Current Progress On Energy Policy

Gore vs. Pickens vs. Congress vs. McCain

The U.S. Congress is pursuing such brilliant energy policy alternatives as:

1. Suing OPEC for anti-trust

2. Stopping “speculation”

3. Subsidizing corn-based ethanol while taxing imports of foreign ethanol

4. Leasing more U.S. land for oil and gas drilling

These ideas range from idiotic (1 and 2) to counter-productive (3) to moderately useful in the longer term (4).

To be more specific on drilling, my view is that since there would be no additional oil flowing from drilling the OCS or ANWR for 7 - 12 years, and since that is just when we are likely to be experiencing the greatest oil supply crunch, we should in fact move now to pave the way for more domestic oil production that will come available then. But clearly it is only a way to mediate future economic pain and in no way contributes to a long term solution to our energy crisis.

So in sum, Congress, on a scale of 0 - 10 rates a minus 5 in my view. They have been worse than useless.

McCain

Two small but potentially useful ideas have been offered recently by John McCain. He said we should subsidize the purchase of plug-in hybrids. I think they’ll be so popular that car makers will not be able to keep up with demand, even at initially high prices (more below). But McCain’s idea might help.

McCain also had a wonderful idea, as reported here, which I have now added to my “Rx for U.S. Energy Policy” position paper. He would allow individual states to set fuel economy standards. The upshot would be that California would set U.S. fuel economy standards for everyone because no car company can afford to not sell cars there. California has always had a more enlightened electorate on the whole than the people who elect Congress.

Gore and Pickens

Fortunately some leaders are starting to get out front and begin to lead toward a real energy policy. Both Gore and Pickens are making important contributions. Gore, of course, comes to the issue primarily from the climate perspective. But his position has the great benefit of being all about transitioning away from fossil fuels and toward electricity as the “driving force” for our economy - pardon the pun.

Gore is not only directly on target in aiming at making the petro-to-electron transition. But by emphasizing renewable sources of electricity he also deals with the great objection many people have to electric vehicles: that they just contribute to GHG production since so much of our electricity is now produced from coal.

Pickens’ plan is a baby-step toward the future. It helps transition us away from oil but relies on the temporary solution of natural gas. It does make sense to produce more electricity from wind. And in the short term it does make sense to use natural gas for local industrial traffic like garbage trucks and busses. His plan is not counterproductive and it may even be more “practical” than Gore’s ideas in the short term sense of being implimentable. But it fails to provide the “big idea”, the “go to the moon” long term goal that can give the whole country a valid conceptual framework for thinking about the future.

Of course, Pickens is “talking his book.” He has huge investments in wind generation and in natural gas. I don’t hold that against him. After all, I try to make money investing in ways that are consistent with how I see our energy future evolving. In the short term that means much higher fossil fuels prices. So I own oil and gas assets. In the long term, it’s all about electricity, but investment options there are more indirect, often very expensive, and usually unlikely to pay off for many years.

The general direction advocated by Gore and Pickens was echoed in recent editorial essays by Andrew Grove, former President and CEO of Intel. As more leaders put forward the petro-to-electron vision, it is more likely take finally catch the consciousness of legislators who might actually help it along.

PHEV’S: the Next Tsunami?

I’m getting increasingly excited about the next generation of plug-in hybrid electric cars (PHEV’s) that will begin hitting the market in 2010 or 2011 though some, like Chrysler, will come to the party a few years late. These PHEV’s will become so popular, I think, that manufacturers will not be able to make enough of them.

What turns me on is visualizing that most people will use their cars every day only on battery propulsion and will come back home and plug them in at night at a fraction of the cost of buying gas. That will happen because the cars will have a 40 mile or so (and growing every year) capacity for battery-only propulsion - read no use of gasoline - which is all that most people drive in a day. Americans are going to love that.

The beauty of the PHEV -as opposed to all-electrics - is that the gas engine takes away the fear of running out of electric juice. As soon as the battery runs down far enough the low-power gasoline engine kicks in to recharge the battery.

Moreover, based on reviews of the new Tesla Roadster it seems like battery driven performance will be very exciting. This $110,000 all-electric sleek sports car is blowing away the racing crowd with its performance. Of course, $30,000 PHEV’s will not give us quite that kind of 0 - 60 in 4 seconds thrills. But my guess is that we will be quite satisfied - if not thrilled - with the pick up.

So I am starting to think that the PHEV is going to be a very big deal. Probably a Tsunami. Whether it will be an investment tsunami or not is another issue. The current directly related investment options are limited. We have the major lithium producer (SQM) and a couple of publicly traded lithium ion battery companies, neither of which are “mainstream.” They are Valance (VLNC) and Ener1 (HEV). The major lithium battery makers are either subsidiaries of large Japanese companies or privately held.

Eventually one or more of the vehicle manufacturers such as Toyota or Honda or possibly even an American car company may become screaming buys. But they have to face a few very rough years directly ahead trying to peddle cars with obsolete technologies in a bad economy before they come out the other side into the sunlight of PHEV’s. I think it’s still a little early for them. And some may not even make it there before going bankrupt.

Someone Agrees - Sort Of

The Tesla inventor, a highly successful entrepreneur, thinks the PHEV’s is too clunky and that the all-electric vehicle will be the ultimate answer. That may be true ultimately, but I think the need for battery recharge and exchange facilities all over the place will make the all-electric unfeasible in the short term.

Anyway, here is a somewhat contrary opinion to mine from a Newsweek interview:

ENERGY

A Tesla In Your Future?
PayPal’s cofounder hopes to produce a practical $30,000 all-electric car in four years.
By Fareed Zakaria | NEWSWEEK

The electric car has been pronounced dead many times, but Elon Musk is out to resurrect it. The South African-born Musk left home at age 17 for North America and made a fortune when PayPal, a company he cofounded, was sold to eBay in 2002. One of his new companies—he’s chairman of three start-ups—is Tesla Motors, a San Carlos, Calif.-based electric-car manufacturer. Its first model, the Tesla Roadster, is a sleek, high-end sports car with an eyepopping price tag. It’ll start rolling onto streets this summer. NEWSWEEK’s Fareed Zakaria spoke to Musk about the future of transportation in an oil-constrained world. Excerpts:

Zakaria: What’s your goal in producing the Tesla Roadster?
Musk: This car itself is not going to change the world—it’s a $100,000 sports car being produced in quantities of about 1,800 a year. Where it really becomes meaningful is when we produce the next models, which will be lower-cost and higher-volume. Our second product is a sedan that is about half the price and will be produced in late 2010 in 20,000 units a year.

And your third model will be even cheaper.
Yes. As a rough rule of thumb, when you increase the production quantity by a factor of 10, you can reduce the price by a factor of two. In the early 20th century, cars were initially something for wealthy people. It took quite some time for the cost to be optimized and become accessible to a broader population. It’s the same thing here—we’ll see the traditional technology learning curve. We’re trying to push it as fast as we possibly can, and we think we could either directly or in partnership with a major auto company actually get to a car that is under $30,000 in four years.

Your car runs exclusively on electricity, but GM and Toyota are working on so-called plug-in hybrids, which also feature a gas tank to extend the range. Why didn’t you do the same?
We spent a lot of time last year looking at plug-in hybrids and ultimately concluded that it would not be a very good car. You’re forced to compromise. Because you need both a gasoline-powered engine and a big battery, neither can be very good, and the engine will be a weak engine. It’s just not where the future lies. We’ll be able to offer a car with a 305-mile range roughly three years from now.

Most people travel less than 50 miles a day.
And 99 percent of travel is under 200 miles [a day]. There is the occasional road trip, but that’s actually pretty rare, and for some people it’s never. Our second model will address that rare case in two ways. One is to allow people to switch out the battery pack, so you can go to a battery-change station just like you’d go to a gas station. The second path is to have a high-speed charge. If you have a high-powered onboard charger, you can get an 80 percent charge in 45 minutes. If you’re going from L.A. to San Francisco, which is about a 400-mile trip, you can drive 200 miles, stop for lunch, charge your car in the restaurant parking lot, finish lunch and continue the remaining 200 miles to San Francisco.

What is your solution to the problem of needing a large or heavy battery in order to store a lot of energy?
I think what we’ll see is an increasing amount of energy being stored in the battery pack and a lowering of the cost of the battery pack over time. It’s not the only thing. The efficiency of the electric motor, the efficiency of the powertrain, the rolling resistance are all important.

Why is it so difficult to make a battery that can hold a huge charge for lots of time?
I think engineering is harder than physics, and I’m a physics guy. If you look at the improvement of battery energy density, it tracks to about 8 or 9 percent a year.

Do you think all cars will be electric?
Absolutely. In 30 years, a majority of all new cars produced in the United States, perhaps worldwide, will be electric. And I don’t mean hybrid. I mean pure electric.

When you plug into an outlet, you’re in effect plugging into coal, because a lot of the electricity produced in the United States is coal-fired. Does that bother you from a global-warming perspective?
I’m very familiar with the “long tailpipe” criticism. I have another company, SolarCity, which is the largest provider of solar power to homes and businesses in California. The solution is to get a SolarCity solar panel on your roof and then have an electric car. It takes actually only a small solar-panel setup—of about 10 by 15 feet—to generate 200 to 400 miles a week of electricity for your car.

A lot of people say solar is really only viable because of massive government subsidies.
That’s a very simplistic statement. Solar is viable in certain parts of the country—depending on the local cost of electricity—without subsidies. Subsidies make it economically viable in more places than it would otherwise be. Like almost any industry, there are huge economies of scale. As solar gets bigger and bigger, it gets increasingly economically viable.

If you had a magic wand, what change would you make in America’s energy policy?
I would certainly shift any subsidies on hydrocarbons to renewable energy. It’s ludicrous to be subsidizing oil and coal and other things that clearly don’t have a long-term future and bring great damage to the environment.

Would you like to see a carbon cap-and-trade system in the United States?
I’m actually a bigger fan of a carbon tax, just because it’s a simpler thing to do than cap-and-trade.

What you’re describing is a pretty optimistic future. You believe that American industry can successfully refashion the transportation sector to run on renewable energy?
I am actually fairly optimistic that we will solve this problem. But there’s an important caveat there, which is, we cannot be complacent and just assume it will happen. There needs to be strong government action. There needs to be private investment; there need to be entrepreneurs that attack this problem. We will solve this problem—but only if we do all that.

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Comment by jlounsbury59

2008-07-22 14:19:12

Outstanding discussion. There is not one magic bullet for the energy problem - there is a whole magazine full of bullets. I believe that the impact of point 4. is over-stated. The best statement about the effect of more drilling leases is, in my opinion: it won’t do much harm. It can only be moderately helpful (economically) if the other bullets in the magazine are not well aimed by government policies and private investment.

I’ve been reading a lot of complaint about the small investment of big oil in exploration. I think there is limited exploration because big oil (behind closed doors) has come to the conclusion there is not a good business case. I believe they are consolidating capital (making hay while the sun shines philosophy) before alternative sources of energy price their product out of many of the markets they have dominated.

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