THE BLOG
08/06/2009 05:12 am ET Updated May 25, 2011

Government Assisted Suicide? GM Goes Bankrupt

This is an historic moment for the world auto industry. On the morning of June 1st 2009, General Motors, once the world's largest company, filed for bankruptcy. This follows the recent bankruptcy of Chrysler. Events which were once unthinkable have come to pass.
When cars were first invented more than a century ago, there were a lot of ideas in competition both for engines and fuels. Steam engines, for example, were an idea that people pursued, just shovel in the coal or wood and away you go. Ethanol was a serious contender as fuel as well. So was the pure electric vehicle. But the internal combustion engines invented by the German Nicolas Otto, which, in evolved form, is the one used in all US cars today, took over, and the one by Rudolf Diesel became dominant for trucks, and in more recent years for European cars. And products derived from oil became the fuel of choice.

Back in the 1970s, when we had the first couple of oil shocks, there were people talking actively about alternatives and about improving fuel economy, and the rationale then was that we had to get off oil, it was just too expensive at $30 a barrel rather than the $2 a barrel it had been, but it was also believed that the internal combustion engine had evolved about as far as it could, and there was not much left to improve.

Well, it was possible to improve fuel economy, in fact the miles per gallon of the US car fleet doubled between 1973 and 1980, and that gain was maintained right up until many Americans started driving trucks instead of cars as our personal vehicles. But the assumption that there was no real improvement left in the old internal combustion engine turned out to be wrong. Mostly, it did not foresee the quantity and quality of computer power we could have inside a car. So I would say that the improvements in our cars that took place in the 1980s and 90s were greater than all the advances of the previous eight decades. Cars became much more reliable -- when you buy a new car today you don't expect it to break down, and for the most part it doesn't. They also became very durable; you can drive a good car for a long time. My son traded in his Honda Accord a few years ago and it had more than 250,000 miles on it, and it was still going.

So, we come to today, or maybe to 10 years ago. I say 10 years ago, because around that time I was sitting in a big oil company, and had responsibility for our relationships with car companies. So I spent quite a lot of time in Detroit, mainly with Ford and GM, and in Stuttgart with Mercedes, and in Wolfsburg with Volkswagen. The Japanese we didn't talk to that much.
Here is a conversation we had in Detroit, at what was then a very big car company, and is now on the way to becoming a much smaller car company. We were discussing various areas for cooperation, and I said, 'let's talk about fuel economy, because I think if we worked together, you on engines and us on fuels and lubricants, we could really make a difference, not just a few miles per gallon, but a big difference'. And the response was, 'we are not at all interested in fuel economy. Our customers don't care about it, it is less important than how easy it is to open the windows'. 'Well,' I said, 'trust us, we know something about oil and the future price of oil could be a lot higher than it is today, and then the customers will care'. 'Look', they said, 'we sell a lot of trucks and SUVs. That's how we make our money. Don't ever mention improving miles per gallon in this building again'.

Well, even the most rudimentary competitor intelligence would have taught them that Toyota had a huge effort underway to make hybrid vehicles that could make a big improvement in fuel economy. Honda had two buildings full of people working on nothing else. In Washington, the big 3 (now the little 1¾) lobbied hard against improving the so called CAFE standard, the Corporate Average Fuel Economy that they had to meet in their US sales, and very hard against including small trucks in that CAFE standard. Honda's representatives in Washington? They said, bring it on, whatever standard you want, fine with us. And Washington listened to the Detroit guys, because after all we have to protect our boys here.

Protect them? We destroyed them by listening to them. The most basic lesson in environmental regulation is to set the bar high, and give industry time to comply. If you do that, you bring in technological innovation, and it always costs less then you think it will. And at the same time as we were destroying these companies by protecting them from cruel efficiency regulation, we became more and more dependent on foreign oil. Because we needed a lot more of it. We could have doubled the fuel economy of our fleet and used much less Middle Eastern oil. I think you can guess which countries thought that was a bad idea, and one way or another helped protect our country from increased cafe standards.

Now when it looked like things might get serious about legislation for better fuel economy, and this might hit the gold mine of the SUV sales, the autos had a really good idea. They diverted attention from this by proposing a leapfrog strategy, and that went by the name of the hydrogen economy.

'Why bother to improve what we've got?' the story went. Way back when there was an invention called the fuel cell. This thing makes electricity by taking hydrogen and combining it with oxygen from the air to make water and electricity. Only product is water, clean as a whistle, no air pollution, no middle eastern oil, no nothing. It will take us a few years to get this all fixed up and commercial, but by 2002 or 2003 we will have these babies on the road, problem solved.

Oh this is appealing. And a lot of people were taken in by it, myself included. For a while. In 2002 Jeremy Rifkin, who is a very smart environmental campaigner and author wrote a book called The Hydrogen Economy: The Creation of the Worldwide Energy Web and the Redistribution of Power on Earth. Now that is something. Amory Lovins, who is really one of the innovative thinkers on environmental issues, became a big booster of hydrogen. And guess who else joined the bandwagon: George W Bush. In his 2003 State of the Union address, he announced that there would be an all out effort to make hydrogen cars a reality.
Did you notice that we are now in 2003 and this is still the beginning of the plan, and the 1998 promise of tens of thousands on the road by 2002 has been rewound? I'm sure you did.
Well, what really does in hydrogen as a fuel for cars is economics. If we take the whole chain from making the hydrogen to getting it into your car, then along this chain one or two small steps, like getting it from the hydrogen making factory to the filling station, cost more than gasoline costs today. High priced gasoline. And just the cost of converting say one third of the stations to hydrogen storage and dispensing, sort of the minimum needed, is so high that there is no price of hydrogen that you could ever charge that would recoup that cost. Of course, the government could pay that cost, they seem inclined to pay for stuff these days, but it was a lot of money. Say $2 billion for New York City alone.

So we have had a long hydrogen digression, which old GM thought was great because it staved off increasing CAFE standards, standards that would have actually made them competitive. And finally a realization, which some people who actually knew about this stuff were saying back in 2003, that hydrogen fueled cars were probably 30 years off. When someone says something is 30 years off it means we don't know how to do this, we don't know if we want to do this, and we probably will never do this. And now our new Secretary of Energy, Steve Chu, who actually knows something about science, has come in and cut the budget for hydrogen way back. And the President has put in place increased CAFE standards, big increases, not as far as we need to go, but at least a step change.

So now we come back to the question we had to ask all along, 'what are our alternatives?'. Sure, we can make the cars we drive today more efficient, say twice as efficient. But is there something else? Well, one possibility is electric cars. Now I used to go around poopoohing this idea, saying that electric cars are good cars for driving batteries around in, but there just wasn't a good enough battery to make them a reality. About 4 years ago some innovative thinking started to change all this, first with a couple of Silicon Valley guys who formed a company called Tesla. They didn't know anything about making cars, they just thought it couldn't be all that difficult. And when they heard that the problem was batteries, well, they went for the batteries they knew the best, the Lithium ion batteries we use to power our laptops. These guys made people sit up and listen. And a while after that, another guy coming out of the world of software and business systems, Shai Agassi, started a company called Better Place. He had a modest goal -- take whole countries and turn them into electric vehicle only countries. Well, it just might happen.

We did a whole program on this on my radio show, Environment on the Edge. You can listen to it via podcast from itunes for free, at http://itunes.apple.com/WebObjects/MZStore.woa/wa/viewPodcast?id=319560376

The great Canadian thinker on energy, Vaclav Smil, wrote 'Only infrequently is human history marked by truly decisive departures from long-lasting patterns. The twentieth century was so remarkable as it offered a greater number of such examples , all of them closely connected with the dramatically higher use of energy, than the entire preceding millennium'.
This might be just such a time.