There's an upside and a downside regarding major auto companies and the quest to develop vehicles with increased fuel-efficiency.

The upside: Auto makers are positioning themselves to carve out niches in fuel-efficient technology and design, The Wall Street Journal reported Monday (subscription required).

The downside: Auto makers appear to be exhibiting a 'herd mentality' on the current propulsion technology -- hybrid engine cars with both a modest electric power source and a mainstay internal combustion engine.

An electric hybrid focus

Following up on its successful electric-gasoline Prius hybrid, Toyota (NYSE: TM) announced it will make hybrid engine systems available on all models by 2020, The Journal reported. Meanwhile, Honda said it would import new hybrid technology to the U.S. to compete with Toyota and Ford (NYSE: F) plans to double its hybrid lineup next year, and Chevrolet's (NYSE: GM) Volt hybrid that will go on sale in 2010.

Economist David H. Wang said investors and consumers should not be overly optimistic or pessimistic regarding the sector's concentration on electric-fuel hybrids.

"On the one hand, consumers, when looking for a hybrid, will have a wide variety of body styles and vehicles to choose from," Wang said. "Also, the auto makers will be monitoring each other's cars, and look to better each other. That should advance the electric hybrid platform quicker."

"On the other hand, all of this concentration runs the risk of leaving other, new, fuel-saving technologies behind, delaying their development," Wang said. "Automakers should allocate more dollars to other technologies, such as hydrogen-powered cars."

Hydrogen, whether powered by an in-car fuel cell or via hydrogen filling stations (which are similar to gasoline stations) appear to be the most attractive, alternate fuel technology, Wang argued. "Ethanol used to hold that title, but it's losing favor as its impact on food prices and the environment become more-clear." Still, there are fewer than 100 hydrogen filling stations in the U.S., and in-car fuel cell technology has not advanced enough for mass application.

"Focusing on electric hybrids will delay hydrogen technology development, and that would be a mistake, in my interpretation," Wang said. "We would be putting too many eggs in one basket, from a car transportation technology standpoint."

Auto Sector Analysis: Given oil's long-term supply / demand fundamentals, flexibility dictates that auto makers not leave hydrogen -- and other technologies -- by the wayside. Hybrids represent the quickest way to increase auto efficiency, but not necessarily the best. Absent a battery technology breakthrough, electric remains a short-trip technology. That fact, combined with oil's price uncertainties, suggest other technologies should not be ignored.