There are two things you can do with a more efficient automobile engine. One is build a vehicle that gets more miles per gallon. The other is build a vehicle that moves more pounds of steel. And Christopher Knittle points out that we’ve largely been doing the latter:
From 1980 to 2004 the fuel economy of U.S. vehicles has remained stagnant despite apparent technological advances. The average fuel economy of the U.S. new passenger automobile fleet increased by less than 6.5 percent, while the average horsepower of new passenger cars increased by 80 percent, and their average curb weight increased by 12 percent. For light duty trucks, average horsepower has increased by 99 percent and average weight increased by 26 percent over this period. But there’s more to this story: in 1980, light truck sales were roughly 20 percent of total passenger vehicles sales — in 2004, they were over 51 percent.
In Automobiles on Steroids: Product Attribute Trade-Offs and Technological Progress in the Automobile Sector (NBER Working Paper No. 15162), Christopher Knittel analyzes the technological progress that has occurred since 1980 and the trade-offs that manufacturers and consumers face when choosing between fuel economy, weight, and engine power characteristics. His results suggest that if weight, horsepower, and torque were held at their 1980 levels, fuel economy for both passenger cars and light trucks could have increased by nearly 50 percent from 1980 to 2006. Instead, fuel economy actually increased by only 15 percent.
Of course this was just manufacturers and consumers responding to market incentives. During this period the price of gasoline was generally falling, personal income was generally rising, and the massive negative externalities associated with burning gasoline were largely unpriced. In a different, better, policy regime taxation of gasoline would have risen so as to make the price of fuel grow relative to personal income, creating incentives for this technology to be deployed in a socially useful way.