A Free-Market Energy Blog

Screwing Up the Auto Industry

By -- December 29, 2008

Despite all the pressure on him, energy is the perfect area for Barack Obama to do nothing hasty. For decades, activists and foreigners have lamented the fact that the U.S. doesn’t have an energy policy. This is, of course, nonsense. Simply because we don’t have a big E big P Energy Policy doesn’t mean we don’t have one at all. Compared to most other countries, our energy policy is most notable for the things it doesn’t do, as in the doctors’ creed, “First, do no harm.”

And energy policy is now threatening to intersect with economic policy, first, as rising unemployment suggests to many that renewable energy subsidies offer an attractive use of funds but also as the government considers assistance for the US automobile industry (at least the home-grown sections of it). But in offering money to the Big Three, politicians are being urged to set certain conditions, such as ‘guidance’ concerning appropriate uses of the money.

The pundits have already weighed in, whether it is the scions of John Rockefeller calling on ExxonMobil to abandon their successful business strategy or Thomas Friedman arguing that “Any car company that gets taxpayer money must demonstrate a plan for transforming every vehicle in its fleet to a hybrid-electric engine with flex-fuel capability, so its entire fleet can also run on next generation cellulosic ethanol.” (NYT 11/11/08)

What is most distressing is that this is a near repeat of the mistakes made during the energy crises of the 1970s. Then, short-term problems caused higher prices, but the cause was misinterpreted by nearly everyone—industry, most academics and the huge number of instant pundits—as being resource scarcity, which would mean ever higher prices and economic problems into the future. The oil industry listened then and diversified into department stores, solar energy, and electric motor producers. Chrysler, for its part, abandoned its large car line, to its regret, while oil prices declined as if every pundit, (nearly) every computer model, and (nearly) all the economists had not predicted otherwise. [This roughly corresponds to Charles MacKay’s story of the London astrologers who found that the Thames failed to flood the town as they had predicted. Extraordinary Delusions and the Madness of Crowds.]

Amazingly, the auto industry has bought into the pundits’ argument, despite their own experience. The auto industry now seeks massive government aid because, as the CEO of Ford said, “We focused on trucks instead of fuel efficient vehicles.” On NPR,[1] the CEO of GM described his biggest mistake as abandoning the EV1, a vehicle that was not even close to being commercially viable.

In fact, the failure of the auto industry primarily was its inability to quickly shift from large to small vehicles when oil prices unexpectedly rose. (Although many pundits claimed they foresee the increase, the root causes—the Iraq War, the strike against Petroleos de Venezuela, and the unrest in the Nigerian delta—were not those predicted by the oil bulls. Indeed, in its 2005 Annual Energy Outlook, the US Department of Energy survey of long-term forecasts found that no one—including this author—expected prices to rise above $30 before 2025.)

The production of trucks and SUVs was not bad strategy as they were in fact incredibly profitable for years. The US industry could not produce fuel-efficient vehicles at competitive prices, so they did not (rather than rack up huge losses). Why they couldn’t—high labor costs, big retiree benefits, and/or high health costs—certainly reflects bad management to a degree, but also the different political economy of the US industry.

A major industry failing, arguably, was that instead of investing in more efficient production, some companies focused on corporate restructuring and acquisitions (Ford buying Volvo, for example, Chrysler’s merger with Daimler, subsequently reversed) but also on silver bullets. Most notably, all of the three major US companies have put significant efforts into developing hydrogen fuel cell vehicles, a technology that is clearly decades away, but which a decade ago was claimed to be on the verge of economic viability. A consortium including Ford, for example, set a 1997 target of ten to fifty thousand hydrogen fuel cell vehicles on the road by 2004. As of now, none of the technical problems has come close to being resolved.

Equally disturbing is the argument that electric vehicles are the solution to the US auto industry’s problems. The fact that proponents of electric vehicles have long oversold the technology seems to escape nearly every one. In the late 1970s, there were numerous glowing articles about the prospects for electric cars, despite the very obvious drawbacks, technical and economic, and they have continued to appear to this day. Years ago, an auto magazine editor sardonically commented that the electric car had been described as just around the corner for his entire career, and was still just around the corner.

The point is that the electric car is substantially more expensive than the internal combustion engine, about $40,000 for a small car that has limited range (which shrinks alarmingly if power drains like air conditioners and heaters are used), takes much longer time to ‘refuel’ than a gasoline car and at best only marginally reduces the impact on the environment (aside from the scary nature of the contents of the batteries) by transferring emissions from the car’s engine to the electric power sector.

The idea that this electricity could be ‘clean’ is irrational or unrealistic. Renewable energy—solar and wind—amount to only 0.8 percent of US power generation, while coal represents more than half. Changing that significantly would cost trillions—not something that seems desirable with today’s budget constraints.

So in effect, electric cars are not a solution to either the problems of the automobile industry or society: a very large expense achieves a very minor environmental effect. They are a technology that is not yet ready for prime time, and will only waste large amounts of public—and the automobile industry’s—money. Undoubtedly, the Chevrolet Volt will occupy a place in automotive history—right next to the diesel Oldsmobile, which was also premature and also failed spectacularly.

When, three, five or ten years from now, reality sets in and the electric vehicle is acknowledged as not yet viable, will the auto industry ask for another bailout? Will electric car proponents blame ‘brain-washed’ consumers for not buying a terrible product? Will consumer advocates accuse the, respectively, power and auto industries, of passing on their high costs for a) renewable energy and b) electric vehicles. One thing is certain: proponents of the yet another ‘silver bullet’ solution will claim that if only the industry had adopted their not-ready-for-prime-time technology, its problems would all be solved.

[1] All Things Considered 12/04/08.


  1. Mike  

    I think you are factually correct about the economics of the electric car. However, one thing that I think may provide for a different outcome this time around is the underling cause of the electric car demand.

    You are assuming that what will drive demand is the fuel efficiency and ultimate positive effect on the environment. This may in fact not be the case as the hybrid vehicle will be purchased for the same reason as the SUV; it is the “in car”, and therefore, one of the most important factors when us Americans make our purchase decisions.

    So, while as you, I may not agree with the solution, I would argue that due to a “tipping point” type inflection from the demand side, forcing Detroit towards the electric car may actually subsidize them long enough where when the fad runs out, the economics may then make sense. I.E. they might just get lucky this time around.


  2. Auto Industry Bailout » Blog Archive » Screwing Up the Auto Industry — Masterresource  

    […] Chrysler , for its part, abandoned its large car line, to its regret, while oil prices declined as if every pundit, (nearly) every computer model, and (nearly) all the economists had not predicted otherwise. [This roughly corresponds to …[Continue Reading] […]


  3. mlynch  

    It is interesting that on the same NPR show that Waggoner apologized for failure to support the electric car, they talked about the sharp dropoff in demand for the Toyota Prius as the tax break expired.

    At $4/gallon gasoline, there will be some demand for hybrids beyond just ‘faddists’ (or early adopters). But at $2/gallon, this drops sharply, unless someone (?) provides large tax breaks, which seems likely.


  4. techreseller  

    This is such a simple answer. If we do not institute a greater gasoline and/or carbon tax, we are wasting time and money. People will buy small cars and hybrids when the price of gasoline incents them to. Do Europeans buy small cars to help the environment. Heck no. They buy small cars because fueling a big car costs too much. People respond to price signals. That is it. You can argue all day whether this is the correct course or not, but if you believe America needs to reduce oil consumption, raise the price. Econ 102.


  5. Ed Reid  

    I predict that the new “Congressmobile” will be a cross between the Yugo and the Lada. It will be named the Yada. The view from the end of the assembly line would then be “Yada, yada, yada”. (Apologies to Jerry Seinfeld.)


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