John Petersen
Last Friday
Obama and executives from thirteen leading automakers gathered
in Washington DC to announce an historic agreement to increase
fleet-wide fuel economy standards for new cars and light trucks from
27.5 mpg for the 2011 model year to 54.5 mpg for the 2025 model
year. While politicians frequently spin superlatives to describe
mediocre results, I believe the President’s claim that the accord
single most important step we’ve ever taken as a nation to reduce
our dependence on foreign oil” is a refreshing example of
political understatement. After three decades of demagoguery,
debate, dithering and delay, meaningful policy change has finally
arrived, and not a moment too soon.
The economic impact will be immense – a staggering $1.7 trillion in
fuel cost savings that will flow directly to consumers. As those
savings begin to work their way through the economy and kick-start
secondary fiscal multiplier effects, the boost to GDP will be closer
to $7 trillion. I believe Friday’s agreement will ultimately be seen
as the biggest economic stimulus event in human history.
The following graph from a new White House report titled, “
href="http://www.whitehouse.gov/sites/default/files/fuel_economy_report.pdf">Driving
Efficiency: Cutting Costs for Families at the Pump and Slashing
Dependence on Oil” says it all.
The most surprising aspect of this agreement isn’t the aggressive
goals; it’s the fact that the auto industry has helped forge the
goals and plans to achieve them by implementing “
the road today.” The new goals are not based on the
electric dreams of a Tesla Motors (
They’re based on the automaker’s hard-nosed evaluation of the
cumulative gains that can realistically be achieved with existing
ICE technologies like engine downsizing, stop-start idle
elimination, turbocharging, optimized cooling, low friction, direct
fuel injection and variable valve timing.
Individually the fuel economy gains from advanced ICE technologies will only be
baby steps toward energy independence. Collectively they’ll give
American consumers passenger cars with lower
well-to-wheels CO2 emissions than a 2012 Nissan (
plugged into the typical wall socket. They’ll change the world
without a budget busting paradigm shift.
In early July The Boston Consulting Group released a new report
titled “
href="http://www.bcg.com/documents/file80920.pdf">Powering Autos
to 2020; The Era of the Electric Car?” that evaluated the
combined potential of baby-step fuel efficiency technologies and
considered their likely impact on wildly expensive and impractical
proposals to convert the world’s transportation infrastructure from
liquid fuels to electricity. In the report BCG concluded that:
- Conventional technologies have significant emissions-reduction
potential, but OEMs will need to pull multiple levers
simultaneously to meet emissions targets. - Advanced ICE technologies can reduce gasoline consumption by
40% at a cost to the consumer of $50 to $60 per percentage point
of reduction – roughly half what BCG predicted three years ago. - Advanced ICE technologies are likely to become standard
equipment worldwide during the next decade. - Electric cars will face stiff competition from ICE and will
not be the preferred option for most consumers. - Battery costs will probably fall to about $9,600 per vehicle,
but become increasingly uneconomic as the potential fuel savings
per kWh of battery capacity plummets. - In addition to dismal economics, plug-ins will face
substantial go-to-market challenges including battery durability
concerns and the absence of adequate charging infrastructure.
In my view the BCG report is a must read for investors who want to
profit from this fuel efficiency mega-trend and avoid heavy losses
in vehicle electrification schemes that will become increasingly
uneconomic over time. The fundamental flaw is simple. Today an EV
with a fully charged 24 kWh battery pack can save a consumer the
equivalent of 3 gallons of gas. By 2025, the savings will be closer
to 1.5 gallons of gas. Even with falling battery prices the value
proposition can only get more challenging with each passing year.
For the last couple years I’ve been cautioning investors that
gee-whiz vehicle electrification technologies are transitory, a
flash in the pan, and the biggest business opportunities in energy
storage involve cheap, simple and effective baby-step technologies
like stop-start idle elimination that will slash fuel consumption by
5% to 15% for a few hundred dollars. The BCG report and the newly
announced fuel economy goals are yet another proof of that
principle.
The future is all about getting more from less and has absolutely
nothing to do with increasing consumption of one class of scarce
natural resources in the name of conserving another.
While I can’t identify the component manufacturers that will thrive
from the widespread implementation of advanced ICE technologies like
turbocharging, direct fuel injection and variable valve timing,
picking the winners in energy storage is easy. Johnson Controls
(
and Exide Technologies (
will be the first beneficiaries as automakers upgrade their
electrical systems to withstand the strains of stop-start idle
elimination. As stop-start systems become standard equipment
worldwide and the inherent limits of current AGM battery technology
become obvious, more powerful energy storage solutions from emerging
technology developers like Maxwell Technologies (
and Axion Power International (
will ascend to prominence if not dominance.
The new fuel efficiency standards are not an omen of doom for
lithium-ion battery solutions from A123 Systems (
Ener1 (HEV)
and Valence Technologies (
which will no doubt gain a toehold among the 6% to 13% of consumers
who say they’d purchase an environment-friendly car even if they had
to pay a premium over the life of the vehicle. I’m just not certain
how significant that toehold will be in light of the
incontrovertible reality that less than 2% of consumers actually buy
environment-friendly cars.
On balance I believe that survey-based uptake forecasts will be just
another example of a painful lesson I learned in the biodiesel
business – that individual buying decisions speak louder than surveys and the
green in a consumer’s wallet always takes priority over the green in
his cocktail party conversation.
For several years the mainstream media, financial press and
sell-side analysts have been publishing irrationally optimistic
stories and reports about the end of the ICE age and the dawn of a
golden electric era. On Friday the Obama Administration and the
automakers put the world on notice that IC Empire is striking back
and plans to bury the now generation of electric wannabes like it
has all of their predecessors.
Disclosure: Author is a
former director of Axion Power International (
and holds a substantial long position in its common stock.
