Vintage Oil and Other Hare-Brained Ideas

Let me start off by apologizing to Dr. Robert Wilder, one of our customers who was slated to post here this week. You will hear from him next week, but today I want to comment on President Bush’s State of the Union speech.

Our spies in Washington gave me a heads-up that President Bush would address energy and alternative fuels for cars this year, so I made a point of watching the speech and listening carefully.

The President spoke about many subjects, but our spies were true: He spoke for a few minutes about several important energy issues. I will constrain my comments to these issues only; my opinions about the rest of his speech have no place on this blog.

First, a recap: The President opened his speech by noting that this was the first State of the Union ever to start with the words “Madam Speaker” and graciously congratulating the Democrats. He then moved on, pointing out that it was the Government’s responsibility to spend the people’s money wisely. (Who could disagree?) He added this: “Our economy is on the move, and it is our job to keep it that way, not with more government but with more enterprise.”

After talking about the budget, earmarks, entitlements, public schools, health insurance, and immigration, he rolled onto several related energy topics:

  • The need for a stable supply of energy that is not dependant on foreign oil from hostile regimes or terrorists
  • The need to diversify America’s energy supply, mentioning (in order) clean coal, wind and solar power, and “clean safe nucular energy”
  • The need for research to develop batteries for plug-in and hybrid vehicles
  • The desire to invest in new methods for creating ethanol, specifically wood chips, grass, and agricultural waste
  • A commitment to reduce gasoline usage in the United States by 20 percent in the next 10 years, allowing us to reduce our imports from the Middle East by three quarters
  • More specifically, reforming the CAFE (Corporate Average Fuel Economy) rules for cars, and reducing gas consumption by 8.5 billion gallons by 2017
  • Stepping up domestic oil production
  • Doubling the strategic petroleum reserve

He concluded this segment by claiming that we were on the verge of (unspecified) technological breakthroughs, and by (finally!) admitting that we must confront the “serious challenge of global climate change.”

After this discussion, he moved on to the legal system and the need to protect our people from terrorists as well as guard the homeland more effectively, a long discussion about the state of the wars in Iraq and Afghanistan, and his proposal to increase troops in Iraq. Next he talked about terrorists with “malignant ideologies,” the need to support our troops, the wonderfulness of bipartisanship, a proposal to increase the size of the Army and the Marine Corps by 92,000 people, the creation of a “Volunteer Civilian Reserve Corps,” Iran and their nuclear ambitions, diplomacy and North Korea, and Freedom for Cuba and other oppressed places. Finally he called for an end to hunger, poverty, and disease; AIDS relief; $1.2 billion over five years to combat malaria; and expanded trade and debt relief. He introduced four people planted amongst the audience with heartwarming stories that demonstrate “the spirit and character of America.”

Okay. So no comment on anything but the energy bit. I’ve already bit the heck out of my tongue.

Obviously, I agree that we need to diversify our energy supply. One of the foremost principles that led me to found Tesla Motors was that (as General Motors Chief Executive Rick Wagoner noted in his opening remarks at the LA Auto Show), electric cars move our choice of energy source upstream from the vehicle, making them the ultimate multi-fuel vehicles: You can power them with clean (or dirty) coal; wind or solar power; clean, safe (or otherwise) nuclear energy; or even good ol’ oil.

The bit about research into batteries for plug-in or hybrid vehicles was quite interesting to me. On the one hand, I was blown away that he actually acknowledged the existence of plug-in vehicles – the EV is not as dead as Chris Paine suggested :). On the other hand, this sounds a lot like a response to Rick Wagoner’s request for $500 million for battery research, especially when you remember his opening comments about more enterprise rather than more government.

We can bicker all day about whether Big Government can ever do anything efficiently, but the track record for Big American Auto’s battery progress through the U.S. Advanced Battery Consortium is abysmal. In all the years of its existence, this consortium has produced, well, nothing. No batteries for American electric cars. No batteries for American hybrids. No batteries that GM could put into its hyped-up Volt. Nothing at all to help the USA become a leader in battery technology. Zip. (oh, they did recently funnel $15 million into A123, so I expect the folks over there are big fans of this consortium.)

So as much as I would dearly love a similar research grant for Tesla Motors, I am not enthusiastic about government spending on battery research. Much better would be incentives that encourage consumers to buy an electric car. (Imagine if you got a $25,000 tax credit for buying an EV for your “business,” like you can for a Hummer!) This would drive the right behavior throughout the industry, and would spur development.

Did he just win the lottery?

Moving on to ethanol. I was struck by the glaring absence of any mention of corn-based ethanol. Holy smokes! Did the good people over at Archer Daniels Midland forget to make their political contributions this year? Instead, the President focused on new feedstocks for ethanol, all of the Cellulosic variety. I am still pretty skeptical about this as a serious fuel source, but it seems a lot better than using food for fuel! (Note two recent news articles: on January 16 this year, the Wall Street Journal ran an article called “Ethanol Could Fuel Rise in Corn,” wherein they explicitly discussed the “food-versus-fuel” issue, and NPR ran a story on January 22 discussing the sudden 50 percent hike in the price of tortillas in Mexico, blamed at least in part on U.S. ethanol production from corn.)

On the TV station I watched, the camera panned to an older gentleman who looked like he just won the lottery when the President spoke of these new ethanol sources. Who was he anyway? [UPDATE: I’ve since learned that the gentleman is Senator Grassley from Iowa, the largest producer of Ethanol, (which explains why he is so pleased at the news.) Senator Grassley has also sponsored legislation to offer income tax credits for purchasers of EVs, so we applaud his efforts on that front.]

I am a big proponent of CAFE reformation. Specifically, I want to see two things: a gradual rise in the CAFE each year and, most importantly, the ability for one company (e.g. Tesla Motors) to sell its excess CAFE credits to another company (e.g. GM or Ford.) This would help out all companies and promote the growth of electric cars.

Raising the CAFE standards is tricky. Here is why:

  1. Although it is totally true that the CAFE has not risen for any large car company for decades, the gas mileage for any specific *class* of vehicle has risen for every single company. For example, the current Ford Focus gets much better gas mileage than the equivalent Ford Fiesta of a couple decades ago. And it is a far better car! The problem is that we consumers don’t buy enough Focuses – we prefer great big monsters like the Ford Expedition or Excursion or Valdez. (Note that despite their highly publicized success with the Prius, Toyota’s CAFE is lower now than it was 10 years ago: we actually prefer Land Crushers to Priuses, on average…)
  2. Under the existing system, car companies can bank CAFE credits indefinitely. This puts GM at a significant disadvantage to Toyota, because Toyota has banked a Fort Knox-sized vault full of CAFE credits from a few decades back, when they mostly sold little cars. This means they can actually sell more guzzling Land Crushers than GM can sell guzzling Avalanches. (Got to love a truck named after a natural disaster.) IMHO, CAFE credits should decay: banked CAFE credits should lose their usefulness by about 20 percent per year. This would prevent distortions from long-past behaviors, and force competition based on today’s cars.

I actually don’t have a good suggestion about how to encourage consumers to make fuel efficient choices other than to make great electric cars. There are lots of good ideas out there; maybe you all can discuss it for a while on this blog.

But I do know that tradable CAFE credits would help Tesla Motors and its peers, and it would probably find little resistance from the government, which already enables other kinds of credit trading for pollution, etc. Write your congresspeople!

I am not so enthusiastic about stepping up domestic oil production. I actually like our wildernesses, and I don’t think we need to fill our few remaining unspoiled places with oil extraction industry. Lots of other people have written on this subject; let me just agree with them.

But I have another odd opinion about this subject: The oil is ageing just fine underground. I am actually in favor of sucking up foreign oil today *in favor of* consuming domestic oil. Why? So that when oil does become truly scarce, we will still have some… Even if we all drive electric cars – even if we figure out how to fly airplanes without petroleum products – the stuff is really nice as a source of long, complex hydrocarbons that we can make into an amazing array of products. Okay you economists, shoot this hare-brained theory down. :)

I don’t have a sensible opinion (or even a hare-brained one) about increasing the petroleum reserve.

Let’s hear your opinions. I know President Bush is highly polarizing, but please stay focused on the energy portion of his speech.

Editor's note: The White House published a transcript of the President's speech shortly after Martin posted his blog. Find it here.