Libya's Ripples for Energy Markets

The unrest that began in Tunisia and Egypt has now destabilized a country that exports important quantities of petroleum, and the oil market is reacting in earnest. With Libya in violent turmoil, UK Brent crude traded above $108 per barrel today, and even West Texas Intermediate (WTI), which has been massively discounted due to excessive inventory at its Cushing, OK delivery point, hit $98 in early trading before falling back to the mid-$90s. Unless events in Libya resolve quickly and positively, oil's price moves will shortly translate into higher gasoline prices. As I considered these events over breakfast, it also struck me that GM and Nissan could turn out to be very lucky indeed in launching their electric vehicles now, instead of a year or two ago when gas prices were lower and less volatile.

The media commentary I've seen so far concerning Libya's oil production has missed some key details that explain why a disruption of exports that in theory can be covered by OPEC's ample spare capacity--currently at a multiple of Libya's output--could be disproportionately large. Instead of focusing on Libya having Africa's largest oil reserves--a fact that is important for the long run but essentially irrelevant in the current situation--what matters is production and exports, and especially the location and quality of the latter. Libya produces around 1.7 million bbl/day of crude oil and exports much of that, due to its small domestic market. As oil companies evacuate personnel, that output will drop, and exports from Libya's ports are at risk of disruption by the chaos unfolding there. The majority of those exports stay in the Mediterranean, where they are key inputs for Italian, French and Spanish refiners. Very little of it comes to the US, for which Libyan oil made up less than 1% of our imports in 2009. So any effect on US markets will be indirect, but no less dramatic for that.

On the surface, OPEC is more than capable of making up for the loss of a bit over 1 million bbl/day from the market, if it wished. However, most of the cartel's roughly 5 million bbl/day spare capacity is on the Arabian peninsula--near another focus of instability in Bahrain, which is no longer an oil exporter. Nor is most of OPEC's remaining capacity of a quality comparable to the typically light, sweet crude types that constitute most of Libya's output. These crudes are well-suited for making the diesel favored in Europe, and it would be difficult for many European refiners to switch on short notice to a diet richer in Saudi grades that are higher in sulfur.

Various analysts have noted that US gas prices were already reflecting higher world oil prices, rather than the lagging WTI indicator. With April gasoline futures trading above $2.75/gal. on the NYMEX this morning, that would yield an effective average US retail unleaded regular price of around $3.45/gal, after factoring in excise and sales taxes and typical dealer margin. That's well above the $3.18/gal. average that the Lundberg Survey reported for last week. It would also be the highest average at the pump since October 2008, when prices were unraveling from their $4-plus peak of that summer.

It's too soon to predict an imminent return to those heights, although no one can gauge what will happen next in Libya, where it's not even clear who's in charge at the moment. (It does seem safe to predict that the US will not lead a NATO invasion of Libya, as Fidel Castro has apparently warned.) Still, it is worth thinking about how consumers might react if the current chaos persisted. The last time gas prices rose sharply, we saw significant drops in both US vehicle miles traveled and gasoline consumption. We also observed a noticeable increase in the sales of hybrid cars, which have lagged recently. There were no mass-market electric vehicles available at the time, but it doesn't require a leap of faith to envision a healthy boost in EV sales from their low initial levels, too. That would be good for both GM and Nissan, which have invested enormous sums--and their corporate reputations--bringing their Volt and Leaf models to market. It might not be so positive for sales of clean diesels, despite their high efficiency, if constraints on Libyan oil tighten European diesel supplies and drive up world diesel prices.

Events in North Africa and the Middle East will determine how high oil and gasoline prices rise in the weeks ahead. If Libya's dictator departs as readily as President Mubarak did, things could settle down quickly, unless the unrest spreads to another major oil producer. It's still too early to call this a new oil crisis, but it's not too soon to consider our options if it proved to be one. Although that would be a very unwelcome shock to an economy just regaining some momentum, we have many more options than in 1979, when the Iranian Revolution sent oil prices to levels that it took nearly three decades to exceed, in real terms.

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Big Energy Stories of 2010

Many of the main energy trends of 2010 were predictable at the year's start, including the growing reliance of renewable energy on government assistance in the aftermath of the financial crisis, the debate over US greenhouse gas legislation, the emphasis on green jobs and competition with China, the delayed arrival of cellulosic biofuels, and the anticipation surrounding the product launches of the first mass-market electric vehicles. As interesting as all this was, the year in energy was dominated by two transformative events: the Deepwater Horizon accident and the multi-million barrel leak that ensued, and the less spectacular but no less profound awakening to the possibilities of the shale gas revolution.

The Deepwater Horizon disaster has been the subject of such extensive coverage and investigation that there's little I can add concerning the facts, other than to note that we have not heard the last word on just how much oil actually leaked into the Gulf of Mexico. The consequences of our response to the spill will be with us for a long time, both in terms of reduced offshore drilling activity and the decline in US oil output that must inevitably follow. The impact will reach far beyond the tens of thousands of workers whose livelihoods are directly or indirectly linked to the US offshore industry. Early in 2010 it looked like the industry would finally be offered access to areas that had been off-limits for decades, and by year-end not only has drilling in the central and western Gulf come to a near standstill, but the prospect of leases in the eastern Gulf and the mid-Atlantic coast has been foreclosed, perhaps permanently.

The psychological impact of the event could extend even farther than its physical and economic fallout. Whatever misgivings many people had about offshore drilling before the accident, the industry had built up trust through an impressive string of technical achievements--pushing the boundaries of resource accessibility from depths of a few hundred feet into nearly two miles of inhospitable ocean--and a solid reputation for safety. In the space of one day and the following weeks, that trust was shattered. Coming on the heels of a financial crisis that destroyed the trust of millions of Americans in the nation's largest financial institutions and markets likely amplified the effect. As fickle as we Americans sometimes seem, I wouldn't bet that this trust can be restored quickly, or to the same degree.

The shale gas revolution is a completely different kind of story, though it, too, has arguably been tainted by Deepwater Horizon. As it unlocks a resource that has converted the US natural gas supply outlook from one of scarcity and growing import dependence to expected abundance for decades, the gas industry can't assume it will receive the benefit of the doubt concerning the environmental impact of the drilling techniques that have made this turnabout possible.


Perhaps one reason the impact of cheap natural gas hasn't sunk in yet is that the main market price for gas, the futures price at the Henry Hub in Louisiana, doesn't have much relevance for the average consumer. Residential gas customers don't buy their gas in the million-BTU (MMBTU) lots in which the futures contract is denominated; we buy gas in therms--one tenth of an MMBTU--and by the time we see it on our bills all sorts of handling and distribution fees and mark-ups have been added on. But when you compare the price of traded gas in barrels of oil equivalent (BOE) to the price of West Texas Intermediate crude, the remarkable divergence of the last two years becomes obvious, as shown in the chart above. Between 2000 and 2006 gas and oil tracked each other closely, allowing for the greater seasonal volatility of the former. There were even periods when a barrel-equivalent of gas was worth more than a barrel of oil. Yet while oil and gas prices fell precipitously when the recession and financial crisis burst the various asset bubbles, they have diverged sharply since then, with oil advancing back up to today's $91/bbl and gas settling into the $20-25/bbl range in which we were accustomed to see oil prices a decade ago. Adjust that for inflation and you're looking at an average natural gas price for 2010 equivalent to $20/bbl in 2000.

That might help explain why the developers of renewable electricity sources such as wind have struggled so much this year, despite receiving $3.9 billion in direct cash grants from the US Treasury. They're not competing with $90 oil; the US generated less than 1% of its electricity from petroleum this year, through September. Instead, they're competing with gas at an effective price of $25/bbl or less. But if this is a new obstacle for some renewables, it surely represents a huge opportunity for the country as a whole, as we struggle to find our way out of the fiscal and competitive pit we've dug. Cheap energy has always been a key to growth, and right now, gas is the only energy source offering that without requiring an enormous up-front investment. It's no panacea, and it can't take on every burden without being spread so thin that its price advantage would disappear. But I'd much rather be looking at the possibilities this presents than at the constraints that high-priced oil and natural gas imposed only a couple of years ago.

That's probably as good a note as any on which to end the year. New postings will resume the week of January 3, 2011. In the meantime, I wish my readers a happy holiday season.

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Temperature Extremes and EV Battery Trade-offs

The first production-model Nissan Leaf electric vehicle is scheduled to be delivered to a customer in the San Francisco Bay Area tomorrow. I know if I were on the receiving end, I'd be as excited as a kid on Christmas morning, particularly in a place where having the first Leaf will score its owner many green points. However, if the assessment by MIT's Technology Review of Nissan's choices concerning the temperature control of the Leaf's battery pack is accurate, then it's probably just as well that the first one is going to a location with such a benevolent climate, instead of the Midwest, upstate New York, or the desert Southwest. Batteries are sensitive to external temperature, in terms of both performance and longevity, and Nissan appears to be betting that making the battery simpler to replace is a higher priority than optimizing its condition at all times, as GM has done for the battery pack in the Chevrolet Volt.

It's easy to forget that batteries are fundamentally chemical, rather than just electronic devices. The chemical reactions in a battery absorb or release heat during the charge/discharge cycle, and the capacity of the battery's environment to accommodate those heat flows can affect these reactions. For a battery pack storing and delivering as much energy as required to run a car, these interactions are significant, and early adopters of EVs are already learning that the range of EVs becomes more limited in hot or cold weather. It's not as clear that they understand the degree to which extreme temperatures can degrade battery life. The economics of an EV could look very different if a battery pack only lasted six or seven years, instead of ten.

As the article explains, GM chose a liquid cooling system for the battery pack in its Volt range-extended EV. This system cools or heats all of the battery's cells, as necessary, and sometimes draws power for this purpose even when the vehicle is parked, as I learned when I test-drove one with the Volt's Vehicle Line Director last winter. According to him, GM's design team knew it had to go to extraordinary lengths to ensure the battery would perform reliably and last the expected ten years or 150,000 miles. Nissan appears to have taken a different path to battery management, providing a cooling fan for the battery pack and an optional battery heater--an option reportedly not available on the first Leafs. You don't have to be an expert in heat transfer to guess that air won't move heat around the battery pack's cells as well as liquid can, and that as a result, at least part of the Leaf's battery could potentially be exposed to more heat and cold--and possibly suffer more performance impact from them--than the Volt's.

That trade-off might reflect a different vision for how the battery will be used. Nissan (with its alliance partner Renault) is the main carmaker working with Better Place, Shai Agassi's EV battery recharging-and-exchanging start-up. A battery pack with only electrical connections to the car will be much easier and neater to swap in and out than one with liquid hoses running to a radiator and heater. This situation wouldn't even be a consideration for the Volt, which has an onboard generator to take over when the battery's charge falls too low. But for battery-only EVs, battery-swapping is as close as they can get to replicating the convenience of refueling a gasoline or diesel car in a few minutes. If EVs catch on via a business model like Better Place's, in which consumers routinely exchange their flat batteries for fully-charged ones (and might not even own the battery pack, but instead rent it by the month or the mile) any shortcomings from Nissan's less robust battery-conditioning strategy would fall on someone other than the consumer, as a statistical cost of doing business.

From my perspective this is just one of the uncertainties concerning the operation and consumer acceptance of EVs about which we'll learn more as their numbers climb from the low thousands to the hundreds of thousands and millions. However, I find it interesting that few journalists have picked up on an issue that could have far more impact on the EV ownership experience than the tempest in a teapot that some stirred up when they found out that the Volt's wheels are occasionally driven partly by the engine-generator, rather than entirely electrically. If I were buying one of these cars, I'd be a lot more interested in how far its expensive battery pack will carry me and how long it will last, than in whether the car is truly a range-extended EV or just a plug-in hybrid.

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Electric Vehicle Choices Expand

One of my basic assumptions about our energy future is that most automobiles will eventually be electrified. That's based on extensive scenario work done with my former colleagues at Texaco, Inc. in the late 1990s. Nothing I've seen since then has changed my view on that. However, vehicle electrification is not necessarily synonymous with "electric vehicle" (EV) in its common usage to connote a car powered only by electricity stored in batteries. It's a much broader category, covering all three electrification options now slated to be available to consumers by year-end: hybrids, plug-in hybrids, and "pure" EVs. It also encompasses fuel cell vehicles, though these have yet to move beyond the test-market stage. The characteristics of the three current varieties of electrified vehicles differ in important ways that will affect both their impact on our energy consumption and their success as consumer products.

With hybrids already well established and plug-in and EV models intended for the mass market about to go on sale, this is no longer just a theoretical comparison. Shortly, consumers will be assessing these cars against each other, as well as against more conventional choices, including clean diesels and ordinary gasoline-powered cars, which are becoming more energy-efficient all the time, as noted for the new-model Ford Explorer SUV. Only part of that comparison will hinge on how their drivetrains are energized. In order to achieve mass-market success, they must compete on the whole array of product attributes, since for many people cars are much more than simple transportation.

Start with hybrids, which are sometimes referred to as conventional hybrids, or even "non-plug-in hybrids", to distinguish them from other types. According to the June Hybrid Cars Dashboard at hybridcars.com, 26 hybrid models represented 2.3% of the cars sold in the US in the first half of 2010. That's down from about 2.8% last year. The Prius by itself accounted for half those sales, and it's still the archetypal hybrid for comparison purposes. Like other hybrids of this type it gets all its energy from the gasoline that's put in its tank, and it uses this fuel more efficiently than non-hybrid cars by recovering and recycling part of the energy otherwise lost through braking, and by avoiding idling. (The latter feature is pretty much all that some "mild" or stop/start hybrids do.) The EPA rates the 2010 Prius at 51 mpg city/48 mpg highway. The base model Prius has a sticker price of $22,800, and as far as I can tell it is no longer eligible for any federal purchaser tax credits.

The Chevrolet Volt is based on a different hybrid design, as a plug-in hybrid (PHEV) or more accurately a range-extended electric vehicle (REEV). It also represents a different car philosophy, presumably aimed at a different segment of the market than the Prius. This kind of hybrid gets its primary power from an external electricity source, stored in a battery pack that gives it a range of roughly 40 miles without using gasoline. At that point, and before the battery's charge is fully depleted, the car's onboard generator--a four-cylinder gasoline engine--kicks in to recharge the battery, which continues to send power to the electric motor. Actual fuel economy thus depends on how often and how far one drives with the generator running. I believe the EPA is still grappling with an appropriate methodology to represent this fairly. Of course even when driven only on battery power, it still consumes energy, and in most parts of the US that means that some fossil fuel will be burned somewhere to power it, most likely natural gas.

GM just announced the base sticker price for the Volt, and at $41,000 before tax credits this should make it pretty clear that GM had someone other than Prius buyers in mind. Having driven a pre-production Volt this winter, I'd see it competing more with the Lexus HS250 hybrid, which starts at $34,650, and with non-hybrid entry-level luxury cars like the Acura TSX ($29,310 MSRP but more like $32,410 similarly equipped.) If it lives up to its potential, the Volt could significantly broaden the appeal of hybrids in general, while also saving a lot of gasoline for its owners. Whether it will also save them money is much harder to assess, because the calculation hinges on the specifics of where and how the car would be used.

Nissan's new Leaf is a bolder, if technologically less-complex step than the Volt, because it relies entirely on grid power stored in a 24 kWh battery pack, with no back-up other than a cable and plug--or a tow-truck. At $32,780 before tax credits the stakes are also somewhat less daunting for buyers willing to risk a bit of range anxiety and some adjustments in their lifestyles. I'm not the only one who sees the Leaf aimed squarely at the green consumers who have formed the core of Prius buyers. That's important for several reasons. It reduces the substantial product launch risks for Nissan, which already has thousands of prospective buyers on its waiting list. However, if the Leaf cannibalizes existing hybrid sales, rather than dramatically broadening the electrified vehicle market, then its impact on US oil consumption and the economics behind those tax credits will look a lot less valuable to policy makers.

My skepticism about the Leaf goes a lot farther than Nissan's incredible claims concerning its equivalent miles per gallon. In the basic architecture of the Leaf I see many of the same issues that caused the launch of GM's ground-breaking EV-1 electric car to fail. Attitudes towards oil and the environment have changed significantly in the last decade, and the government is pushing recharging infrastructure much harder and with much more financial support than when the EV-1 was launched. The Leaf also benefits from not being the only plug-in vehicle coming to market, though it requires its plug, whereas the Volt merely works better with one. Fundamentally, however, I just don't know if enough Americans are ready for a car that can only go about 100 miles on a good day, and potentially a lot less than that when conditions aren't ideal. That's particularly important when we recognize that at the price points for both the Leaf and Volt their realistic market isn't first-time buyers in their early twenties for whom basic assumptions about range and refueling times might not be so ingrained. Taking advantage of the entire $7,500 federal tax credit would require an adjusted gross income of at least $55,000 for single taxpayers ($74,000 for married couples), based on last year's tax tables--and probably even higher when taking into consideration itemized deductions, dependents, and other factors. In my view, likely buyers for both cars would be solidly middle-to-upper-middle class.

Rather than making expansive predictions based on guesses about how well these new cars will do with real consumers, I will be watching the start of this grand experiment with great interest. If the Leaf catches on as well as Nissan hopes, then the trickle of other EV launches that are expected to follow could turn into a tidal wave of automotive innovation. If the Volt does better than the Leaf, despite its higher price, that could signal that consumers still value the comfort of knowing they can pull into a gas station and refuel in three minutes--rather than several hours--more than they value their independence from oil. And if both do well without eroding the sales of conventional hybrids, then that would bode well for a much more efficient vehicle fleet in the years ahead, relying on a much wider mix of energy sources than today's.

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How Fast a Transition from Oil?

The Gulf Coast oil spill remains the top energy story this week, eclipsing a $10 drop in oil prices that should soon ripple through to gas pumps near you. With BP's latest effort to contain the spill having run afoul of a slush buildup composed of methane hydrate crystals, the deepwater well continues to leak at an undetermined rate. The longer the spill continues, the greater the chances for severe environmental consequences, and the likelier that it will become a perception-altering milestone event as some environmentalists have already suggested. However, even if the spill were to galvanize public opinion in a manner similar to the 1969 Santa Barbara oil spill, what options do we have that could realistically reduce our reliance on oil produced from offshore platforms?

Last week I focused on the energy contribution of the oil we produce offshore in US waters, particularly in the deep water of the Outer Continental Shelf (OCS) of the Gulf of Mexico. It constitutes 30% of domestic crude oil production, or about 10% of our total oil consumption, and contrary to the wildly-inaccurate assertion on a widely-read environmental blog last week, essentially none of it is exported. (Anyone who doesn't know the difference between crude oil and petroleum products has no business commenting on that aspect of energy policy.) Today I'd like to go into a little more detail on the alternatives to offshore drilling that I alluded to last Wednesday.

Gasoline, jet fuel and diesel accounted for 75% of the petroleum we consumed last year. Other than the heating oil included in the diesel tally, these are the fuels that power most transportation of people and goods. Many initiatives are under way to develop non-petroleum fuels for cars, trucks and even jet aircraft, though at this point they are all in relatively early stages of development or deployment. On paper, at least, electricity looks like the best option for replacing gasoline, by means of plug-in electric vehicles like the Chevrolet Volt and Nissan Leaf. Since less than 1% of US oil consumption is used to generate electricity, switching cars from gasoline to electric power represents a nearly total displacement of oil. It would also facilitate the direct use of renewable electricity sources to eliminate greenhouse gas emissions. This prospect has many people excited, and I've heard it mentioned frequently in reactions to the Gulf spill. Yet this is hardly a slam-dunk, for numerous reasons, topped by scale and the unproven consumer acceptance of mass-market EVs.

In one of their periodic special sections on energy, today's Wall St. Journal included an article on the development of EV recharging networks in the US. It cited a study by Pike Research forecasting 610,000 EVs by 2015. That would be a great start, though it would fall short of President Obama's goal to put a million plug-in vehicles on the road by then. Even assuming that the million-EV mark were reached that soon, and that they were driven as much as other cars and replaced vehicles averaging 25 mpg, the quantity of gasoline they would displace amounts to just 31,000 bbl/day--less than the quantity of oil the leaking Macondo field would have been producing in a couple of years, had Deepwater Horizon's exploration well been completed uneventfully. Substituting for all of the oil currently produced from offshore drilling--or for the decline in US oil production that would occur by 2020 if we stopped drilling offshore--would require up to 50 million EVs, making up roughly 40% of all the cars likely to be sold in the US this decade. I suppose that might barely be possible on a crash basis, with a World War II-style mobilization of the resources required to achieve it, but it doesn't look very likely to me. I would be impressed if the US had 10 million EVs by 2020, implying annual production of well over a million units within just a couple of years, though that would reduce our current oil demand by under 2%.

So if EVs can only take us a small part of the way to replacing our oil consumption in the near future, what about advanced biofuels? There are many promising avenues, including biofuels produced from agricultural or forestry waste or dedicated energy crops, biofuels from algae, and bio-hydrocarbons from plant sugars. All are in their infancy. The EPA recently had to reduce its mandate for advanced biofuels delivered in 2010 from 100 million gallons to just 6.5 million gallons--424 barrels per day--because no truly commercial-scale facilities will come on-stream this year. We might get a few billion gallons per year from these sources by 2020, if numerous technical and economic hurdles can be overcome, but that would displace at most a couple of hundred thousand bbl/day of oil.

Natural gas looks like another good alternative transportation fuel. T. Boone Pickens has put forward his plan to shift long-distance trucking onto compressed or liquefied gas. There's no shortage of gas available for this purpose, thanks to the much larger supplies made possible by shale gas drilling. It starts from a very low level, however, with current natural gas used in transportation equivalent to less than 1,500 bbl/day of diesel fuel. It also competes with other uses of gas, such as generating more electricity to reduce our consumption of coal. Or, looking at it another way, there might be plenty of gas to do both, but not at today's price.

That leaves what looks like the best option for reducing our oil consumption, other than simply deciding to drive less, as some folks have apparently already done. Because the US car fleet is so large and is driven so far, increasing its fuel efficiency by just 3 miles per gallon could save nearly a million bbls/day of gasoline. That's more than the entire contribution of corn ethanol, our most significant alternative transportation fuel. In fact, the latest demand forecasts of the Energy Information Agency are already based on that kind of improvement, reflecting new regulations requiring new-car fuel economy to increase to 35 mpg before 2020. Still, only a small fraction of our fleet of 240 million cars turns over every year, so it will take a long time before average fleet fuel economy even begins to approach these levels.

Whether your preferred alternative to offshore drilling requires replacing millions of vehicles with hybrids, EVs, natural gas-powered vehicles, or highly-efficient small conventional cars like the new Ford Fiesta, or depends on a vast new infrastructure of alternative fuel production and distribution, none of these solutions can work overnight. In the meantime, every barrel of oil we consume but don't produce here must be imported, some of it from countries that don't like us very much--as we're frequently reminded--and all of it with serious implications for our national financial and trade balances. (And don't forget the inevitable oil spills from all those extra tankers.) If we don't want OPEC to be the biggest beneficiary of a new environmental mindset after the Gulf Coast spill, then we face some very tough choices, including whether we'd prefer to open up major new areas for onshore drilling, instead of some of the offshore prospects that were slated to be leased in the next few years, or to continue drilling offshore under updated procedures and with strengthened environmental protections, at the same time we pursue all of our options for reducing our overall reliance on oil.

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Electric Cars and Natural Gas

Two items in the weekend Wall St. Journal caught my attention. The first concerned the mileage ratings of electric vehicles, with the EPA apparently reconsidering its initial methodology with an eye to making it better reflect reality. The second reported on a meeting of natural gas exporting nations, which seem to be backing away from notions of OPEC-style gas output cuts. While these stories appear entirely unrelated, at least in any cause-and-effect sense, they intersect in interesting ways. That's because natural gas has largely replaced fuel oil as the link between electricity markets and the world of hydrocarbons, while becoming a viable alternative vehicle fuel in its own right. Any shift away from oil-based transportation fuels toward either electric- or natural-gas-powered vehicles could be hindered, if gas prices started to behave like oil prices.

As the article on EV fuel economy reminds us, GM and Nissan made headlines last year with eye-popping mpg estimates for their Volt and Leaf electric vehicles, respectively. However, as I noted at the time, it is simply not realistic to apply a theoretical energy conversion equating the energy in a kilowatt-hour of electricity to the BTUs delivered by a gallon of gasoline without taking into account the means by which it was generated. According to the Journal, Nissan's 367 mpg claim was based on a calculation using 82 kWh/gal. That implies that it takes just 1,414 BTUs to generate each kWh of electricity used by the Leaf. Physics tells us that isn't possible, with 3,412 BTU/kWh as the theoretical minimum and real-world values much higher. Perhaps the earlier methodology reflected assumptions about the fraction of the time the Leaf might be expected to recharge on surplus wind or solar power, for which no fossil fuels are consumed. At this point any such assumptions look premature, at best.

Several years ago, the Pacific Northwest National Laboratory evaluated US power generating capacity to determine the level of EV market penetration that could be accommodated without building more power plants. Their conclusion that 84% of the cars on the road could be electrified without exceeding the capacity of existing power plants surprised a lot of people, and it has been cited many times since--usually without attribution--as evidence that EVs are a practical alternative to imported oil. The aspect of the study's findings that often gets ignored is that the unused capacity available to power EVs came mainly from gas turbines that are used to meet peak power demand and back up the intermittent output of renewables such as wind and solar power, and are thus idle for many hours a day. Yet while wind and solar have both grown substantially since the 2006 PNNL study, their contribution to actual US net generation has still only increased from 0.6% to 1.8% of the total--not enough to alter the conclusion that for the time being any incremental power consumed by EVs will come mainly from natural gas and other fossil fuels.

In that light, realistic fuel economy estimates for EVs must incorporate reasonable estimates of the amount of gas needed to generate each kWh used. Depending on the applicable gas turbine configuration, which would vary by time-of-day and market, that could range from 7,000 to 12,000 BTUs or more. Even if we used a conservative figure of 8,000 BTU/kWh, that means that the amount of natural gas equivalent to one gallon of gasoline (carrying 116,000 BTUs) would generate at most 14.5 kWh of power. If the previous 367 mpg estimate for the Leaf was truly based on an assumption of 82 kWh/gal., then its effective fuel economy might actually be no higher than about 65 mpg. That's still impressive, and it would save a lot of oil, but does it represent enough of an improvement over a Prius-type hybrid--or compared to the Chevrolet Volt, which the Journal cites as getting 50 mpg on its range-extending generator after the initial battery charge has been depleted--to justify the lifestyle constraints of a 100-mile range and recharging times measured in hours? More fundamentally, is this even the best use of the natural gas involved, compared with backing out coal-fired power generation and its high CO2 emissions, or using the gas directly as a vehicle fuel, particularly for trucks and delivery vehicles, as proposed by Mr. Pickens?

While the answer to the latter question is neither trivial nor obvious, all of these options hinge on natural gas being both plentiful and cheap, especially relative to crude oil. You've heard a lot about the impact of the shale gas revolution on gas supply and pricing in North America. Because the US now needs less imported gas to meet demand, and because domestic gas looks plentiful for decades to come, commodity gas on the Gulf Coast now trades for just 1/20th the price of crude oil. That means that the natural gas energy equivalent of a barrel of oil is selling for just $23.50. Even at the roughly $6/MCF indicated for December 2010 gas futures, that's still just $35/bbl. However, the more we rely on gas to generate electricity--to meet incremental demand, including from EVs, and to back out higher-emitting sources like coal--and the more gas we put directly into vehicles, the likelier it is that we'll need to import LNG to balance supply and demand. If the international gas market were controlled by an OPEC-like cartel that was able to constrain output to put pressure on prices, then eventually this would translate into higher gas prices here--closer to crude oil's--and that would make both natural gas vehicles and EVs running on gas-generated power less competitive with fuel-efficient gasoline and diesel cars. So for both EVs and NGVs, it's good news that the gas producers meeting in Algeria seem unlikely to be able to match OPEC's market power any time soon.

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910 Miles Per Gallon*

Yesterday provided one of those occasional treats that makes blogging about energy so enjoyable. In conjunction with the Washington Auto Show, I had the opportunity to drive a demonstration version of the eagerly-awaited Chevrolet Volt around an impromptu test track, accompanied by the Volt's Vehicle Line Director, Tony Posawatz, who answered every question that occurred to me and many that didn't. The experience was exhilarating. For a bona fide car of the future the Volt--even in "pre-production" form--looked and handled like a real car that I could imagine myself driving around town or on a long trip, aside from its impressive technology and efficiency. That's an important distinction, since to be truly successful the Volt and its eventual siblings must be able to compete beyond a niche market of green-oriented consumers.

My test-drive of the Volt was the latest in a series of advanced vehicle experiences that includes driving a Fuel Cell Equinox a couple of years ago and goes back to a spin around Phoenix behind the wheel of an EV-1, GM's first electric vehicle, in the late 1990s. I asked Tony to what extent the Volt incorporated EV-1 technology, and his answer confirmed that while no actual parts were shared, its design philosophy and engineering DNA owe much to that earlier effort.

At first, when I drove the Volt onto the big, empty parking lot where GM had set up its test track for the DC Auto Show, I was disappointed that I didn't sense that immediate high-torque response I recalled from the EV-1--the kick that my GM contacts at the time called the "EV-1 grin." Then Tony pressed the "sport" button, and the grin was back. While my Acura might be able to beat the Volt's 0-60 miles-per-hour acceleration by several seconds, most drivers should be quite satisfied with the Volt's responsiveness and handling, even when compared to the entry-level luxury cars with which the Volt's expected price puts it into contention--and which its energy efficiency beats hands down.

The technical aspects of the Volt are fascinating, starting with the battery pack, which consists of 400 lb. of Lithium-ion batteries configured as "prismatic cells" that facilitate easier heat management than some other designs. That's a critical factor for battery life, since the battery must dissipate a fair amount of heat during its charge/discharge cycles, and its performance and efficiency are affected by ambient temperature. When plugged in, some of the energy the Volt draws from the grid is used to "condition" the battery, not just recharge it. That should help GM deliver on its expectation that the car's battery pack should last for 10 years and 150,000 miles of normal driving, over which its capacity would gradually decline, while still ultimately retaining at least 70% for later use in other, non-automotive applications. The potential after-life value of the battery could be a critical element of the lifecycle economics of a plug-in hybrid or Range-Extended Electric Vehicle like the Volt.

I was particularly interested in the battery's recharging requirements, in relation to the energy density concerns I discussed in last Tuesday's posting. The Volt recharges in two modes: At 240 V and drawing between 15-30 amps, it takes up to 3 hours to restore the roughly 50% of the battery pack's 16 kWh maximum charge used in "charge-depleting" operation--that first 40 miles or so of battery-only driving that provides the car's main selling point. Recharging on 120 V household current takes more like 8 hours. I was somewhat surprised that Tony seemed to share my view that Volt drivers are unlikely to wait until the middle of the night to recharge their cars, unless their highest priority is minimizing their electricity costs (and possibly emissions.) He has apparently been using a Volt on weekends and cited the benefits of daytime recharging at home or office to keep the battery ready for use, consistent with the main purpose of owning such a car.

The switchover from battery-only operation to driving with the onboard generator running was one of the key features I was anticipating, based on my concern that the Volt would ultimately be handicapped in low-battery, "charge-sustaining" operation by its reliance on a fairly small 4-cylinder engine. After all, the performance expectations in the category the Volt aspires to are set by powerful engines similar to the V-6 in my Acura TL, which delivers 270 peak horsepower. Well, you could have fooled me. The Volt I drove yesterday was intentionally given just enough battery charge to last about 3 miles, and when I passed that point and the little engine fired up, there was no discernible change in performance. That's apparently because the car is never really driven by the engine alone, since the battery is never completely drained. The accelerator controls only the flow of current from the battery to the electric motor; meanwhile the car's software runs the engine as needed to keep the battery charged to acceptable levels, but not to recharge it fully. That's a subtle distinction, because when I pushed the car hard in this mode, I heard the engine rev up noticeably with that characteristic 4-banger tone that provided the one discordant note in an otherwise near-luxury experience. But the trade-off was evident when I pulled the car into its tent shelter and switched it off. The cumulative fuel economy display on the dash read a whopping 910 mpg.

That result prompted an interesting discussion about what fuel economy really means in a car like this, which dutifully calculated mpg based on the tiny amount of gasoline consumed in the last lap of several miles of mostly battery-powered driving. I got a sense that GM recognizes the shortcomings of mpg in measuring such a vehicle's energy usage, though they are clearly quite focused on it as the primary metric of both consumers and the existing and proposed federal fuel economy standards. But even knowing intellectually that the car's electric efficiency, which Tony confirmed is in the range of 200-250 Watt-hours per mile, or 4-5 miles per kWh, equates to roughly 58-72 miles per gasoline-gallon-equivalent of natural gas going into a gas turbine power plant somewhere, that 910 mpg still got my attention with its implication of very rare visits to the gas station.

Recently, I indicated that while plug-in hybrids and full EVs might not yet be ready for the mass market, they do look ready for "innovators and early adopters", the folks who routinely queue up for the latest iPhone and long ago swapped out their cable set-top boxes for streaming video. If the pre-production car I drove yesterday, with the further refinements Tony Posawatz hinted would be incorporated between now and then, was any indication, the production cars that reach showrooms late this year should have early adopters salivating in anticipation, particularly with help from a federal tax credit that maxes out at $7,500 per car and for which the Volt should qualify in full. Based on his comments and my own experience with the car, there's every indication that the Volt is on track to meet its late-2010 launch target. I will be eagerly awaiting the first comment reporting that one of my readers has bought one.

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EVs and Energy Density

If the new vehicles on display at this year's Detroit Auto Show have you wondering whether 2010 might be the Year of the Electric Car, you're not alone. GM's Volt plug-in hybrid is due out this fall, and purely-electric options like Nissan's Leaf aren't far behind. The global auto industry is investing billions of dollars in developing this technology, and the US government is putting up additional billions in loan guarantees for EV manufacturers and consumer purchase subsidies. No one should dismiss the seriousness of these efforts or their potential to reshape the vehicle and transportation energy markets over the next couple of decades. At the same time, their ultimate success depends on whether a combination of improved technology and significant changes in consumer expectations concerning vehicle performance and characteristics can overcome the core challenge of vehicle electrification: either matching the effective energy density of liquid fuels or giving up the flexibility they provide.

Understanding the practical consequences of energy density, which refers to the amount of energy that can be stored in a given volume or mass of fuel or battery, requires putting electricity and fuels onto a common basis of comparison. Although I've generally tended to do this in terms of gallons, barrels or BTUs, for a change I'd like to consider the fuels we commonly use in terms of their equivalent electrical energy. The units may be less familiar at first, but this should make a side-by-side comparison with the battery capacities of new electric vehicles (EVs) easier.

According to the Department of Energy a typical gallon of gasoline delivers 116,000 BTUs of energy, and a gallon of diesel fuel 128,000 BTUs, based on their lower heating values. Converting to electricity units gives us 34 kilowatt-hours (kWh) per gallon and 37.5 kWh/gal., respectively. Using typical volumetric densities for these fuels, I come up with figures of 5.5 kWh/lb. for gasoline and 5.3 kWh/lb. for diesel. By comparison, the battery for the extended-range GM Volt hybrid, which is rated at 16 kWh, appears to weigh 400 lb., yielding an energy density of just 0.04 kWh/lb., or less than 1% of the energy density of hydrocarbon fuels. If this were the entire story, EVs would look like a hopeless proposition, and we could dismiss them for another generation.

The factor that helps to bridge the enormous gap in energy density between the best batteries and liquid fuels is efficiency. While neither electric motors nor internal combustion engines (ICEs) can turn 100% of that stored energy into motion, the EV motor has an efficiency advantage of roughly 4:1 over ICEs. Even after taking that into account, we're still left with a requirement for roughly 25 lb. of batteries to deliver the same range as a pound of gasoline, with the effective useful capacity of the Volt's entire battery pack storing the equivalent of no more than one gallon of unleaded regular. Plug-in hybrids like the Volt cleverly finesse this limitation by using on-board generators running on liquid fuels to extend their range. Of course this entails big trade-offs of cost and weight, but the designers of such vehicles hope to come up with a mix that will satisfy consumers who are accustomed to cars that can go 300 miles without provoking "range anxiety".

In some respects the bigger concern related to energy density might be the one that proved to be the Achilles' heel of GM's first effort to produce a consumer-friendly electric car, the EV-1. To understand why recharging EVs is such a tough problem, let's take a look at your last visit to the gas pump in terms that would never occur to most people. Gas pumps in the US are limited by EPA regulations to deliver a maximum of 10 gallons per minute. Half that is probably more typical. But even at 5 gallons per minute, the gas pump is "recharging" your car at the power equivalent of 10 megawatts (MW), effectively delivering the entire daily power consumption of the average US household every 12 seconds. Even if you discount that figure by the lower conversion efficiency of an internal combustion engine, it's still the equivalent of a couple of megawatts. Matching that for an EV would require either stupendous voltages or currents well above most designers' comfort level. For example, a car recharger drawing 100 amps would have to operate at 25,000 Volts--more than ten time the voltage of the electric chair--to deliver a comparable charge in the same interval. At the 240 V of your home's appliance circuit, you'd need about 10,000 amps--similar to what a transit train draws from the "third rail." Almost inevitably, the safe recharging of EV batteries must take longer--hours longer--than refueling your gasoline vehicle, or entail clever-but-costly workarounds such as the battery-swapping scheme of Better Place and other firms.

From the above it's hard to avoid the conclusion that EVs and plug-ins might not be quite ready for prime time. However, I was struck by a comment from a GM official cited in a New York Times article on the Detroit Auto Show, concerning the need for first-generation EVs to pave the way for an eventual mass market. There's every indication that these cars will shortly be ready for "innovators" and "early adopters." The Volt, Leaf, and cars like them will prove out not just the technology of vehicle electrification--a trend that began with the original Honda Insight and Toyota Prius and still looks like the strongest competitor to the ICE in the long run--but also the response of real drivers who aren't engineers or environmentalists. My own experience with energy density in the more modest realm of battery-powered lawnmowers suggests that this will require adapting our expectations and usage patterns to this new vehicle type, rather than treating it as plug-and-play in our current lifestyles. In the meantime, the automotive mainstream has some very attractive non-plug-in options for getting the most out of the energy density of our current fuels, based on the steadily-growing variety of conventional hybrids, advanced diesels and downsized gasoline cars with direct injection and other innovations.

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The Demise of MPG

Even before the advent of partially- or fully-electric cars, it was becoming increasingly apparent that the old fuel economy metric of miles per gallon isn't as useful for measuring energy consumption in vehicles as when it was first codified in the original Corporate Average Fuel Economy standard in the 1970s. That is due in part to the proliferation of new fuels--E85, LPG, LNG, CNG, methanol, and hydrogen--but also because expressing the relationship between distance and volume in this way obscured the diminishing returns to higher levels of fuel economy. As a Wall St. Journal column earlier this week put it, adding electricity into the mpg mix, "risks giving consumers inaccurate information about the financial and environmental costs of driving." But if we need a new metric, what should it measure?

I've been interested in this issue for some time, and GM's recent announcement that its new Volt plug-in hybrid achieves 230 mpg in city driving prompted some further thought. I don't doubt the accuracy of that figure or the thought that GM's engineers put into bridging this new vehicle type into a system that was designed when the average US fuel economy was 13.1 mpg and unleaded gasoline was the newest fuel around. Yet all this figure tells us is how much liquid fuel the car's generator would consume over a carefully-chosen driving interval, completely ignoring the electricity--with its cost and consequences--required to deliver that result. Nissan's Twittered riposte that it's new Leaf electric car gets 367 mpg is even less useful, because the assumptions behind it are not clear--and might just ignore some basic engineering realities.

Without access to Nissan's calculation, I can only guess at how they might have arrived at it by backing into it. (Skip this if you hate numbers.) Start with the fact that each gallon of petroleum gasoline (without ethanol) carries 115,000 BTUs of energy. At an official conversion of 3412 BTUs per kilowatt-hour (kWh), that equates to 33.7 kWh per gallon, so 367 mpg implies that the Leaf would go nearly 11 miles per kWh. That's pretty amazing by itself, considering that the Volt is generally expected to go between 4 and 6 miles per kWh. It also suggests that the Leaf would be using less than half of its 24 kWh Lithium Ion battery pack to deliver its advertised 100 mile range. But even if this is all correct, there's a basic problem with the calculation; in the real world it can take a lot more than 3,412 BTUs of primary energy to generate one kWh of electricity, depending on how you do it. If the power source is surplus wind, solar or nuclear power that wasn't already being used to displace power generated from fossil fuels, the BTUs required could be effectively zero. Otherwise, for power generated from coal or natural gas they would range between 6,000-12,000 BTU/kWh. Even assuming a relatively conservative 8,000 BTU/kWh for the natural gas turbines that provide the incremental power supply for many markets, the resulting equivalent mpg falls from 367 to 156 mpg. But that still doesn't tell us enough, in my estimation.

The problem here is the existence of a variety of perspectives on vehicle energy efficiency with competing information needs. From the standpoint of energy policy, we are most concerned about annual oil consumption and greenhouse gas emissions. We already have a new federal mileage standard that is set in terms of grams of CO2-equivalent per mile, which gets at the latter issue. The EPA's current mpg methodology based on liquid fuels comes close to addressing the former, though the increasing contribution of biofuels renders it suspect. Unfortunately, any standard or metric that treats non-petroleum energy as essentially free seems certain to result in colossal unintended consequences, as non-oil energy sources ramp up. The engineer in me would argue strongly for something like the MPGe calculation used for the Automotive X-Prize, comparing all the energy delivered to the car in any form with how far the car went. However, from a consumer perspective that still seems overly complex and opaque. While I would certainly prefer the inverted form of fuel economy--gallons per 100 miles--to our current mpg, it's hard to beat miles per dollar as a means of comparing how much it will cost the average driver to operate any of these new cars.

Money is the common denominator for most of the things we consume, so why shouldn't it be for vehicle energy, as well? At current pump prices, an average American passenger car goes about 9.5 miles per dollar (mp$), while a Prius-type hybrid approaches 20 mp$. If we factor in electricity at the national average retail price of $0.11/kWh, then the Chevrolet Volt would deliver something in the vicinity of 30 mp$, if I've correctly understood how they arrived at their 230 mpg figure, while the Leaf might yield as much as 99 mp$--though my natural skepticism about its unofficial claims leads me to suspect it would be closer to 45 mp$. Of course, when you have to pay $5,000-10,000 extra for a battery pack, you'd certainly hope the operating cost per mile would be a lot lower than for a conventional car. And that's precisely the kind of comparison that a truly useful fuel economy metric should facilitate.

In the near term, the EPA should continue its work on adapting the familiar mpg metric to a new world of more diverse vehicle technologies, but for the longer term it ought to convene other government agencies, car and fuel companies, universities, and consumer groups for the purpose of developing a new and more helpful set of metrics that would tell consumers what they need to know about costs and consequences as the car fleet undergoes its long transition toward an uncertain destination.

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Building Bridges to Greener Wheels

It's a heck of a time to hold a car show, when new figures indicate car sales last month were off 37% compared to the prior January, and with a brand new administration for which cars must surely seem to be a much bigger problem than opportunity. But then the 2009 Washington Auto Show, with its theme of "The Automotive Seat of Power", had a very different feel from most of the car shows I've attended in the past. While there was no shortage of glitzy new models and concept cars, the emphasis was squarely on making cars much more efficient and environmentally-friendly. Visiting dignitaries included the new Administrator of the Environmental Protection Agency. In remarks at a presentation on the new EcoCar competition--the follow-on from the Challenge X competition I described last year--one of her deputies emphasized three overarching imperatives for the industry: economic stability, energy security, and emissions reduction. The auto company officials I spoke with were already on board with that message.

I can't fit all my experiences and a proper assessment of the issues involved into a single posting, so instead I'll just recount the highlights of attending the media-only preview of the show, and a dinner for a small group of bloggers organized by General Motors the previous evening. I hope to expand on much of this in subsequent postings.

The GM dinner was certainly a highlight. I met the head of the Chevrolet division and had a lengthy conversation with Tony Posawatz, who leads the design team for the Chevrolet Volt plug-in hybrid, the latest prototype of which was on display at the show. I had a chance to ask all of my questions about the Volt's configuration and how it will perform once its approximately 40 mile electric-only range is exhausted. I was particularly impressed with the Chevy team's underlying philosophy on the eventual electrification of most vehicles, which would greatly diversify the sources of transportation energy, and by their understanding of the complexity of the larger energy and environmental challenges involved. Cost remains a crucial hurdle for EVs and plug-ins, with battery packs still tremendously expensive and fuel so cheap, just now. I was assured that the Volt is on-track for its launch in the latter part of 2010.

A brief conversation at the Honda display underlined that cost concern, in the context of Honda's redesigned Insight hybrid, which is aimed at reducing the price premium of hybrids over non-hybrids and making them more affordable for a mass market. The new Insight has more than a few styling similarities to the Prius--"The same equations have the same solutions", as the great physicist Richard Feynman once said--and has no non-hybrid version to compare with. Both are probably smart moves on Honda's part. I also saw the new, third-generation Prius, which will apparently get even better fuel economy than the current model. If you liked the look of the old one, you will probably find this version sleeker and more graceful. Otherwise, it's yet another jellybean.

The other big highlight for me was the opportunity to drive three different European-style diesel cars, courtesy of the folks at Bosch, which makes the components that transform today's diesel engine from the smoky, noisy, balky device that Americans normally associate with this fuel into a smooth, clean and relatively quiet powerplant. The Mercedes ML320 and VW Tuareg and the 41 mpg (highway) Jetta TDI were all fun to drive, and their advanced particulate control systems meet the air-pollution requirements of all 50 states. I was also impressed with the Jetta's "double clutch" electronic transmission, which shifts almost imperceptibly. This model, which qualifies for a $1,300 fuel economy tax credit, will certainly be on my short list when I next go car-shopping. The other treat provided by Bosch was a ride in a test car that integrates advanced safety features with radar-based adaptive cruise control. If you haven't experienced it before, it's a bit eerie watching the cruise control handle city traffic, coming to a full stop without driver intervention. We are rapidly approaching the point at which computers can drive our cars better than we can, or at least make better use of their capabilities, including achieving the car's maximum fuel economy potential.

The emphasis on fuel economy and green credentials yesterday was pervasive, if not necessarily in all the models filling the DC Convention Center's halls, then at least in the ones that the companies emphasized. I found it remarkable that Chevrolet's new Camaro was touted for the 27 mpg (highway) fuel economy of its standard V-6--an engine unlikely to have been of much interest to the car's target demographic prior to last year's fuel price roller coaster--rather than its acceleration. And the new 40 mpg Cruze non-hybrid compact, already on sale in Europe, garnered as much attention. The proximity of so many cars delivering appreciably better mileage than most of those on the road in the US today to the really high-tech cars such as the Volt, Fisker Karma, Tesla Roadster, and Mini-E kept reminding me of a phrase I heard several times from the engineers from Bosch, in the context of their diesel technology: a bridge to the future, in the form of cars built with the best of today's technology, at an affordable cost, while the engineers and early adopters drive down the cost of the next generation everyone wishes we could all have now, but can't.

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Detroit, Bailouts and Fuel Economy

As Congress meets today to take up the subject of rescuing the Big 3 US automakers from possible bankruptcy, I'm concerned that this issue has been conflated with energy and environmental policy, rather than being viewed as an expedient palliative. While the mix of cars made and sold in this country will certainly have a large and growing influence on the quantity of petroleum and other fuels consumed by our car fleet in the years ahead, and on its emissions, it requires several leaps of faith to travel from that indisputable fact to the proposition that only by preserving at least GM and Ford in roughly their present form can we ensure that consumers will be able to purchase highly-efficient cars made in the USA. There are other arguments for bailing out Detroit, but if it is done on the premise that US carmakers can immediately retool to make all hybrids and plug-in hybrids, everyone involved is bound to end up severely disappointed.

It has become conventional wisdom that these companies have been done in by high fuel prices, or more precisely by product strategies that assumed that gasoline would remain cheap in perpetuity. Yet while the profits of the Big 3 were indeed leveraged to the sales of large SUVs that on average deliver at least one-third worse fuel economy than their passenger car lines, Ford's stock price has been declining steadily since early 1999, when oil prices were under $15 per barrel and gasoline sold for just under $1 per gallon. GM's market value peaked in early 2000, when gasoline was around $1.50. It had already fallen by half by May 2004, when weekly average US gasoline prices breached $2.00/gal. for the first time.

Although it would be quite helpful for the parallel causes of reducing US oil imports and greenhouse gases for the Big 3 to pivot and begin producing large numbers of hybrids and plug-ins, it is by no means obvious that such a strategy--launched in the midst of what is shaping up to be the worst global and US recession in decades--constitutes a recipe for a quick return to profitability. GM's Volt plug-in hybrid (or range-extended electric vehicle, for purists) is a case in point. With a sticker price expected to be in the low $30,000 range, net of a $7,500 federal tax credit, and delivering fuel savings, the value of which has been cut in half by the precipitous decline of oil and gasoline prices, this car might make energy and environmental sense for the nation, but it looks like a tough sell to consumers in a weak economy, at least in numbers large enough to matter.

For as much attention as the Volt has garnered, it might be even more instructive to note that GM's new "Cruze" non-hybrid economy car will also not launch in the US before 2010, at the earliest. That serves as a useful reminder that it still takes several years to plan, design, and re-tool for a new model. Even converting plants to produce more of existing light-vehicle models, or to build the more efficient cars these companies already sell in Europe and elsewhere, could not be done overnight. The return on such an investment remains uncertain, as well, with the demise of lending to less-than-prime applicants contributing to car sales that have fallen to their lowest level in years. The combined passenger car sales of GM, Ford and Chrysler are off by 12% year-to-date, or more than a quarter-million cars in total. That's much better than the 25% decline in "light truck" sales compare to last year, but it confirms that there is more to Detroit's problems than just the demise of the SUV fad.

The most sobering analysis of the situation that I've read so far was a commentary in the Weekend Wall Street Journal by a professor at NYU's Stern School of Business. It points out that over the last ten years, GM and Ford collectively invested $485 billion dollars without closing the competitive gap versus Japanese carmakers, including those producing vehicles in this country. (I would add that attributing the relative success of Toyota, Honda and others to prescience about the benefits of hybrid cars represents a misleading distortion of a much more complex situation.) Along the way, their combined market capitalization fell by over $110 billion. The author decries the destruction not only of shareholder value, but national investment capital. That doesn't mean that allowing the Big 3 to fail is the wisest course, but it should at least temper our expectations that a bailout measured in the tens of billions of dollars would do more than stave off a drastic restructuring of Detroit for a brief interval.

I don't have a magic solution for saving the domestic car industry, and I doubt that anyone else does, either. By comparison, the recipe for boosting fuel economy and lowering CO2 emissions from our vehicle fleet is much simpler. Among other things, it involves higher fuel prices, whether by taxes or courtesy of OPEC, though at last week's average of $2.22/gal., gas prices were providing an implicit $260 billion per year economic stimulus, relative to the average for June and July. New incentives for consumers to buy efficient cars could also play an important role, and while the TARP bill included large tax credits for plug-in hybrids, the credits for conventional hybrids--which address the biggest increment of fuel savings--are phasing out. And we can't forget that buyers of more efficient cars need readily-available financing. That requires not just replenishing the capital of banks and other lenders, but restoring confidence that loans will be repaid. At least two of those three measures would benefit Detroit, but like a bailout, they would still fall well short of a guaranteed recovery from the hole into which the industry has fallen.

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