New Car Prices Are Soaring Biden’s Policies Would Make Things Worse

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New car prices are soaring, according to a report released last week by Kelley Blue Book. From Kelley’s press release: 

New-vehicle prices jumped up for a seventh straight month and hit another all-time high in October 2021, surpassing $46,000 for the first time, according to a new report from Kelley Blue Book. At $46,036, the average transaction price (ATP) for a new vehicle was up 12.9% (or $5,266) from one year ago in October 2020 and up 2.0% (or $910) from September 2021.

Kelley also reports that while the average sales price hit a new record high, industry spending on dealer and consumer incentives “fell in October to a 20-year low, dropping to 4.3% of ATP last month, a decrease from 5.6% in September 2021 and well below the 9.1% of ATP recorded in October 2020.”

Although total new-vehicle sales in October were up 4.1 percent compared to September, sales “were down 22.4% compared to one year ago and down 21.0% compared to October 2019.” Kelley expects “little relief from high new-vehicle prices in the foreseeable future.”

Although not mentioned by Kelley, the Biden administration’s regulatory agenda deliberately aims to further increase automobile costs. Moreover, the cost of lithium, nickel, and cobalt—metals used to make electric vehicle batteries—could increase dramatically under aggressive electric vehicle mandates, and jacking up energy prices is a feature, not a bug, of the NetZero campaign to eliminate fossil fuels.

New Auto Rules

The Environmental Protection Agency (EPA) and National Highway Traffic Safety Administration (NHTSA) have proposed to rescind the Trump administration’s Safer Affordable Fuel-Efficient (SAFE) Vehicles Rule. A major aim of the SAFE Rule was to slow the rise in new-car prices by alleviating regulatory costs that automakers pass on to consumers.

The Trump agencies worried that millions of middle-income households were being priced out of the new car market. The SAFE Rule cited reports by The New York Times and Car and Driver that the average cost of new cars had hit $34,000 in 2016 and $35,000 in 2017.

Accordingly, the SAFE Rule placed “greater weight on the costs to industry and the up-front vehicle costs to consumers” than did the 2012 Obama administration motor vehicle rule it replaced (85 FR 25120). Initially, the Trump agencies proposed to freeze tailpipe carbon dioxide (CO2) and fuel economy standards at model year (MY) 2020 levels. They projected a $2,039 reduction in the average cost of MY 2029 vehicles compared to the 2012 rule baseline (83 FR 43360).

The final SAFE Rule ended up increasing regulatory stringency by 1.5 percent annually. That was still deregulatory compared to the 2012 rule, which increased regulatory stringency by 5 percent annually during model years 2022-2025 (77 FR 62638). Compared to the 2012 rule baseline, the final SAFE Rule was estimated to lower the average cost of MY 2029 vehicles by between $991 to $1,138 (85 FR 24259-24260).  

Fast forward to the present. The average new car price is roughly $10,000 higher than when the Trump agencies proposed the SAFE Rule in August 2018. Yet the EPA now proposes to increase the stringency of tailpipe CO2 standards by 24.1 percent during MYs 2023-2026—multiples of the SAFE Rule’s 6.7 percent increase (86 FR 43733). The Biden EPA projects those more stringent standards will add $1,044 to average vehicle cost in MY 2026 (86 FR 43775). Similarly, NHTSA proposes to tighten fuel economy standards by 8 percent annually during MYs 2024-2026 (86 FR 49745) and expects those requirements to add $960 to average vehicle cost in MY 2026 (86 FR 49620).

New car prices may well exceed those estimates. A major reason for the increase in new car prices is that a “global shortage of microchips is severely impacting the automotive market with no fast or easy resolution within sight,” writes auto industry analyst Peter Maithel. The agencies began their rulemakings with no apparent consideration of the cost effects of supply chain disruption, and the administration’s official position at the time was that inflation was “transitory.”

Spendulus Bill

The big economic wild card, though, is the Biden administration’s push for policies to eliminate fossil fuels, scale up renewables, cut U.S. greenhouse emissions to 50 percent below 2005 levels by 2030, and zero-net emissions by 2050. That agenda is a recipe for inflating energy costs and politicizing industrial supply chains.

In The Role of Critical Minerals in Energy Transitions (May 2021), the International Energy Agency (IEA) explains that what the Paris Agreement and NetZero agenda aim at most fundamentally is a “shift from fuel-intensive to a material-intensive energy system.” For example, the IEA points out, “a typical electric car requires six times the mineral inputs of a conventional car, and an onshore wind plant requires nine times more mineral resources than a gas-fired power plant.”

Reaching Paris treaty de-carbonization goals would increase demand for energy transition minerals (ETMs) by at least 400 percent by 2040, according to the IEA. Seven times more rare earths will be needed by 2040, 19 times more nickel, 21 times more cobalt, 25 times more graphite, and 42 times more lithium.

In a commentary on the IEA report, energy researcher Mark Mills explains that the mining and processing industries required to build a material-intensive energy system do not yet exist. He cautions:

Spooling up production can’t happen overnight. The IEA observes something every miner knows: “It has taken on average over 16 years to move mining projects from discovery to first production.” Start tomorrow and new ETM production will begin only after 2035. This is a considerable problem for the Biden administration’s plan to achieve 100% carbon-free electricity by 2035.

A scenario is easily imagined in which the demand for ETMs, ramped up by onerous mandates and lavish subsidies, increases faster than available supplies, injecting additional inflationary pressures into commodity and energy markets.

A recent study by the International Monetary Fund (IMF) finds that copper, nickel, cobalt, and lithium “are potential bottlenecks for the energy transition.” It explains:

Inflation adjusted metal prices would reach peaks similar to historical ones but for an unprecedented, sustained period of roughly a decade in the IEA’s net-zero emissions scenario. This would imply that real prices of nickel, cobalt, and lithium would rise several hundred percent from 2020 levels, while the copper price would increase more than 60 percent.

One can also easily imagine that “ambitious” climate policies decrease fossil energy supplies faster than supplies of renewable energy increase. The vaunted transition from fossil fuels to renewables could easily become a transition from abundant and affordable to scarce and unaffordable fossil fuels.

China is by far the world’s largest processor of copper, lithium, nickel, cobalt, and rare earth elements. It is also the world’s leading exporter of solar panels and a major exporter of wind turbines. So, there is also a risk that NetZero leaves America increasingly dependent on OPEC and Russia for hydrocarbons and on China for ETMs. NetZero could result in a huge transfer of wealth and geopolitical influence from America to foreign adversaries.

The Biden administration claims that industrial policy—public-private “partnerships” funded and led by federal agencies—can build domestic supply chains for advanced batteries and other renewable energy technologies. But how exactly do such partnerships differ from crony capitalism?

Creating and updating webs of relationships to coordinate economic activities across space and time is what businesses do every day. Their profit margins and even survival depend on finding the right suppliers and customers. Why should anyone believe government-managed supply chains would be more efficient?

The U.S. government’s most recent large-scale planning effort—the withdrawal from Afghanistan—does not inspire confidence. U.S. officials gave orders to abandon America’s only secure airfield and evacuate large numbers of military personnel before giving the order to evacuate civilians. It is hard to imagine a more backwards plan.

Yet we’re asked to believe politicians and bureaucrats in Washington, D.C. can mandate and subsidize favored technologies and centrally plan complicated supply chains, all without significant risk of price shocks, bottlenecks, and corruption. Fat chance.