 2004, the increase in incentives surpassed in value the rise in fuel costs to operate the vehicle over three years. For SUVs, the average incentive was close to 70 percent higher than the three-year increase in fuel expenditure.



U.S. automakers were willing to go to these extremes to ignore the fuel efficiency issue because SUVs and pickups were incredibly important to their financials. Indeed, these two vehicle classes represented more than 60 percent of total 2004 pretax profits for both General Motors and Ford, and close to 50 percent for Daimler-Chrysler. In sharp contrast, this figure was just 25 percent for Toyota, which has scored a huge success with its line of hybrids.



After spending $17 billion on consumer incentives in 2004 alone, U.S. automakers – burdened with huge losses – finally rolled back these programs and began focusing production efforts on more fuel-efficient vehicles.



The irony here is that U.S. automakers understand – and can deliver – meaningful fuel efficiency. Eco-responsibility in Detroit is now expanding, stimulated by technology, electronics and revolutionary new materials as well as steadily improving engines that boast the latest in fuel efficiencies.



General Motors, for example, now trumpets a line of vehicles that is “gas-friendly to gas-free.” This quintessential American automaker also talks about eight 2007 models that get an estimated 30 miles per gallon on the highway or better, and it already boasts more than two million E85 FlexFuel vehicles on the road that run on ethanol, in addition to the development of cars powered by electricity and fuel cells.



The Other China Syndrome



Unfortunately, it may not matter what General Motors and U.S. automakers achieve in the realm of fuel efficiency if the Chinese vehicle market continues to explode.



Increased vehicle penetration in China is by far the single most important driver of road-transportation fuel demand in the world. The most recent forecasts peg China’s total vehicle count to rise exponentially from 25 million in 2003 to 120 million by 2020.



Policy makers can play a major role in nudging the global auto industry into becoming more fuel-efficient.



Fuel-economy standards could be tightened to facilitate the introduction of non-engine fuel saving technologies and ensure industry-wide adoption of the technologies. Standards are currently in place around the world, and Europe and Japan – where standards are already more aggressive than those in the United States – plan a further tightening over the next five years. If the U.S. aligned its standards with those of Japan and Europe, global fuel economy would increase by four miles per gallon by 2020.



Tightening fuel-economy standards is good public policy. In the U.S., fuel economy increased sharply from 1975 to 1988 after the introduction of Corporate Average Fuel Economy (CAFE) standards. Once CAFE standards had been met, however, fuel economy stopped improving as auto manufacturers focused on increased horsepower, acceleration performance and comfort.



CAFE standards affect new vehicles only, so they could have a significant and immediate impact in China where new vehicle purchases over the next 15 years are expected to represent the majority of the vehicle stock.



The removal of fuel subsidies around the world would also improve energy efficiency considerably. The McKinsey Global Institute believes that if global subsidies ended, there would be an estimated demand abatement of 3 million barrels of transportation fuels per day. McKinsey predicted this could cut projected 2020 fuel consumption by about a third in developing regions where fuel prices are subsidized.



Europe is well worth noting in terms of best regional practices in automotive fuel efficiency. Last year, Western Europe accounted for approximately 26 percent of global car sales but just 15 percent of carbon dioxide (CO2) emissions. And in 2005, the average CO2 emission in Europe was 160g/km, about half the comparable figure in the U.S.



One reason Europe is pacesetting is its increasing share of diesel cars, which typically emit 15 percent to 20 percent less CO2 than their gasoline-powered equivalents. Market share for diesel cars in Europe rose from 23 percent in 1995 to more than 50 percent in 2006.



Europe has also invested more than its regional competitors in research to increase engine efficiency – especially in the area of direct injection technology for diesel and gasoline engines. The Mini Cooper, for example, is the first high volume BMW product to utilize a state-of-the-art direct gasoline injection engine system. The end result? An 18 percent reduction in CO2 output.



Direct injection technology isn’t the only fuel efficiency innovation taking place. With their ability to run on electricity from the grid, plug-in hybrid vehicles reduce fuel consumption and emissions. A plug-in with an electric-only range of 20 miles can reduce fuel use by about a third compared to current hybrids. A plug-in with a 60-mile range could cut gasoline consumption by about two-thirds, although battery cost would be nearly three times that of the 20-mile plug-in.



Battery cost is a major hurdle to the commercialization of plug-ins with extensive electric-only range. The cost of a plug-in battery exceeds $10,000 today but could drop to a few thousand dollars in the long term. Smaller and lighter lithium-ion batteries are considered promising for plug-ins, but they still require major advances in durability and cost before they are truly viable.



In terms of greenhouse gas emissions, the advantage of plug-ins over hybrids is large in areas where electricity is generated with low-carbon fuels, and much less elsewhere. Under the average U.S. power generation mix, the CO2 reduction of the plug-in relative to a hybrid would be about 15 percent.



Leaving on a Jet Plane



Reducing CO2 emissions is less promising in the commercial aviation sector, where CO2 emissions are expected to grow by 3.6 percent annually between now and 2020. By then, this industry will account for nearly 3 percent of global energy demand – up from 2.2 percent today – and its appetite for petroleum products will equal 8.2 percent of the global total, compared with 6.6 percent in 2003.



But despite Richard Branson’s recent announcement that he’ll invest $3 billion over the next 10 years to develop alternative jet fuels, no significant fuel-mix shifts are expected in air transportation.



Higher fuel prices, however, have forced airlines to look for ways to conserve fuel. The McKinsey Global Institute predicts the annual technical efficiency of the average new airplane in the global fleet will grow by 1.3 percent per year between 2003 and 2020.



The average new airplane currently consumes 40.5 liters of fuel per 1,000 seat miles traveled, but this will fall to 33.3 liters by 2020. Regional jets, however, are less efficient and consume an average of 55.0 liters per 1,000 seat miles, while narrow- and wide-body planes consume only 36.2 and 37.3 liters respectively.



Several action items could increase energy efficiency in the air transportation sector, such as reducing air congestion. Stacking airplanes, especially acute in the Northeast, is a major fuel waster. Recent estimates suggest air congestion can drive emissions up by as much as 50 percent on short-haul flights.



Gordon Brown, Britain’s Prime Minister, has used a blunt instrument – increasing taxes on passengers – to help boost jet-fuel efficiency and curb airline emissions. A less Draconian measure might be taxing aviation fuel itself.

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At this time, there is just no easy way for this industry to stay in the skies and keep them clean at the same time. But there is hope in the automotive sector where, looking toward mid-century, we’ll see zero-emissions hydrogen-powered vehicles. The obstacles between now and then are the lack of a hydrogen supply network and technology to safely and economically store this post-petroleum fuel.



But we’ll overcome these obstacles sooner than we think because the automotive industry finally understands how crucial energy and fuel efficiency is to its future – and ours, too.