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As Fuel Prices Fall, Will Push For Alternatives Lose Steam?

By Steven Mufson
Washington Post Staff Writer
Monday, October 20, 2008

Just four months ago, a conference here on electric cars drew four times as many people as expected. District fire marshals ordered some of the crowd to leave, and the atmosphere was more like that of a rock concert than an energy conference. A brief film depicted an electric car owner driving off with a beautiful woman to the strains of "The Power of Love" while her original companion struggles to pay for gasoline. The audience cheered.

One discordant note in the series of enthusiastic speeches came from Bill Reinert, one of the Toyota Prius designers. He cautioned that designing and ramping up production of a new car takes five years.

"If oil goes down to $60 or $70 a barrel and gasoline gets back to $2.50 a gallon, and that very possibly could happen," he said, "will that demand stay the same or will we shift back up?"

It didn't take five years to hit those numbers. One type of oil shock has given way to another. Even more swiftly than the price of oil rose, it has tumbled to the range that seemed far-fetched when Reinert spoke and oil was more than $130 a barrel. Now that drop threatens a wide variety of game-changing plans to find alternatives to oil or ways to drastically reduce U.S. consumption.

"Declining oil prices can give us an artificial and temporary sense that reducing oil consumption and energy consumption is an issue we can put off," said Greg Kats, a managing director of Good Energies, a multibillion-dollar venture capital firm that invests in global clean energy.

The credit crisis is compounding that threat by making it more difficult to finance capital-intensive projects, whether they are new auto assembly lines or solar panels or wind turbines. General Motors has been touting the Chevy Volt as the first mass-marketed, plug-in hybrid vehicle. GM, which has been holding merger talks with Chrysler, believes the project will help justify federal financing. It hopes to deliver the car by the end of 2010.

Tesla Motors, a maker of a handful of pricey electric sports cars, had planned to unveil a cheaper sedan next year. But on Thursday it delayed the new model because of trouble lining up financing. It also said it would close two offices and has replaced its chief executive.

The uncertain future of electric cars points to a sticky aspect of the global oil equation. The price of oil can change rapidly, but responses that would cut petroleum use take time. As oil prices climbed, major automakers including GM, Mitsubishi, Renault-Nissan and Toyota moved ahead with plans to produce plug-in vehicles. But the first of those cars won't be ready for a couple of years. What the price of oil will be then, and what consumers' appetite for plug-in cars will be then, is anybody's guess.

Focusing on Efficiency

Doing something about the amount of gasoline Americans use is essential to defusing future oil shocks. The American motorist is among the most profligate in the world. More than one out of every nine barrels of oil produced worldwide ends up in the gas tanks of cars in the United States. The amount of petroleum burned by U.S. motorists exceeds the entire crude oil output of Saudi Arabia, and that has propped up demand -- and prices.

Yet U.S. cars are among the least fuel efficient in the world. "The U.S. dependence on oil imports is based on waste, not on needs," said Paolo Scaroni, chief executive of Italian oil giant Eni.

Electric cars aren't the only answer. More efficient cars, whether better combustion engines or hybrids like the Prius, may be a cheaper way to achieve big fuel savings.

Some firms are creating substitute fuels such as ethanol derived from corn or diesel derived from algae. Biofuel players range from the oil majors, such as BP and Royal Dutch Shell, to ethanol giants VeraSun Energy and Poet, to tiny firms like Solarzyme, which started in its founders' garage five years ago and is now testing an algae catalyst in a large commercial vat. Many firms are working on cellulosic ethanol, derived from organic materials such as grasses or wood chips, but those factories are still in the pilot or demonstration stage.

Almost all of those alternatives rely on federal subsidies or are counting on lower costs as technology evolves. The cheaper oil gets, the bigger those technological improvements need to be to compete.

The electric car has the potential for making a bigger impact than alternative fuels because it would be powered by the electricity grid, which relies on a mix of coal, nuclear, natural gas and renewable energy sources. Moreover, recharging an electric car is much cheaper than refueling a gasoline car.

Its proponents say the electric car has transformative potential that other transportation alternatives lack. "We want customers to see the Volt as the game changer it is, not only for the technology, but also for business, and maybe more importantly for the way the world drives," said Troy A. Clarke, president of GM North America.

"Reducing our oil dependency meaningfully in the U.S., under any scenario, requires radically improving the efficiency of our vehicles," says Saurin D. Shah, a vice president at investment firm Neuberger Berman who expects an explosion of hybrid and plug-in cars by 2030. He predicts hybrid and electric cars will replace conventional vehicles as swiftly as electric locomotives replaced steam-driven ones.

But because their batteries are expensive, plug-in cars are going to cost as much as $8,000 more than conventional gasoline cars. The lower the price of gasoline, the longer it is going to take for fuel savings to make up for the car purchase premium. That is one reason why Democratic presidential candidate Sen. Barack Obama (Ill.) has proposed a $7,000 tax credit for consumers who buy electric cars. Republican presidential hopeful Sen. John McCain (Ariz.) favors a $5,000 tax credit for cars with ultra-low emissions.

A Long Road to Transition

More than a decade ago, GM killed an electric car called the EV1; the company said motorists weren't interested, but many analysts said a hidebound GM lacked interest. The car ended up as an expensive public-relations debacle. It didn't help that oil prices at the time had collapsed.

But even if oil prices are high, there are bumps in the road to a plug-in automobile future.

If large numbers of electric cars are plugged in at the wrong time of day, they could strain utility capacity. "Today, our electric grid cannot support massive quantities of plug-in hybrid vehicles very well," said Peter Darbee, chief executive of Pacific Gas and Electric. Depending on a utility's fuel mix, plug-in vehicles could boost particulates, or soot. And only half of Americans have electrical outlets where they park their cars at night, according to a major auto firm executive.

Electric vehicles might not solve all strategic issues, either. James Woolsey, former head of the CIA, promotes electric cars because, he says, "We can, we should, and we must, as a major national priority . . . absolutely, totally, completely destroy oil's monopoly" to break the U.S. dependence on foreign oil.

But Irving Mintzer, an energy expert, notes that most electric vehicle motors contain rare elements such as neodymium, and about 95 percent of the world's supply currently comes from China. The United States might swap one form of dependence for another, he said.

And then there is the question of consumer tastes and habits.

Alan L. Madian, director of consulting firm LECG, notes that it takes time for motorists to get used to new types of cars; it has taken a decade for Toyota to sell 1 million Priuses, less than 1 percent of the cars on the road. Madian said that even with "heroic" assumptions about the sales of new electric cars, they would make up 50 percent of new vehicles by 2030 and only 8 percent of cars on the road.

"These transitions take a long time," he said.

Financing Challenges

Ultimately the future of all alternatives to oil comes down to money. That's why one of the most intriguing promoters of electric cars isn't an automobile person at all.

Shai Agassi, once a contender for the chief executive slot at international software giant SAP, says that the right business model will put electric cars in the fast lane.

He wants to make owning an automobile more like owning a cellphone. In exchange for signing up for refueling service, he would give you an electric car for free. You could plug it in at public parking spaces or at home. You'd pay for electricity with a card, like a phone calling card. During long trips, motorists could pull into recharging stations resembling car washes and swap a battery running low on juice for one fully charged in just a bit more time than it takes to fill a tank with gasoline and check the oil.

Agassi's plan will get a test drive in Israel and Denmark, whose governments have pledged support. Agassi's Silicon Valley-based firm Project Better Place has raised $200 million venture capital from the likes of Morgan Stanley, VantagePoint Venture Partners, Wolfensohn & Co. and oil refiner Israel Corp. Renault-Nissan chief executive Carlos Ghosn has promised to deliver tens of thousands of electric cars by 2011.

"We started with the following question: How do you run an entire country without oil?" said Agassi. The cost of installing half a million recharging stands and 120 battery swap stations would come to $5 billion, he said, considerably less than Israel's annual bill for oil imports -- at least earlier this year.

Falling oil prices, however, make Agassi's plan a tougher sell. With gasoline at $7 a gallon, he can recover the cost of the car he gives away through his recharging stations. The price at the pump, combined with heavy taxes, was higher than that in Israel and most of Europe this summer. But this week, prices fell even in countries with heavy fuel taxes; in Britain, prices fell as low as $5.40 a gallon.

Keeping electric car projects going could be even tougher for the big automakers in the United States, where fuel taxes are much smaller.

"If you have to spend X dollars and your profitability has just gone into the black hole and you're having issues getting financing and just keeping the lights on, are you going to spend a lot of money on a high-risk product?" asked analyst Shah. "Probably not."

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