Obama Envisions An Energy Future Through Pink Shades
In Monday’s third foreign policy debate President Obama promised to develop the energy sources of the future.
Similarly, a New York Times columnist, Thomas L. Friedman, assured readers on Sunday that the Administration’s new motor-vehicle fuel efficiency standards are "already spurring a wave of innovation in auto materials, engines, and software." They are "the future of progressive politics in this age of austerity."
This is a rosy, selective view of the ability of government to foster new technologies by rule and with financial assistance.
The new Corporate Fuel Economy Standards (CAFE) announced in August would raise required average performance for all models of each automaker from 30 miles per gallon now to 35 in 2016 and 54 in 2025. The administration projected cumulative fuel savings of $1.8 trillion, reduced fuel consumption of 2.1 million barrels a day, and 6 billion fewer metric tons of greenhouse gas emissions.
Neither the president nor Mr. Friedman mentioned the previous week’s bankruptcy of the electric battery company, A123 of Livonia, Michigan. It received a $249 million grant from the Energy Department in August 2009. Nor did they mention the bankruptcy in January, 2012 of another battery company, Ener1, of Indianapolis, Indiana which received a grant of $118 million.
Raising the CAFE standard and picking the technology to accomplish a reduction in greenhouse gases is an issue about the government’s role that divides President Obama from Mitt Romney. Obama approves of government support of new technology. Mitt Romney said he would rescind the 2025 standards, which the Administration negotiated with a reluctant auto industry, and get the government out of the business of picking new technologies to underwrite at the expense of the taxpayers.
Enacted by Congress in 1975, CAFE requires automakers to calculate average fuel economy across their respective fleets. This means that the production of low-mpg vans and SUVs must be offset by high-mpg sedans, electric cars, and hybrids, even if consumers don’t want to buy them. The electric car market remains small, and in September, General Motors announced a second suspension of production for its electric Chevy Volt.
New standards combine a number of administration goals in one package; lower oil consumption and reduced imports, diminished exhaust pipe emissions, and electric cars. Subsidized technology is a means to accomplish these goals.
Despite the president’s optimism, the new technology doesn’t yet exist to make cars that get 54 miles to the gallon and that are no smaller than today’s models. No smaller is important, in my view, because smaller cars are less crash-resistant and so less safe.
EPA estimated that the retooling to make lighter cars would cost $140 billion for model years 2017 to 2025, following a cost of $51 billion for model years 2012-2016. These are costs that inevitably will be absorbed by car buyers, with delayed, possibly partial recoupment from reduced fuel consumption.
Perhaps the technology will be invented by 2025, perhaps not. A former Obama White House aide said in 2011, "Our technical folks think you can get there. It’s the best we can do." That puts the onus on the car makers. Their history shows incremental progress, not a sudden, heroic breakthrough in one model year.
Attempts by the Energy Department to move electric cars into the mainstream are not yet working. There’s one major problem, namely that Americans don’t want to buy them. Hence, most firms which received government grants aren’t doing well.
Take Fisker Automotive, for example, a Wilmington, Delaware company which received an Energy Department loan guarantee of $529 million in April, 2010. Last February the Department blocked further disbursements under the loan because the company failed to meet progress benchmarks. Production of the Karma, Fisker’s $100,000 luxury electric car, has been delayed, and Fisker has laid off employees in its Delaware and California plants.
Then, take Tesla Motors, of Fremont, California, which is behind its production schedule and at its lowest cash position in the firm’s history, according to CFO Deepak Ahuja, who was quoted in the Wall Street Journal. Tesla received $476 million in Energy Department grant money in January 2010. The firm is burning through cash and had to sell 5 million shares last month to raise revenue. It produced only 255 cars between June and September.
Ecotality of Phoenix, Arizona, a maker of charging stations, received $126 million in Energy Department grants in August 2009. Yet it incurred $45 million in losses and told the government that it may not achieve profitability in the near future.
Compact Power of Holland, Michigan, a division of LG Chem, a Korean company, received a $151 million Energy Department grant in July, 2010 to make electric batteries for the Chevy Volt. More than two years later, those batteries are made in Korea, rather than in the United States, and the company is placing its employees on rotating layoffs.
The list goes on. What is clear is that the government can’t seem to do a good job of picking electric car and battery makers, just as it can’t do a good job of picking candidates for energy loan guarantees. Of the 33 companies that got Energy Department loan guarantees, 30 are struggling. Of the 8 electric car battery manufacturers who got Recovery Grants from DOE, 5 are in difficulties.
Besides, with higher CAFE standards, prices of new cars, electric and gasoline, will rise. The nonprofit, politically unaffiliated Center for Automotive Research anticipates an increase of $4,000 to $11,000 between 2008 and 2025. If that occurs, fewer motorists will buy new cars and clunkers will stay on the road longer.
The new CAFE standards will result in more people getting killed on the roads because lighter cars are less safe. Larger, heavier vehicles give more protection in collisions because they have more mass to absorb collision forces.
With gas prices now falling but still averaging $3.50 per gallon nationwide, and over $4 in California, consumers have every incentive to buy fuel-efficient cars if they want them. The implicit message of the administration in advocating higher fuel standards is that energy markets are unreliable and wrong because too few motorists care about greenhouse gas emissions, which has become the driver of raising CAFE standards.
On Monday night, Mr. Obama said "we also have to develop clean energy technologies that will allow us to cut our [oil] exports in half by 2020." But billions of government dollars spent on a product that no one wants to drive will not help our economy, it will only slow it down and add to the growing public debt.
This piece originally appeared in RealClearMarkets
This piece originally appeared in RealClearMarkets