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A Rapidly Changing Energy World?

12:00 AM, Jun 23, 2012 • By IRWIN M. STELZER
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The electric car and its hybrid variants have become the véhicule de jour of the wealthy, trendy green, Hollywood set, but no one outside of the White House believes President Obama prediction that one million such vehicles will be on the road by 2015, in part because a battery-driven car costs about $15,000 or almost 40 percent more than an identical gasoline-driven car, according to Alan Mulally, CEO of Ford, the maker of the all electric Focus. 

So far, growth in the use of these vehicles depends heavily on several subsidies from the federal government for these so called plug-in electric vehicles (PEVs). Buyers get a tax credit of $7,500, and makers of batteries for PEVs receive subsidies from a $2 billion fund used by the administration to pick winners in the race to develop batteries that can reduce “range anxiety” by increasing the range of PEVs from their current at-best 80 miles, clocked by the new Ford Focus Electric. Hybrid electric/gasoline vehicles do better.

One beneficiary of taxpayer largesse, A123 Systems, the poster-boy for President Barack Obama’s drive to replace gasoline with batteries, recently laid off some of its workers after one of its products proved a dud, and is now seeking private financing to supplement the $249 million promised by the government so that it can continue down a new, allegedly more promising path. The company’s first-quarter loss of $125 million and 40 percent drop in revenues were due to soft demand for PEVs, even though sales of conventional vehicles are booming and consumers can remember $4 gasoline. If A123 does go under, its fall will add to the President’s embarrassment at the failure of his other chosen “winner”, Solyndra, a bankrupt solar panel manufacturer that cost taxpayers half-a-billion dollars. Politicians make poor venture capitalists; Mitt Romney’s supporters argue the reverse is not true.

Not all the news is bad for the PEV industry: Federal Express is slowly converting parts of its truck fleet from gasoline to battery-driven, and the military is attempting to do the same to reduce problems of supplying gasoline to its far-flung forces. But the gasoline-driven car will be with us for a long while, eliminating any pressure on the Saudis to open the valves enough to lower prices to the $50-$70 range on which they thrived a mere three years ago.

Which brings us back to the subsidies to battery manufacturers. Because the use of oil imposes on society security and other costs not borne by consumers—what economists call externalities—it is not unreasonable for society, aka taxpayers, to set aside some modest sums for research into ways of reducing that security risk. So score one for the President, and ignore the never-subsidize-anything crowd. But when it comes to allocating the funds, the President has it wrong and his critics have it right: politicians can’t pick winners, and in many cases don’t even try—with all those campaign contributors at the trough, we get crony capitalism rather than efficient use of resources. Indeed, the lending process itself becomes distorted. In the case of batteries, recipients of grants had to agree to staffing targets unrelated to market demand for their batteries -- a job creation scheme, timed with the election in mind.

There is a solution. The funds set aside for this sort of product research and development can be put in a pool, and handed out to the bidders who agree to put their own funds at risk. Those offering the most skin in the game, get the subsidies. In effect, that leaves the allocations to expert venture capitalists and entrepreneurs who have a real incentive to pick the most likely winners.

If America’s environmentalists lose their fight to prevent the spread of new drilling technologies, to curtail development of oil-rich areas in the United States, and to prevent the construction of pipelines to Canada, and if some of the new alternatives to gasoline develop, OPEC’s power over prices might be weakened. Not eliminated, just weakened. That’s progress of sorts.  

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